Investors are lowering expectations for U.S. growth and buying government bonds amid rising fears about bets on artificial intelligence.
Although the US reported better-than-expected growth this week, investors reached mixed conclusions about the sustainability of the AI-driven rally following third-quarter corporate earnings.
While some of this migration into bonds is a temporary movement by traders waiting out stock volatility, others argue that a more fundamental shift is taking place. Market indicators of growth expectations, which had triggered months of selling in the Treasury market, have reversed course in the past two weeks.
The yield on a ten-year public bond discounted for the effects of inflation — the equivalent, in Brazil, of the long-term Treasury IPCA+ — fell this week to 2.58%, its lowest level since the beginning of September.
Movements in five-year and 30-year bonds were equally impressive, and both also reached their lowest levels since September, reversing much of the selling.
Bond yields fall along with growth expectations as investors buy these securities, betting they will outperform stocks. This week's outflow from stock exchanges is smaller than that seen in the Northern Hemisphere summer, but the inflow into bonds is enough to suggest that investors are looking for ways to protect themselves from their significant exposure to AI.
Bill Campbell, portfolio manager at DoubleLine, said: "The market has been betting on strong growth, supported by AI and expectations of some relief in the Middle East, and we are now reassessing the scenario."
Negative news from Meta, Alphabet, Amazon and Intel this week contributed to the Nasdaq 100's 2% drop, adding to losses from previous weeks and pushing the index into correction territory.
A huge portion of that drop came from Alphabet, whose shares fell 13% on Thursday after the company reported that its free cash flow had turned negative for the second time in a quarter since its IPO in 2004. Capital spending rose sharply at the other three companies, while revenue began to slow in some areas.
This occurred on the same day that the Bureau of Economic Analysis reported, on Thursday, that the US economy had grown 3.4% in the third quarter, above the 3.2% predicted by economists consulted by Bloomberg.
Priya Misra, portfolio manager at JPMorgan Asset Management, said: "There are no signs of slowing growth in any of the economic data. But markets look to the future. A reassessment of AI implies a reassessment of growth expectations."
Economists have long warned that the US economy has become overly dependent on the AI boom.
"The composition of growth is worrying," said Vincent Reinhart, chief economist at BNY Investments. "It's too reliant on technology spending. And it's not just a U.S. phenomenon, it's a global phenomenon."
Reinhart added, "You don't have to be pessimistic about technology to be worried."
Robert Sockin, chief US economist at PGIM, said the AI boom was also raising concerns that the US economy was at risk of overheating.
"We've been calling this environment the story of the thickest tails," Sockin said. "Often, the economy overheats, and this leads to a recession."
He added that while the PGIM raised the likelihood of strong growth next year, the risk of recession had also increased, from 10% at the start of this year to 20% a month ago. "Given the events of the last few weeks... maybe it's 25%," Sockin said.
Federal Reserve Chairman Kevin Warsh this week tried to dispel such concerns, saying that the sources of the US economy's strength were not "concentrated just in narrow niches."
"That's a much harder narrative to support now than it would have been a few quarters ago," Warsh said on Wednesday after the Fed decided to leave interest rates unchanged.
Some investors also suggested that the problem with the growth and boom of AI was more of a relative issue.
“When we talk about growth, we often measure change from one year to the next,” said Jason Granet, chief investment officer and head of credit services at BNY.
"Because AI companies grew so much last year, it will be harder to beat these numbers. Growth may be slowing, but that doesn't necessarily indicate weakness in the economy."
