Top U.S. Advisors Analyze August U.S. Stock Market: Value Stocks Rebound, AI Capital Expenditure Soars, While Bond Market Tells a Different Story

Podcast Source: Creative Planning

Compiled & Organized by: Shenchao TechFlow

• Host: Charlie Bilello (Chief Market Strategist at Creative Planning)
• Guest: Jamie Battmer (Co-Chief Investment Officer at Creative Planning)
• Release Date: August 1, 2026
• Core Topics of This Episode: Sustainability of Asset Rotation, Semiconductor and Leverage Liquidation, IPO Surge, Inflation and Bond Market Divergence, Fiscal Deficit, AI Capital Expenditure Cycle, Employment and Business Formation Data.
• Disclosure: Charlie Bilello and Jamie Battmer are employees of Creative Planning, one of the largest independent registered investment advisors (RIA) in the U.S., officially disclosing management/advisory assets of approximately $370B+ (as of June 2025). This episode focuses on the overall market, sectors, and macro framework, without recommending any specific securities, but the program itself carries the branding purpose of Creative Planning, with a standard disclaimer at the beginning of the video: the content does not constitute personalized investment advice.

Senchao Insight: History does not repeat itself, but it often rhymes. This phrase runs through every topic of this episode: value stocks, small-cap stocks, and emerging markets have collectively rebounded after being neglected for 15 years; semiconductors surged 237% over 14 months only to give back 20% in a month; leveraged funds halved in a month and were forced to sell positions to Citadel; SpaceX's IPO briefly reached a $3 trillion market cap before quickly falling below the issue price; IPO fundraising in 2026 has already surpassed the bubble peak of 2021. Meanwhile, the four major cloud providers saw a staggering 87% year-on-year increase in capital expenditure in the first quarter, Google recorded negative free cash flow for the first time in history, and Meta's free cash flow shrank by 91% year-on-year, as asset-light tech giants rapidly transform into asset-heavy companies. The most jarring narrative comes from the bond market: core PCE has been above 2% for 64 consecutive months, and the 30-year U.S. Treasury yield surged to a 19-year high of 5.2%, marking the first time in history that long-term rates have risen during a rate-cutting cycle. The Chief Market Strategist and Co-Chief Investment Officer of Creative Planning, one of the largest independent investment advisors in the U.S., connected these dots in a 44-minute discussion to create a market map for August.

Key Takeaways {#article-toc-33030-2}

• Asset rotation has been intense this year: value stocks are up about 20%, small-cap stocks 19%, emerging markets 15%, international stocks 13%; the U.S. large-cap market is up 9%, but growth stocks have slightly declined, with the Magnificent 7 down 3%.
• This is a mean reversion after 15 years of growth/tech stocks outperforming, but both the host and guest agree that this does not justify chasing value stocks or reallocating portfolios.
• The semiconductor sector experienced what Charlie refers to as "speculative frenzy" at the end of June, with a 237% rise over 14 months, exceeding the gains before the internet bubble peak; in July, the semiconductor index fell 20%, and the DRAM ETF dropped 30%.
• Korean retail investors leveraged bets on SK Hynix and Samsung faced margin calls; the U.S. Situational Awareness hedge fund, due to extreme leverage bets on semiconductors, plummeted 67% in July and was forced to sell positions to Citadel.
• SpaceX's post-IPO market cap briefly exceeded $3 trillion, surpassing Google and Amazon, with a price-to-sales ratio over 150 times; it has since retraced over 50% from its peak, falling below the issue price.
• From 2026 to date, U.S. IPO fundraising has reached approximately $144 billion, surpassing the 2021 peak; giant IPOs like OpenAI and Anthropic may further increase market supply.
• Core PCE has been above 2% for 64 consecutive months; the 30-year U.S. Treasury yield has risen to 5.2%, the highest since July 2007, and it is the first time in a Fed rate-cutting cycle that it has risen instead of falling.
• Over the past six years, U.S. inflation has averaged about 4%, double the target; the market is beginning to price in a 25 basis point rate hike in September.
• Since July 1, U.S. national debt has increased by over $400 billion, nearing $40 trillion; both the "growing out of debt" and "tariff revenue to pay off debt" narratives have not materialized.
• The four major hyperscalers (Amazon, Google, Microsoft, Meta) had combined capital expenditures of $165 billion in the first quarter, a year-on-year increase of 87%, and a 393% increase compared to three years ago.
• Google recorded negative free cash flow for the first time; Meta's free cash flow plummeted from $14 billion to $784 million, a year-on-year decline of 91%.
• Initial jobless claims have dropped to the lowest level since January 2024; the number of new businesses formed in the information technology sector has reached an all-time high, with significantly lowered barriers for one-person companies.

