Spending Is Up 7%. Paychecks Are Up 3%. What Happens When Stocks Stop Paying the Difference?

Bob Elliott · Unlimited Funds

AI mania has priced in extraordinary earnings growth, setting up disappointment and bad forward equity returns.

Elliott describes the AI complex as a mania, a dynamic in which a seed of reality, here strong recent earnings growth, gets extrapolated into the future. Current pricing implies the most extraordinary earnings growth over the next five years of the entire post-WWII period. That creates two risks: disappointment against very high expectations, and tightening, both market-based (rising spreads and more persistent borrowing) and from the Fed, which the oil complex forces to run tighter policy. Historically that combination is bad for manias on a forward basis. He compares it to 2007 housing, when stocks made new highs even as losses were coming, and says the timing is uncertain.

“what's penciled out is, you know, the most extraordinary earnings growth by a lot in the entirety over the next five years of the entirety of the post war World War two period.”at 8:52

Aahan Menon · Prometheus Research

Forward growth pricing assumes AI firms absorb nearly all revenue and earnings, an unlikely outcome.

Menon sees Bob as focused on the forward pricing baked into growth expectations. Looking at that pricing, it assumes AI companies and hyperscalers will absorb everyone's revenue and earnings. Menon calls that a pretty unlikely outcome, even by his own reckoning. Growth momentum is strong today, but there is less room for it to keep rising as it runs further.

“it basically kind of assumes that these AI companies and hyperscalers are gonna absorb everyone's revenue and everyone's earnings, which seems like a pretty unlikely outcome even to me.”at 32:07

Bob Elliott · Unlimited Funds

The real economy shows no sign of paying for AI chips; tech margin gains reflect capex accounting, not AI.

Margin expansion is concentrated in tech and comes from fixed investment: capex is amortized over about twenty years while the cash cost is spent upfront, which makes margins look better without AI itself producing income. Outside tech, nothing in margins or income per worker shows companies willing to pay for the chips. Productivity gains may exist at the margin, but much of the benefit may be consumer surplus, which doesn't raise incomes. If AI is priced as the greatest technology in history, its macro effects should be visible, so the burden of proof sits with the bulls.

“the answer is, like, nothing in the real economy indicates that they're willing to pay for [Nvidia's] chips, in terms of their margins, in terms of their income per worker, none of it.”at 38:24

Bob Elliott · Unlimited Funds

AI revenue is far too small to justify the roughly $10T buildout; recent revenue growth has flattened.

About $10T of AI-related investment is expected cumulatively by 2030, and servicing it would need roughly $3-4T of annualized revenue. Current AI revenue is maybe $150-200B. Reaching $3T in a couple of years would require exponential growth, but revenue at the highest-frequency AI adopters has been roughly flat for about three or four months after looking parabolic over the summer. Bob argues the expectations built into markets are far ahead of what the revenue data shows.

“You can't have many flat for four months periods if we're gonna go from 200,000,000,000 to 3,000,000,000,000 in the course of a couple of years. Like, we are so far off the curve in order to get to what is priced into the market right now.”at 41:54

Bob Elliott · Unlimited Funds

Bonds look more favorable than stocks on a forward-looking basis, as priced-in growth looks too high.

Elliott frames the stocks-versus-bonds trade as a bet on whether extraordinary nominal growth persists. Over the last few months bond yields rose sharply while stocks barely moved, which only makes sense if markets priced even better earnings just as the main source of earnings growth is being challenged. On days when a major AI company's earnings disappointed, stocks fell and bonds rallied, showing repricing of growth. Pricing does not assume terrible outcomes, but the extraordinary outcomes priced in look much less likely, so bonds look more favorable to stocks forward. Not impossible, but much lower.

“bonds look more favorable to stocks on a forward looking basis from my perspective.”at 27:43

Aahan Menon · Prometheus Research

Bonds look unattractive versus cash, since tightening risk could cost 7-10% for a 1% expected cash edge.

Menon frames a 10-year bond yield as compensation for taking on the risk of monetary policy tightening. He thinks the Fed may need a full tightening cycle, historically around 200bp. Even if only half of that happens, bonds would lose roughly 7-10% against an expected return only about 1% above cash. On that basis, bonds are not very appealing versus cash for anyone who shares his view.

