Dear Uncle Sam, Drink Less
A potential turning point for the market... Rate-hike expectations plummet... Growth is great... Less spending is better... Practically the worst house in the neighborhood... Phase 2 of the AI boom – what to know and what to buy...
Today was a little different...
Last week, we wrote to you about the "stealth bear market."
As our colleague Whitney Tilson noted recently, many stocks and sectors are down – some by a lot – while many Big Tech and AI names continue to drive the top-heavy bull market.
From last Thursday's Digest (written by Nick Koziol)...
Over the past month, the semiconductor industry has been the only thing keeping the market afloat. Over that period, the average S&P 500 stock is down about 5%, but the overall market is just about flat. And that's because the chip sector – as measured by the iShares Semiconductor Fund (SOXX) – is up more than 15%.
However, today, the benchmark S&P 500 Index was up about 0.7%, and market "breadth" – which measures the number of stocks going up versus down – was a little better.
More than 300 S&P 500 companies saw their shares go higher today, as did about two-thirds of the large-cap Russell 1000 Index and more than half of the small-cap Russell 2000 Index. Meantime, the semiconductor sector, as measured by SOXX, was little changed.
Treasury yields were up again too (which is more of the same). The 10-year yield is above 5.3% – a level not seen since 2002. But yields rose while oil futures went lower, which hasn't been very common this year with the war in Iran causing inflation concerns.
What has changed?...
Well, market expectations for a Federal Reserve rate hike at its next meeting later this month have almost completely reversed.
This time last week, federal-funds-futures traders put a 70% likelihood on the Fed raising rates again this month.
Today, the odds of Kevin Warsh and the central bank keeping rates the same are around 76% – thanks to a weak nonfarm payrolls report on Friday (29,000 jobs added versus 90,000 expected). This gives the Fed room to "do nothing" for a month.
The potential for steady rates might be why we're seeing high(er) inflation and growth expectations in the bond market... and why a broader range of stocks got a lift, regardless of the impacts of higher prices.
As Ten Stock Trader editor Greg Diamond wrote on Friday...
The bad news is job growth is slowing. However, capital markets are taking it as a sign of relief, and the oversold conditions we've been tracking in certain sectors of the stock market are finding a base.
One or two days doesn't make a trend, but we'll keep watch. "We're probably looking at more volatility heading into the midterms," Greg says, "but from where I sit, the stock market is also setting up for another bullish run."
On 'growing our way out'...
In Friday's Digest, as part of explaining the current bull case for the yearslong AI-driven bull market, I (Corey McLaughlin) noted the U.S. government's motivations for encouraging AI growth.
I wrote about some of the messaging we've heard lately from President Donald Trump and the Treasury Department about the idea of AI investments helping the country "grow our way out" of tens of trillions of dollars in debt obligations.
That got subscriber Stuart S. thinking. He asked us over the weekend...
Corey, can you explain to us (me) how this growth in AI is going to pay off 40 trillion dollars in debt? It seems as a Republican, I have been fed this line since the Reagan administration. It has never come close to happening. Now the Republicans control all branches of government, and it is still going in the wrong direction. I just don't understand the concept. Please help me understand.
Well, Stuart, you sort of answered the question already. It's not going to happen. In fact, I am betting on the opposite outcome, which is a long run of more debt, more inflation, and higher interest rates (and stocks rising, too).
That's because what Trump and Treasury Secretary Scott Bessent are pitching – using AI productivity gains to eat into the $40 trillion national debt – is just today's version of the same promises we've been hearing for decades.
The idea is that AI will boost corporate efficiency... profits and wages will skyrocket... and the resulting tax windfall for the government magically pays down the deficit.
But history proves that math never works because Washington spends like a drunken sailor... and manipulates our currency to make short-term "fixes." The scourge of inflation outpaces any economic growth. It would take sobriety, or at least less drinking, to make this idea work... and elected officials have no taste for that.
The debt spiral has been ongoing for 25 years now. Uncle Sam hasn't run a fiscal surplus since 2001. We're at a point where the U.S. government is just about the "worst house in the neighborhood" (the democratic world) when it comes to budget management.