Highlights of Insights {#article-toc-33030-3}

• "These more value-oriented assets have finally started to outperform after a long period of underperformance, but don’t rush to chase them. Just like after the tech stock crash in 2000, everyone rushed to buy value stocks, or after emerging markets doubled over ten years, people only then flocked to BRICS, which often turns out to be the wrong timing."
• "The four most expensive words in financial innovation history: This time is different."
• "The Fed says inflation is under control, but the bond market completely disagrees. A 30-year yield of 5.2% is a 19-year high."
• "The federal government is the one blackening the drunk sailor. At least the sailor has to return to the ship in the end; the government’s borrowing has no endpoint."
• "The end of AI capital expenditure will either be when the money runs out or when someone in a dormitory comes up with a more efficient solution. History has always been this way."
• "Excitement is not related to investment returns. In the long run, it is often the boring things that win."

Chapter One: Diversification Becomes Important Again {#article-toc-33030-4}

Charlie Bilello: Over the past year, diversification has almost become a dirty word. Many people ask, why should I hold value stocks? Why should I hold small-cap stocks? Take these international stocks out of my portfolio. But this year, we have seen what I call "everything reversing." Value stocks are up about 20%, small-cap stocks 19%, emerging markets 15%, mid-cap stocks 15%, and international stocks overall are up 13%. The U.S. market is still performing well, up 9%, but growth stocks have actually slightly declined this year, with the Magnificent 7 down 3%. What do you think about this rotation? What lessons should investors learn?

Jamie Battmer: It has finally happened, and I’m actually quite happy. Because previously, growth stocks and U.S. tech stocks had been outperforming for about 15 years, and the longer it dragged on, the easier it was for people to jump in at the peak to chase. We’ve seen this too many times, in 2000 and 2010. At that time, emerging markets and international stocks surged while U.S. large tech stocks fell by 33%, and the S&P had almost zero returns over the decade. So seeing this rotation is a good thing; it shows that asset allocation and diversification are starting to work again, rather than everyone rushing to chase hot stocks.

Charlie Bilello: Now, many of the questions we receive are the opposite. A year ago, everyone was asking, "Why should I hold these things?" Now they are asking, "Value stocks are up 20%, growth stocks are down, and this spread is one of the largest in history; is it too late for me to reallocate?" I will show you this chart; whether it’s the large-cap/small-cap ratio or the U.S./international ratio, it’s the same. Value has indeed just started to reverse relative to growth, but we are coming down from historical highs, and it is entirely possible that this outperformance could continue in the coming years. Of course, it won’t happen linearly, but given the previous 15 years of continuous underperformance, just a one-year reversal might still be early in the time dimension.

Jamie Battmer: Yes, it could last another three months, or it could last 30 years; no one knows. But as long as you have done sufficient diversification, this matter is not actionable for you. Those long-underperforming value assets have finally started to outperform, which is great, but don’t rush to chase. Just like after the tech stock crash in 2000, everyone switched their portfolios to value stocks, and it turned out to be the wrong timing; or after emerging markets rose over 100% in ten years, only then did people flock to BRICS, which was also the wrong timing. These are all parts of the portfolio; just maintain balance. In the long run, a correction could start tomorrow, but that does not justify adjusting asset allocation.

Charlie Bilello: I completely agree. Predicting the future, if we could really do that, we should concentrate our bets on the assets that will win in the future. But since we can’t, that’s why we diversify. We don’t know what will happen, so we must spread our bets and hold everything.

Jamie Battmer: My crystal ball is as useless as the other Wall Street crystal balls that pretend to predict the future. The only difference is that mine only needs a small battery, while theirs charge exorbitantly.