“Even if we achieve half of that tightening, that is, you know, somewhere between a seven to 10% loss for a 1% expected return over cash.”at 30:25

Aahan Menon · Prometheus Research

Inflation-nowcast rule says avoid bonds above 2%, own them below; currently around 1.7-1.9%.

Menon's simple template uses his inflation nowcast. Above 2% you avoid bonds, and below 2% you own them. Since the late nineties the rule has captured most of the fixed-income upside while avoiding most of the downside. For most of this episode it has pointed to avoiding fixed income. A recent brief window, starting about three weeks before recording, flipped it to owning bonds, but that change was driven almost entirely by oil selling off. The core inflation problem has not gone away, and the nowcast is currently around 1.7-1.9%.

“If our inflation now cost was above 2%, you would avoid bonds. If it was below 2%, you would own bonds.”at 34:09

Bob Elliott · Unlimited Funds

Democratic governors now cover about 80% of expected data-center build-out, up from 30%, a drag on AI.

Governors normally matter little, but they have real authority over data center investment and can restrict data centers by executive order, so the election matters more than usual. Before the election, Democratic governors covered about 30% of the expected increase in data center construction or power over the next five years. After the election that share is about 80%. Elliott also notes stocks rose while video fell after the results. For a market so concentrated in AI, this is another chink in the armor of the AI mania. It does not change the picture alone, but it adds to the drag on the narrative.

“Democratic governors covered about 30% of the perspective, expected increase in data center construction or power over the next, whatever, five years, and now 80% of that is covered by democratic governors.”at 4:52

Bob Elliott · Unlimited Funds

About $6T of AI forward commitments far exceed roughly $200B of income, risking a self-reinforcing downturn.

Forward contractual commitments across the AI cycle total about $6T, against about $200B of actual income, which Bob calls pretty levered. Those commitments work like debt: firms engage in economic activity today on the promise of future income. If people doubt AI will generate enough real-economy revenue to deliver on those commitments, they scale back activity. That slows capex, which leads to an earnings downturn, then an asset-price decline and negative consumer spending, a self-reinforcing cycle. Bob stresses this is the dynamic, not a near-term prediction. He calls it a real-economy risk rather than a credit risk.

“we have built up, you know, $6,000,000,000,000 of forward contractual commitments, particularly related to the AI dynamic.”at 51:32

Bob Elliott · Unlimited Funds

Consumers are in a savings-driven expansion with income growth lagging spending, showing cracks and flat real spending.

Elliott argues the expansion moved from income-driven, when spending and income both grew about 6%, to savings-driven, where nominal spending runs 6-8% to keep up with high prices while income growth has slowed to about 3-3.5%. Households have been stressed since early 2025 and acutely since oil prices rose this year. Real consumer spending was zero in September, and he sees cracks. The model relies on asset prices rising to keep incentivizing savings drawdown, but stocks have been flat for six months, 401(k)s are flat, and housing is flat or down in sensitive areas, removing that support.

“we've transitioned from an income driven expansion where essentially spending was 6% annual growth and and income was 6% annual growth, to DIS savings driven expansion, where spending is six, seven, 8% nominal”at 15:39

Aahan Menon · Prometheus Research

Dissaving and surging household wealth are propping up consumption; the savings contribution is unusually large.

Menon estimates nominal growth of roughly 6-8%, with consumption about 70% or more of GDP. About 2 points of consumption growth come from households dissaving, a contribution he says has not been seen consistently in most of macro history. Wage growth is anemic, but a very large increase in household wealth from real estate and equities has been a major source of funds for households. That combination sustains the dissaving impulse, so consumption would be about 2% lower without it.

“sans that that dissaving impulse, we would have consumption which is 2% lower, which is, you know... it is at levels that we have just not seen on a consistent basis on... In most of macro history.”at 18:38

Bob Elliott · Unlimited Funds

Central banks are abdicating with inflation at 3-4%; tightening is market-driven, and the Fed is lazy, not behind.

Elliott notes inflation is around 3-4% across the developed world, yet central banks are doing little beyond speeches. In a past regime with low unemployment and inflation of 3-4%, a central bank would be tightening. Pressure is needed to get even one hike. The Royal Bank of Australia is an exception. He reads this as a shift in the reaction function: the tightening cycle is more market-based than central-bank-based, and policy is less acute than conditions warrant. Asked whether central banks are behind and will catch up or are simply lazy, he bets on lazy. Menon sees it as a debate, not a settled view.

