12/14/25
S&P 500: 6827
Nasdaq: 23,195
10 Year Treasury: 4.1%
David R. Snyder, CFA
The timing and circumstances are almost too perfect for the AI bubble to burst within the next couple of years to end the current secular bull market. It seems too easy to call. Almost every CEO of the major hyperscalers have publicly stated that we are in an AI bubble but that they have to continue to invest or else risk being left behind in the race. There are a myriad of events that could go wrong in the next year or two to burst this bubble. First, we are in a race with China for AI dominance and China has at least 20 times more effective training runs per dollar than the US. China’s $42 billion private investment in 2025 delivers the equivalent real world training output of $1-1.4 trillion in US terms. At some point in the future are American hyperscalers going to realize similar efficiencies or will more world capital flow to Chines AI to get higher returns for each dollar spent. Second, there is still no proof that AI companies are going to deliver a reasonable return on capital for all the money invested so far, at least in the next couple of years, which may lower demand for AI. Third, even if demand for data centers continues to grow, will there be enough energy supplied to the data centers? Orders for nuclear and natural gas turbines are back ordered for the next 5 to 10 years and Trump is discouraging investment in renewable energy that could come online faster. Also, they need local community permits for these energy facilities and there is increasing NIMBY resistance, especially as the enormous demand for water to cool the data enters could deplete the local water supplies. And the latest research reveals higher cancer rates in communities surrounding the data centers. Fourth, nefarious uses of AI could cause stricter regulation. Fifth, the bonus depreciation could actually backfire as it encourages even more AI investment that wouldn’t generate a high enough return on investment without the tax incentive, adding to the bubble.
Nividia (NVDA 184) only trades at a 25 P/E on 12 month forward earnings estimates, with many investors believing it is very cheap vs. its growth rate and its historical P/E. But for all of its strengths, NVDA is still a cyclical company and the stock market is saying that NVDA’s earnings are going to decline significantly sometime in the not too distant future. Cyclical companies actually trade at their lowest P/E’s near the top of earnings cycles and their highest P/E’s near the bottom of cycles. NVDA also has major concentration risk with the hyperscalers and potential increasing competition. The stock market also does not like the circular agreements it has made with its customers, a real red flag and similar to the circular agreements back in the late 1990’s. Memory chip prices are advancing this year at the highest rate since 1999, another eerie resemblance to 1999. The stock market could be wrong, but I wouldn’t bet against it.
Higher interest rates have always been the catalyst for recessions and major bear markets, thus it is difficult to figure how this secular bull market is going to end next year if interest rates are going to decline. Valuation has never been the catalyst for a bear market except for the 1962 bear market. 2026 should be a difficult year for the stock market, especially with the third year of the Presidential cycle having statistically significant lower returns. At the very least it will be a more volatile year. During the bear market earlier this year, which I did not foresee, I thought there was a chance that the secular bull market may have been ending, but never went to a sell signal. Then in April and May numerous technical indicators, such as the Zweig thrust, the recovery of 50% of the losses, how quickly we recovered above the 50 day moving averages, led me to believe that the stock market was in a new bull market that would have very little downside through at least February of 2026. This was particularly true of semiconductors, as their bottom off of a cyclical downturn always lasts at least 10 to 12 months. Also new bear markets rarely occur within 17 months of the bottom of the prior bear market. But there could be a major top somewhere between the spring and October of next year. Crypto has most likely formed a major top in October and it has historically been a leading 3 to10 month indicator for the stock market. That would put the time frame of a potential major stock market top between January and August of next year, more likely on the latter end.
The high yield market is also signaling that the end is not too far away. In January of this year the BoFa US High Yield Option-Adjusted Spread fell to a cycle low of 2.6%. The only other times this spread was this low in the past was in September of 1997 and May of 2007. We subsequently entered 50% or more equity bear markets in March of 2000 and October of 2007. Using that time frame, we are within 18 months of a major bear market.
The next recession that ends this secular bull market will likely be similar to the 2001 recession, led by the decline in technology investments and not consumer led. The parallels to the late 1990’s are very strong, although there are more headwinds for the consumer in this cycle than in 2000. Housing was not in a bubble in 2000 as it still is today, and the low income cohort was doing better.
Positioning by investors is at some of the highest historical levels of equity exposure for both retail and institutions, but especially for retail (hold a record 45% of their assets in equities). They have their highest ever allocations to equities (both public and private) with defined contribution plans holding 70% of their assets in equities. Leveraged ETF’s have become very popular with individual investors as well. Retail investors now account for a historical high 20 to 30% of trading volume. They are now allowing speculative crypto in 401 (k) plans! Trump accounts for newborns were approved at the top of the equity market. Ditto for Dell’s children accounts. These are great ideas but just poor timing on initiation. These are all contrarian indicators and they remind me so much of 1999-2000 when Congress attempted to pass a bill that would invest Social Security in equities.
A recent poll found that 28% of young men (ages 18-29) own crypto but only 24% own equities. This is an added risk for the next bear market, as younger people will have to liquidate their equity holdings to offset their crypto losses.
Full Disclosure: I own several of the securities mentioned positively. None have been purchased within the last month. The opinions merely represent the opinion of the author as CIO of Journey 1 Advisors, LLC and intended to inform the readers about our investment philosophy and strategy. The contents of this report are based on sources believed to be reliable. It is not intended for circulation. It is not intended to offer investment advice, or to recommend the purchase or sale of any securities or investment product. Investment advice is only given after a client has signed an investment advisory agreement with Journey 1 Advisors, LLC and will be subject to the terms and conditions therein. Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stock’s expected performance and risk.