Chapter Two: Semiconductor Frenzy and Mean Reversion {#article-toc-33030-5}

Charlie Bilello: Next, I want to talk about what John Bogle referred to as the "iron law of financial markets," which is mean reversion. Before July, I believe the most overextended sector was semiconductors. I spent a lot of time studying it and can only describe it as speculative frenzy. We saw this sector rise 237% over 14 months, which even exceeded the gains before the internet bubble peak. In the weeks leading up to the peak, a large amount of capital flowed into semiconductor ETFs, so-called "chasing hot stocks." There is a DRAM ETF that primarily holds three stocks, and it raised nearly $30 billion in about 30 days, becoming the fastest-growing ETF in history. This almost never ends well. In July, the S&P was basically flat, down less than 1%, but semiconductors fell 20%, and the DRAM ETF dropped 30%. Did you hear a lot of people talking about semiconductors in June? Did many people ask you if they should buy?

Summary (pure text, may be empty):

Jamie Battmer: Of course there is. The excitement in society over the leap in AI technology is so strong that everything related to semiconductors has skyrocketed. You can argue whether Nvidia is overpriced; after all, it is a big company that can really make money. But many of the companies that have risen alongside it are not large, have average management, and are just riding the coattails. It's like the last tech bubble, where just adding "dot com" to a company name could lead to a 50% increase. Interestingly, our clients have not overly participated; occasionally someone asks about it. But from a portfolio management perspective, it does indeed affect our public holdings. We have done a lot of tax efficiency optimization and also tried to balance those clients holding large amounts of Nvidia stock with significant unrealized gains. When such extreme deviations based on greed and irrational exuberance occur, they create many challenges. However, these things will ultimately self-correct, as recent data has shown. It reminds us not to be swept away by irrational excitement and not to chase hot trends.

Charlie Bilello: There’s also a lesson here about leverage. We have seen a surge in leveraged ETFs and related products, and there are many stories about margin accounts. In Korea, many retail investors have been wiped out due to leveraged bets on SK Hynix and Samsung. Here in the U.S., there is a hedge fund called Situational Awareness, which is somewhat ironic because they seem to lack that awareness. They made extreme leveraged bets on semiconductors, and the fund grew from hundreds of millions to $45 billion in just a few years, making it one of the fastest-growing hedge funds in the U.S., but then it ran into trouble. Essentially, they faced margin calls and were forced to sell most of their stock positions to Ken Griffin's Citadel.

Jamie Battmer: This is basically synonymous with "we disappointed you this month"; sorry, we are human too. Humans can be ignited by certain things and can also be scared by others. All data overwhelmingly proves that humans cannot beat the public markets. You should not try to beat it; the optimal strategy is to own it. So when we design portfolios, we preset for "this month might disappoint you." The market may decline, the economy may weaken; this will happen, but the portfolio is prepared for these scenarios and will recover. However, when people heavily bet on these things, it leads to headlines like "Sorry, we were greedy, excited, and disappointed you." Such headlines are as old as newspapers.

Charlie Bilello: This fund dropped 67% in July, which is clearly not what investors wanted, although given its previous massive gains, extreme volatility was expected. As usual, the problem lies in investors chasing past performance. They did not enjoy the rise but have to endure the fall. A very correct saying in investing is that you need to survive to fight another day. When you use leverage, and that leverage encounters extreme volatility, you may lose the chance to fight again. This is a good lesson for all investors.

Chapter Three: IPO History Rhymes Again {#article-toc-33030-6}

Charlie Bilello: The third topic is that history rhymes again. We all know the saying that history does not repeat itself, but it rhymes. I have been talking about the IPO market. In the first few days of SpaceX's IPO, I posted many warning messages, saying its market value once exceeded $3 trillion, higher than Google and Amazon, with a price-to-sales ratio over 150 times. Many people said, "Charlie, you don't understand this company; this time is different; it won't follow the typical IPO trend." But to date, this stock has retraced over 50% from its peak, falling below the issue price and also lower than the closing price on the first day. This time is actually no different, just as you wrote in your letter last quarter.

Jamie Battmer: Thanks, Charlie, for using this to tease me; actually, I stole all these charts from you. But seriously, the phrase "this time is different"—Mark Twain said that history rhymes, and my favorite book, "This Time is Different: Eight Centuries of Financial Folly," tells us that this is not just something that has happened in the past 15 or 30 years, but something that has been happening for a thousand years. It goes back to human nature itself. It is normal for people to feel excited about these things; we have many clients who are excited. If we can help them obtain a relatively higher allocation through custodial partners, we will arrange it if the clients want it, but the data tells us not to do so. What surprises me the most is that Wall Street pretends to have the ability to predict the future. If you ask a hundred people whether a hot IPO is a good thing and whether they should participate, most answers will be affirmative. If these people held up signs saying, "Buy this IPO, and a year later, on average, you’ll lose a third," no one would buy it. But Wall Street manages to rally people in time and again.

