Higher Rates and Pricey Valuations Don't Mix

The Weekend Edition is pulled from the daily Stansberry Digest.

More of the same...

During its policy meeting this week (the first under new Chair Kevin Warsh), the Federal Reserve unanimously voted to keep the federal-funds rate in the range of 3.5% to 3.75%.

And Warsh's policy statement was much shorter than those from former chair Jerome Powell – 130 words versus 341 words for Powell's final meeting in April.

Warsh gave a shorter breakdown on recent economic developments. And the Fed removed the language showing its "bias" toward easing interest rates and about committing to the dual mandate of price stability and maximum employment. Instead, the statement said: "The Committee will deliver price stability."

The Fed also released its quarterly Summary of Economic Projections ("SEP") on Wednesday. The Fed raised its core inflation outlook for 2026 to 3.3% from 2.7%. As for economic growth, it lowered its GDP growth outlook from 2.4% to 2.2% for this year.

The closely watched "dot plot," where Fed presidents estimate where interest rates are headed, showed they no longer see a rate cut in 2026. In fact, 9 of the 18 Fed members see at least one rate hike this year.

Warsh is ready to make changes at the Fed...

In his statement, Warsh made one big announcement. He said he's establishing five different task forces of both Fed members and outside consultants to analyze how the Fed operates. The goals are to...

1. Improve communications between the Fed and the market.

   Warsh said he believes markets are more efficient when they react to data on their own, not to how they think the Fed will respond. He also called for potential changes to the SEP.

2. Analyze the benefits and risks of the Fed keeping its "ample reserves" on the balance sheet to ensure liquidity.

3. Find potential new information sources and data gathering to give the Fed a clearer picture of the economy.

4. Analyze the pace and impact of technologies like AI on the Fed's dual mandate of maximum employment and price stability.

5. Better understand the drivers of inflation and, alongside the task force on data, find a more accurate way to measure inflation.

Warsh added that the start of a new tenure is the time to make changes. But we don't expect changes to how the Fed measures data or to its balance sheet anytime soon. While these task forces will launch in the next few weeks... they won't have recommendations until the fall.

Of course, reporters also asked Warsh about inflation. He tried to play "dove" and not outright say that a rate hike is coming...

Still, the two-year Treasury yield spiked and all three U.S. indexes sold off during Warsh's press conference.

The Fed is still in that "sticky" spot with higher inflation and lower growth.

Whether Warsh likes it or not, interest rates are headed higher across the globe...

Last week, the European Central Bank ("ECB") hiked rates for the first time since 2023. And a member of the ECB's governing board said he anticipates at least one more hike as Europe battles higher inflation.

On Tuesday, the Bank of Japan raised interest rates as well, marking its fifth hike since March 2024... and the highest reading in more than 30 years.

And here at home, things are trending worse, too...

The Chicago Fed's National Financial Conditions Index measures whether financial conditions are tight (higher interest rates) or loose (lower interest rates). As you can see, conditions are loose right now...

But every time we've seen a recession in the past 50 years, conditions have flipped from loose (a negative reading) to tight (a positive reading). The last two times conditions tightened significantly – 2015 and 2022 – led to sharp corrections and drawn-out bear markets.

That's the test that Warsh faces now. While the market is pricing in higher rates, investors (and the president) prefer lower rates and easier policy.

Higher interest rates ripple their way through the economy to fight inflation. But they also make it harder for unprofitable companies to borrow to fuel their growth.

That would be particularly challenging for the technology sector.

A $730 Billion Valuation Built on Expectations

A look at OpenAI's financials...

On Tuesday, the Financial Times released AI startup OpenAI's audited financials for both 2024 and 2025. Last year, OpenAI brought in about $13 billion in revenue – more than triple its sales in 2024.

But spending surged alongside revenue...

Last year, OpenAI reported $34 billion in costs and expenses, up from $12.4 billion in 2024. Altogether, OpenAI's loss from operations grew to more than $20 billion from "only" about $9 billion in 2024.

With its losses getting larger, OpenAI has to raise capital. Back in March, it raised more than $120 billion in the private markets. And earlier this month, it filed for an initial public offering ("IPO").

But, right now, the markets (private and public) care less about the financials and more about the story of AI.

On Tuesday, Stansberry Research Senior Analyst Gabe Marshank explained in an all-new, free presentation alongside Whitney Tilson why OpenAI's valuation has soared from its previous funding round a few months ago...

When OpenAI raised $122 billion this year, the vast majority – $110 billion – came from just three companies: Amazon, Nvidia, and SoftBank...

[J]ust three companies, for which these investments are like a drop in the bucket, determined OpenAI is now worth $730 billion.

What's more, they also decided OpenAI was worth $230 billion more than it was just four months earlier when it raised money at a $500 billion valuation.

That's a roughly 50% increase in valuation in less than a year. OpenAI would be one of the 20 largest companies in the U.S. based on market cap today.

All for a company that is seeing its losses balloon as it commits more and more money to buying chips and computing power.

There's a reason OpenAI is lining up an IPO right now...

According to Gabe, insiders are "cashing out."

Now that private equity and venture capital have seen the value of their investments soar, they're locking in gains. And they're passing the risk on to individual investors who have gotten caught up in the hype of seeing the private valuations climb.

This is a common problem for IPOs...

You see, no matter how good a deal the financial media or investment banks try to make OpenAI's IPO sound, you're likely not getting in at a good price. More from Gabe's presentation...

Investors have the "opportunity" to buy the stock at a valuation maybe 15 or 20 times higher than the venture capitalists got just a few months ago.

That's why folks shouldn't fear missing out... especially in the first days after an IPO, when retail investors rush in to buy the stock for the first time.

And once the insiders cash out, regular investors will be the ones left holding the bag.

All the best,

Nick Koziol

Editor's note: The market just got its first taste of this year's IPO mania with SpaceX... And OpenAI could soon be next. But as Gabe and Whitney explain, the bigger story isn't the IPOs themselves. It's a little-known rule change that could reshape how these stocks spread through the financial system – and affect millions of investors' portfolios without them realizing.