Is your portfolio marching toward a trap? VIEW IN BROWSER In the classic short story “The Most Dangerous Game,” skilled hunter Sanger Rainsford finds himself hunted by the sadistic General Zaroff on a remote island. To survive, Rainsford uses his hunting expertise to create several traps, one of which is the classic "Burmese Tiger Pit." It’s a deep hole, camouflaged with a layer of leaves and branches concealing sharpened wooden stakes at the bottom. Zaroff avoids it, but the trap kills one of his hunting dogs. Today, we need to be careful of an “AI Tiger Pit” – a danger hidden beneath what appears to be solid ground. At first glance, the market’s path ahead appears firm. Indexes hover near all-time highs, Q2 earnings were strong, rate cuts are coming, and the headlines are filled with promises of boundless AI-fueled gains. But look closer, and you’ll see what could be a camouflaged pit… A disproportionate share of earnings strength today is coming from hyperscaler spending on AI infrastructure, while the traditional driver of U.S. growth – the consumer – is beginning to show fatigue. Are we walking straight into trouble? The tidal wave of AI spending that’s juicing earnings In 2024, Microsoft, Amazon, Alphabet, and Meta boosted capex more than 50%, almost all of it aimed at AI infrastructure. That momentum hasn’t slowed. Microsoft spent over $19B in Q2 2025 alone – nearly double last year’s figure – with Amazon and Alphabet close behind. Meanwhile, McKinsey estimates that the global buildout of AI infrastructure could cost $6.7 trillion by 2030. This firehose of spending flows downstream to AI suppliers, utilities, and chipmakers. So, it’s no wonder that when investors look at the earnings scoreboard today, they like what they see. But as great as this hyperscaler tidal wave of spending is, it’s not the same as consumer spending that sustains a healthy economy – and the entire economy, not just the companies within the AI universe. | Recommended Link | | | | After more than 40 years on Wall Street, I feel a sense of duty to share what I’ve recently learned with as many people as I can. A very dark day is coming to America. Millions of people are standing in the shadow of the biggest financial tidal wave this nation has ever seen. And they have no idea it’s coming. My goal here, right now, is to not scare – but prepare you. It doesn’t matter if you have $10,000 in savings… Or $10 million. You can benefit from the information I share here. |  | | So, what is happening with the U.S. consumer? Here’s the top line: - Main Street spending is flat
- Wealthy consumers are skewing the headline numbers
- Overall sentiment is deteriorating
Digging into the first point, this morning brought solid retail spending data. Sales in August clocked in at 0.6% growth, double what economists were expecting. While this looks great, the issue is that it wasn’t adjusted for inflation. As Wells Fargo put it: They look really strong at face value, but some of that is just due to higher prices of product, not necessarily more volume. After adjusting for inflation, the Richmond Fed notes that real PCE has barely budged since late 2024, a sign that consumer spending has essentially been treading water. To be clear, spending from your average U.S. consumer isn’t falling off a cliff. But stagnant spending doesn’t support today’s expensive stock prices. Moving on to our second point, it’s harder to see this stagnant spending from average Americans because spending from wealthy Americans is booming. Let’s go to Bloomberg from this morning: Wealthy consumers continue to account for a growing share of US consumer spending, highlighting the lopsided strength of the economy… Consumers in the top 10%… accounted for 49.2% of total spending in the second quarter, the highest level in data going back to 1989. Finally, overall consumer sentiment is deteriorating. Let’s go to our technology expert Luke Lango from last Friday’s Innovation Investor Daily Notes: The University of Michigan’s September Consumer Sentiment Report landed like a gut punch [Friday] morning. The headline index fell to 55.4 from 58.2 in August, one of the ugliest readings since the Great Financial Crisis (GFC). The Future Expectations Index collapsed to 51.8. Consumers’ outlook for their financial situation—both in the near term and over five years—hit record or near-record lows… Historically, that kind of sentiment collapse has always marched in step with falling stock prices. Luke runs the numbers on the other times when the University of Michigan’s Consumer Expectations Index dipped below 55 (early 1980s, early 1990s, 2008/09, 2011, and 