Charlie Bilello: They are undoubtedly good at sales. The demand is indeed there, oversubscribed by how many times. We have seen this movie before; excitement peaks in the initial days of trading, and you are essentially providing liquidity for others to exit. Those who bought at the IPO price are the sellers. Next week we will see the first real test because insiders and early investors of SpaceX have not been allowed to sell yet. The first earnings report will be released next week, and two days later, the first batch of people will be able to sell. So this is the real test. If you have a 10x, 20x, or 30x unrealized gain on SpaceX, will you sell some? This seems like a high-probability event.

Jamie Battmer: We have hundreds of SpaceX employee clients or related individuals. The key is that you cannot control what the market does; lock-up periods of 3 months, 6 months, etc., are completely beyond your control. But proper estate planning, risk mitigation, and risk management are what you should focus on. This is what we do for our SpaceX employee clients. Companies like Anthropic and OpenAI, or anyone holding highly appreciated assets, the future direction of the public market is a guessing game, but there are many things you can control that are unrelated to stock prices. That is the focus, not fixating on how the stock will perform tomorrow. Of course, what will happen as the lock-up period gradually lifts is indeed worth paying attention to.

Charlie Bilello: It’s not over yet; there are still 5 months left this year. If you look at this chart, the amount raised through U.S. IPOs has set a record, with about $144 billion raised from 2026 to date, surpassing the peak of the 2021 bubble. Of course, much of this is contributed by SpaceX. But as I have always said, historically, whether in 2021 or 2000, when there is such a huge wave of supply and people are looking for exit liquidity, it often signals that the market will be more difficult ahead. This may not happen this time, but if history rhymes, it would not be surprising if companies like OpenAI and Anthropic go public during a market downturn, as the supply in the market has suddenly increased too much.

Jamie Battmer: Yes, Charlie and I have both been in this for over 20 years. Those who remember the last tech boom know that was the last time everyone was so excited about individual stock names. In 2021, it was more about SPACs and some financial engineering, but this time, the excitement around names like SpaceX and Anthropic has returned to the atmosphere of Google, Facebook, and even pets.com, which we haven't seen in 25 years. Those who have experienced it know that the outcome is usually not pretty, and investors need to remember this now.

Charlie Bilello: Excitement is not correlated with investment returns. In the long run, it is often the boring things that win. When Anthropic and OpenAI go public, everyone will be very excited, and the stocks may see a pulse-like increase, but be careful not to assume that this trend will continue and chase the rise. The S&P has stuck to its principles this time and did not change the rules to include SpaceX in the index; it is the only index company to do so. Nasdaq changed its rules, and many large ETF issuers did as well, wanting to include SpaceX due to high demand. So far, not changing the rules has been the right decision because SpaceX is not yet profitable and will not be included in the index for at least a year.

Jamie Battmer: In the short term, it does seem to work well, but who knows in the long term. Looking at the bigger picture, it concerns a fact: 87% of companies with annual revenues over $100 million are still private. So we advise qualified clients to allocate to both public and private markets. Another misconception on Wall Street is that private markets are better, the holy grail. This is not the case; they are just different and represent diversification. This way, you can reach the entire economic system more broadly. In the short term, SpaceX not being in the index is a good thing, but in the future, as more giant IPOs come, whether index companies will stick to their principles or compromise will be an interesting debate.

Charlie Bilello: Moreover, if you hold a total market ETF, SpaceX's weight is only about 20 basis points because the float is too low. So the exposure to SpaceX in a total market portfolio is very small. But if you bet 5%, 10%, 15%, or 20% of your portfolio on SpaceX, that is a huge overweight, a massive bet.

Chapter Four: The Low Inflation Lie and the Bond Market's Counterattack {#article-toc-33030-7}

Charlie Bilello: Next, let’s talk about inflation, which I call the "low inflation lie." The federal government and the Federal Reserve are trying to tell everyone that inflation is under control and not that high. But the Fed's preferred inflation measure, core PCE, has been above 2% for 64 consecutive months. It can now be said that the negative consequences are beginning to show. The yield on the 30-year Treasury bond has risen to 5.2%, the highest since July 2007 and a 19-year high. The bond market is responding to many things, but certainly includes one point: inflation is not as controlled as the Fed says, nor is it close to the 2% target. One more reminder: this is the first time during a Fed rate-cutting cycle that the 30-year yield has not only not decreased but is actually much higher than when the rate cuts began. In my view, this is a signal of policy error and indicates that investors are beginning to hesitate about holding long-term U.S. Treasuries.