As a baseline, GDP growth would need to outpace government borrowing costs for this plan to work. And, right now, it's nowhere close...
The United States is spending about 10.6% of its budget on interest payments for debt alone – just barely below Mexico's 10.9% for the highest percentage among the world's most developed, market-based economies, as the folks at Visual Capitalist recently shared...
Meantime, U.S. GDP is on pace to grow at around 2% annualized... "official" inflation is above 3%, at the least... and Treasury yields are back at two-decade highs.
Even if AI creates an unprecedented economic boom, productivity spikes can't cover things like long-term exploding Medicare and Social Security obligations, let alone higher (and rising) interest payments on the existing debt.
The nominal amount of interest the U.S. pays is $1.23 trillion per year, by far the highest of any of the 33 Organization for Economic Cooperation and Development ("OECD") countries on the list above.
Italy has the next-highest interest costs at $134.5 billion. You can see the problem here. The U.S. debt-to-GDP ratio is around 127%, its highest level ever, eclipsing even the peak after World War II.
We've had the Internet – another generational development – for decades now. It helped make some of the most productive and profitable companies and people of all time... yet the U.S. has never had more debt than it does now.
That's because we've also had fiat currency and constant government manipulation of the purchasing power of our dollars, from – let me be clear – both sides of the aisle in various ways. That includes under various presidential administrations.
The latest example?
On Friday, Trump announced one-time payments of $90 to about 20 million Medicare beneficiaries, a day after he essentially bribed voters with the promise of $5,000 checks to every adult U.S. citizen if Republicans retain control of Congress in next month's midterm elections.
The bottom line is, until any party tackles uncontrolled government spending or returns the U.S. to a "sound money" system (rather than one where you can print your way out of the issues of the day), technology won't save us.
Keep questioning the theory that it can... and protect your wealth from inflation. Owning hard assets, compounding your cash pile at rates that beat inflation, and owning the right stocks are all parts of a good plan.
'Phase 2' of the AI boom is coming. What to know about it...
All this said, AI is a transformative technology that can deliver the productivity gains side of the equation – whether the government adjusts its spending or not.
Companies developing AI tools and infrastructure – like Nvidia (NVDA) and Micron Technology (MU) – have seen their shares soar. And now, the companies that sell AI are positioned to profit.
Senior analyst Brett Eversole says that "Phase 2" of the AI boom is just beginning and that a certain group of businesses will see the largest gains, all while "Phase 1" (the spending and arms race to lay the groundwork for the technology) keeps going on.
Brett has been with Stansberry Research for 16 years... and over the past decade, his annualized returns have beaten the average hedge fund's by nearly 4 times over.
In just about a month, Brett believes the market could reach a turning point... and reprice the entire AI trade, leading to some huge winners and losers. He covers all the details in a new, free presentation.
Brett goes in depth on what's driving Phase 2 of the AI boom... how it could impact the market into 2027... and what it means for your money. He also gives away two free picks – one stock he likes and one you should avoid.
Check out Brett's presentation with the details here. True Wealth Systems subscribers and Stansberry Alliance members can find all this research here.
New 52-week highs (as of 10/2/26): Advanced Micro Devices (AMD), Alpha Architect 1-3 Month Box Fund (BOXX), iMGP DBi Managed Futures Strategy Fund (DBMF), iShares MSCI Japan Index Fund (EWJ), Franklin FTSE Japan Fund (FLJP), Hewlett Packard Enterprise (HPE), ChipMOS Technologies (IMOS), Lumentum (LITE), Palo Alto Networks (PANW), and Invesco S&P 500 Equal Weight Technology Fund (RSPT).
Before we go, we have some more mail to share that arrived over the weekend on gasoline prices... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"The uproar over the price of gasoline is overblown. Yes, it's up but it's been up before and come back down. The real issue is the overall inflation that has already happened and continues to build. Many people don't understand that the numbers talked about in media, internet, etc., are only the rate of inflation. The inflation we already have is not going away. Unless you have income increasing faster than real inflation, your spending power continues to buy less." – Subscriber Robert S.
All the best,
Corey McLaughlin
Baltimore, Maryland
October 5, 2026