2022), concluding: The U.S. economy stalled out and the U.S. stock market was either in the middle of or about to enter into a >15% crash. But this time around, we have the Consumer Expectations Index running below 55 – and yet, stocks are at record highs. This is not sustainable forever. So, what happens if/when overall consumer spending and AI capex spending slows? Right now, many investors see “earnings are good” and stop there. But if those earnings are being inflated by a hyperscaler spending boom that isn’t sustainable – while retail spending stagnates/slows – then the market may be more vulnerable than it looks. So, how soon could we see a slowdown? Many analysts believe we’re several quarters out at a minimum, but not Goldman Sachs. Here’s Barron’s: The AI trade is going full throttle…but it will slow down, Goldman Sachs believes, and Wall Street must be ready when that time inevitably comes… A slowdown in AI capex growth is on the way if Goldman’s team is right. Analysts “assume a sharp deceleration” beginning in the fourth quarter and lasting into 2026. And a big drop could pose what they describe as a “substantial downside risk to both the AI trade and the broad S&P 500” … As Goldman’s analysts noted, the prices of AI infrastructure stocks “have far exceeded the trajectory of near-term earnings,” which they consider a reflection of investor optimism. Although the timing of the capex spending slowdown is important, expectations are more important… Does Wall Street see this AI spending boom as temporary fuel – and after it ends, Wall Street will graciously accept reduced earnings that aren’t goosed by hyperscalers? Or is Wall Street getting hooked on this volcanic spending, setting up for crushing disappointment when it inevitably slows/stops? And that brings us to tomorrow’s FOMC meeting Tomorrow brings the September FOMC meeting where the assumption is we’ll get a quarter-point interest rate cut. A rate cut will give consumers some breathing room, potentially extending their spending power just as corporate America searches for new sources of growth. But the real issue that could move markets will be the forecast for additional rate cuts via the updated dot plot. Here’s legendary investor Louis Navellier from his Breakthrough Stocks Weekly Update: It is a forgone conclusion that the Federal Reserve will finally cut key interest rates at its Federal Open Market Committee (FOMC) meeting [tomorrow]… The big news, though, will be the updated “dot plot,” as Wall Street is anxious to see how many rate cuts are forthcoming. Before all of the data [last] week, Wall Street was expecting three rate cuts. But there is now a growing probability that four rate cuts could be in the offing. We’ll report back. So, where does all this leave investors? It’s not time to abandon AI leaders or the market. Hyperscalers are still spending aggressively, and a dovish Fed is likely to inject more fuel. But it is time to tread carefully – testing each step before plunging into a Tiger Pit. One of the best ways to do this is by investing through a valuation lens, remembering the words from Howard Marks, co-chairman of Oaktree Capital Management: There’s no asset so good that it can’t be overpriced and become a bad investment, and very few assets are so bad they can’t be underpriced and be a good investment. For a head start, our macro investing expert Eric Fry recently released a research package that dives into which AI stocks to sell today based on their valuation, and which to buy. For example, Eric is urging investors to sell Nvidia – a world-class company, but at its current price, perhaps not a world-class investment. From Eric: Nvidia’s market cap is $4.23 trillion — the largest in the world. It trades at 56 times earnings, about double the market average… You don’t want to stock up on overvalued or faulty companies. You want to invest in the right stocks at the right time. In Eric’s “Sell This, Buy That” research package, he reveals – for free – which market moves he’s making today. You can access it right now, right here. Coming full circle The clues suggest there are dangers on the pathway ahead, and yet, so too are rewards. So, let’s step cautiously, but continue forward. I’ll give Luke the final word: If consumers don’t rebound with help from lower inflation, lower rates, and a stronger job market in the next year or two, then once AI spending cools, stocks could face a hard reset. But that’s a longer-term risk—something for 2027 and beyond. For now, AI is strong enough to keep driving this melt-up. Have a good evening, Jeff Remsburg | 
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