Jamie Battmer: I hope so, because you really shouldn’t hold bonds beyond what meets your short- and medium-term cash flow needs. The risk is that someone might say, "5% is good enough; I can live off this." But the data overwhelmingly shows that, in the long run, bond returns are only about half of what the stock market offers. And if interest rates soar like they did in 2022, these so-called safe assets could drop by 20%. A common misconception is that bonds underperform in the long run, but they don’t always provide a safe haven during storms, especially if the storm itself is rising interest rates. Speaking of the chart you just showed, inflation is the ultimate hidden tax, and many of the numbers we see are clearly nonsense. For instance, over the past decade, healthcare costs have decreased, and everyone knows that’s a lie. Take my family as an example: we have three kids, come from a Midwestern farm, and eat a lot of bacon. The price of bacon has skyrocketed, and I even have a pack in the fridge. I told my family to try some cheaper bacon, but the kids wouldn’t eat it. So maybe they’re just picky, or maybe it shows that even ordinary people are feeling the price increases clearly.

Charlie Bilello: I completely agree. The real issue is the cumulative increase, which has always bothered me. When you listen to the Federal Reserve, they only talk about what has happened in the past 12 months. But even looking at that number, inflation is rising, not falling. The new Fed Chair, Kevin Warsh, had a very tough stance this week. One quote from this week’s press conference was: "Households and businesses have been dissatisfied with persistently high inflation for 63, 64 months. We are here, we will deliver, and we are laser-focused on doing this." It’s similar to his tough rhetoric from the first press conference in June. But so far, there has been no action; the Fed hasn’t raised rates, and they are still doing some form of quantitative easing, with the balance sheet still expanding. Over the past six years, U.S. inflation has averaged about 4% per year, which is double the target. In my view, the Fed must act. If you have a 2% target and want to regain the credibility of being inflation fighters, you need to raise rates. The market is starting to price in a 25 basis point rate hike in September, which I think is highly probable. What do you think? Is the Fed behind the curve?

Jamie Battmer: The only data-driven thought is that Wall Street’s error rate in predicting interest rate movements is as high as anything else. A year ago, they predicted nine rate cuts, and none happened. Interestingly, there’s a misconception about the Fed Chair, thinking they are all-powerful, the top gorilla in the tribe, when in fact they are just one voting member. Almost like a president, they receive too much praise and blame, but they are just a human voice pretending to know the future. Alan Greenspan was Fed Chair for a long time and even wrote a book called "Maestro," claiming he coordinated everything. But then we had the most severe economic recession since the Great Depression, with many policies enacted during his tenure. Conversely, Paul Volcker was blamed in the 70s and early 80s for causing a recession and for Carter losing the 1980 election to Reagan because the Fed aggressively suppressed inflation. So yes, prices have remained stubbornly high, and it seems action must be taken, but it’s a balancing act. No one knows what tomorrow will bring. Suppressing inflation will hurt ordinary workers, but higher interest rates will also hurt ordinary workers, small businesses, and the damage to small businesses is greater than to large corporations that can negotiate lower rates. So it’s a balance; future data will tell us the answer, but the fact is prices have just kept rising, rising, rising, never falling, and it has gone on too long. This is a serious hangover from COVID-era policies.

Charlie Bilello: There are indeed many factors. I often talk about the Fed, but it’s clearly not just them. The federal government and fiscal situation are also important parts, but for some reason, the Fed now says, "We don’t talk about this; it’s not our concern." That doesn’t make sense. They must talk and should talk because it’s an important part of the inflation picture. But the Fed also has responsibility; they have kept interest rates ultra-low for a long time, engaged in massive quantitative easing, and their operations on MBS in 2020 and 2021 were absolutely crazy measures that surely fueled inflation and continue to stoke the fire. So I return to this point: if you have a 2% target, you must stick to it. We haven’t achieved it for over five years; you should raise rates to address it. This doesn’t mean you are the only one who can solve inflation, but that’s your job, and you should do something. I believe there will be a rate hike in September, and we can invite you back to discuss it then.

Chapter Five: Fiscal Deficit: More Wasteful than a Drunken Sailor {#article-toc-33030-8}

Charlie Bilello: The next topic is "Slandering the Drunken Sailor." The term "sailor" probably emerged in the 17th century, referring to sailors who spent all their earnings on bars and similar places after coming ashore, until they had nothing left. I often say the federal government spends money like a drunken sailor, but that’s actually slandering drunken sailors. Because we not only spend $7 trillion of the budget but also borrow excessively. Since July 1, the national debt has increased by over $400 billion, which is astonishing. We are rapidly approaching a $40 trillion national debt. Inflation is not just caused by the Fed; this massive borrowing and deficit spending that hasn’t stopped since COVID is the elephant in the room that not many people are seriously discussing.

Jamie Battmer: Yes, it actually started even earlier, after 2008, but it has only gotten worse. Any one of us would be thrown into debtor’s prison for living like this, kicked out of our homes or apartments; it simply doesn’t work.

Charlie Bilello: Don’t try this at home.

Jamie Battmer: Right. And speaking of drunken sailors, at least they eventually return to their ship. Even if it’s the Titanic they’re returning to, they’ve left, and they might hit an iceberg, but they’ve left. The government’s borrowing never has an endpoint. Regardless of which party is in power, it’s always stimulus, stimulus, and more stimulus. It’s like some kind of drug in the medical field; once it enters the body, the economy says, "More, more, more." The pace of growth is frightening. I have three kids, and I was just complaining about bacon prices, half-joking, but the world’s debt, obligations, and the checks we write will ultimately have to be cashed or come due by them. In my view, this leaves a terrifying burden for future generations.

Charlie Bilello: I’ve always said they will pay for this in some way. Not necessarily by repaying debt directly, but more likely through inflation or lower social security in the future. So we have to do something. Moreover, the idea that tariff revenues will balance the budget and pay off the debt, as Scott Bessent said when the debt was $37.2 trillion, now that it’s $39.8 trillion, clearly hasn’t materialized. At the beginning of Trump’s second term in early 2025, many in the government said they would use growth to escape debt, discussing 5%, 6%, or 7% real GDP growth. It sounds nice on paper, but reality is tough. Growth in 2024 is projected at 2.8%, 2025 at 2.1%, and this year’s first quarter at 2.1%, with the latest GDP at only 1.5%. So the idea of escaping debt through growth, unless you have post-World War II growth rates, if you can only grow 1% to 2%, there’s only one solution that no one is willing to do, and that won’t happen until a real crisis, which is cutting spending. There must be discipline.

Jamie Battmer: It’s like someone saying you must eat healthier and exercise more. Before a major heart attack, it’s not an issue; once it happens, it becomes the biggest issue. Will we escape debt through growth? Maybe AI can do something. Maybe. But historical data says no. Will tariffs be the answer? Maybe. But historical data also says no. I just mentioned the new Fed, Greenspan, Volcker, and now Ben Bernanke, who, when he was Fed Chair, truly put these massive debt policies into overdrive. He is famous for understanding the causes of the Great Depression, calling it the holy grail of macroeconomics. But the massive tariffs enacted during economic collapses, all data shows they exacerbated the problems and dragged the global economy into a worldwide depression. So history says no. The future is unwritten, but setting more barriers to capitalism is more likely to bring negative rather than positive effects, and that probability doesn’t seem high.

Chapter Six: How Long Can AI Capital Expenditures Keep Jumping? {#article-toc-33030-9}

Charlie Bilello: There are two more topics. This is a big topic, and much depends on the AI infrastructure boom. Will we keep dancing until the music stops? Everyone remembers Chuck Prince’s famous quote from 2007 when he was CEO of Citigroup, saying they would keep dancing until the music stopped. At that time, the big banks were dancing, and then the music stopped, resulting in the financial crisis. Looking now, large tech companies are still dancing. If you look at the Q1 earnings reports of Amazon, Google, Microsoft, and Meta, Oracle hasn’t reported yet. Their capital expenditures are all above expectations. The four combined spent $165 billion in Q1, an astonishing number, up 87% year-over-year and 393% from three years ago. I keep asking, are we at least close to the peak growth rate of capital expenditures? Are we nearing the moment when the music will stop? I guess when the music stops, it will be because of this chart. Let’s talk about free cash flow. Last week I mentioned Google, which for the first time in its history reported negative free cash flow due to its massive spending on AI infrastructure-related properties and equipment. Meta’s stock was severely hit this week, with free cash flow shrinking by 91%, now only $784 million, down from $12 billion last quarter and $14 billion the quarter before. Jamie, these companies used to be asset-light, which was one reason for their valuation premium, but now they are rapidly transforming into capital-intensive businesses. And ultimately, will investors say, "Wait, I didn’t sign up for this bleeding"? They were once the strongest companies in terms of free cash flow in the world, and now some have turned negative. These companies have given all their money to semiconductor companies. How long can this situation last? Can today’s growth rate be sustained? What will make them pull back on spending plans?

Jamie Battmer: First of all, from a personal perspective, I think Facebook is one of the most evil companies on Earth, so I don't mind seeing it burn cash. But more broadly, we have actually invested a lot in infrastructure. Like any asset class, you have to avoid chasing trends. Yes, there are these hot elements, but there are also companies building roads, bridges, maintaining bridges, recycling centers, and water purification plants. So don't throw out an entire asset class, and don't dump everything into a rapidly growing industry. Yes, it may continue to grow, but we seem to be closer to a peak than a starting point. Interestingly, either as this chart shows, they will run out of money; or, as has always happened, a lot of money and resources will flow into something, making it expensive or draining funds, and then the next revolutionary innovation will make it more efficient. Perhaps someone in a dormitory has thought of that brilliant idea, bringing greater efficiency and reducing the need for such infrastructure. Hopefully, it's Stanford or the University of Montana, not a North Korean government facility. But history has always been like this; soaring oil prices have driven more efficient extraction technologies. Using history as a guide, the outcome could be that they run out of money, or slowly fade away, or AI could really amaze for many, many years. The amazement brought by technology may last a lifetime, but there will be ups and downs, and now a lot of money is flooding into this field, which historically has been a sign of irrational exuberance and danger signals.

Charlie Bilello: Yes, these companies were originally asset-light, which is one reason for their high valuations, and now they are rapidly transforming into capital-intensive businesses, which historically have not provided good returns for shareholders. I also want to quickly mention that this is not the latest financing arrangement; Nvidia has announced $250 billion in financing for OpenAI's data centers. We are seeing this cycle of transactions more and more; companies are running out of money, either issuing debt or equity, and even Google has issued stock, which shocked me. They can no longer finance through free cash flow. OpenAI also seems to lack enough money to do what it wants, now tied to Nvidia, which is essentially guaranteeing financing for this project and using that financing to procure chips. I think this cyclical structure is dangerous; looking back in the future, Nvidia having to resort to this operation will be a warning sign.

Chapter Seven: Positive Signals in Employment and Business Formation {#article-toc-33030-10}

Charlie Bilello: The last topic, let's talk about something positive. There are two very positive trends. First, at the end of last year, we often talked about the weakening job market, rising unemployment rates, and even the first job losses outside of a recession. I call it the most confusing labor market in history. But in the past six months, we have seen a reversal; employment has started to grow again, and initial jobless claims have seen a remarkable decline. The fear that AI will lead to massive unemployment and job losses still exists, and maybe it will happen in the future, but for now, people are not applying for unemployment on a large scale. Initial jobless claims have dropped to the lowest level since January 2024. On the other hand, regarding capital expenditure, which is a potential concern, the number of businesses formed in the information technology sector is so high that the chart is almost overflowing, as shown in this chart. A large number of new businesses are being formed; it has never been easier to start a tech company, requiring fewer employees, and we are seeing many one-person companies emerge. Regardless of market trends and returns, this will bring more innovation and competition. As you said, the cure for this high capital demand and high memory prices will ultimately be innovation. What do you think about the job market and the surge in new businesses?

Jamie Battmer: I think it's great. It shows that people have good ideas. You are right; the barriers to realization have significantly lowered. Some people are in trouble, tired of the daily grind, wanting to try new things, and breaking down those barriers is a wonderful thing. It's also great that fewer people have to go home and tell their families they are unemployed. AI may and will take away some jobs, but history shows that every quantum leap in technology has brought more employment, more welfare, and more productivity. If this time is different, it will be the exception to the rule. Of course, what is effective and what is ineffective will change, but what is effective and what is ineffective has been changing since ancient times. I think it's great that people with ideas and a desire to change can really take a shot at pursuing the American Dream. Many people say the American Dream no longer exists, but the data shows a completely opposite picture.

Charlie Bilello: Great. Jamie, today's show was fantastic, thank you very much.

Jamie Battmer: Thank you, Charlie.

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