“Inflation is three to 4%, and it's pretty much three to 4% across the developed world, maybe a little higher in certain places. And yet, like, what are central banks doing? Like, nothing. Basically, no.”at 21:53

Aahan Menon · Prometheus Research

The Fed is behind the curve, likely for political reasons, and its policy is too loose for the inflation problem.

Menon largely agrees with Bob that central banks are behind. He asks whether they are behind because they don't see inflation or for political motives, and says the answer is increasingly the latter. History suggests about 200bp of hikes are needed for every 100bp of disinflation, which requires a material drop in nominal GDP of around 2%. Central banks have prioritized recession avoidance at all costs, so today's policy looks inconsistent with what is needed. If policymakers don't go far enough, nominal activity keeps running hot and markets keep struggling with the pricing policymakers guide toward.

“Are they behind because they just don't see inflation? Or are they behind because of political motives? I think that, you know, the answer more and more is skewed towards the latter.”at 24:21

Bob Elliott · Unlimited Funds

Credit system is too unlevered to produce a systemic credit event; no existential credit risk remains.

Banks have gone from about 30x levered to about 8x. Much credit now sits on low-leverage terms, around 50% loan-to-value, and private credit funds are often only about 2x levered. Because of this, losses can be absorbed without ruin. Commercial real estate losses have run about 20-30 basis points over the last three or four years, and the 50% LTV loans explain why losses were contained after SVB. Credit has been moved from banks to unlevered pension funds and retail investors via private credit, so it now behaves more like equity than credit and has removed the pre-GFC type of existential credit risk.

“we've transformed the credit system to make it look a lot more like equity than it like credit. And as a result, have basically sucked out all of the, the the type of existential credit risk that existed, you know, in the pre GFC period.”at 49:40

Aahan Menon · Prometheus Research

Growth is not funded by credit or debt, so any blowup would be isolated rather than systemic.

Menon agrees with Bob Elliott's view that credit has been restructured. Economic growth today is not funded by credit or debt, so even if a particular exposure blows up, the damage stays contained and does not become systemic. Menon restates the point in different language rather than adding new evidence.

“when you look at the composition of economic growth today, it is just not funded by credit or by debt. And so as a result, even if you have something just blow up, it's going to be kind of isolated and not systemic.”at 50:38

Aahan Menon · Prometheus Research

Fiscal policy won't change materially under either party; current stance reflects automatic stabilizers.

After the midterms, Menon argues fiscal policy will not shift much regardless of party. He says the current fiscal stance is mostly a function of automatic stabilizers and non-discretionary spending, so the election does not change the fiscal picture materially. He does note a possible faster resolution of the Iran war, but says oil remains driven by supply shortage and a geopolitical premium.

“I think fiscal policy, regardless of party, is not gonna change very materially. A lot of the fiscal policy stance that we have is just a function of automatic stabilizers”at 2:43

Aahan Menon · Prometheus Research

Oil prices face persistent supply shortage and a geopolitical premium, pushing them higher.

Menon says the market outcome of the election is pressure on oil prices higher. He attributes that pressure to a shortage of supply that will likely stay persistent, plus a geopolitical premium already baked into prices from the situation in the Middle East. He sees little that changed in the 24 hours after the election, so oil remains the key macro driver feeding headline inflation.

“And our pressure on oil prices higher is driven by shortage of supply, which will probably likely stay persistent.”at 3:21

Bob Elliott · Unlimited Funds

Nominal growth has peaked and is slowing into Q4, while market pricing still expects very high growth.

Elliott distinguishes peak nominal growth from peak pricing of nominal growth. Nominal GDP growth in Q3 was already lower than in Q2 on a GDP basis, and he expects it to slow even more significantly in Q4. Markets have extrapolated strong nominal growth, so when expectations of very high GDP growth meet slowing GDP growth, disappointment follows. He describes this as alligator jaws, with market pricing diverging from macro outcomes.

“nominal growth in the third quarter, but just on a GDP basis was lower than it was in the second quarter... and likely will slow even more significantly in the fourth quarter.”at 11:02

Aahan Menon · Prometheus Research

An inflationary regime is here to stay; the open question is whether growth is rising or slowing.

Menon's regime work consistently shows an inflationary regime. For most of the year, rising growth and rising inflation have dominated asset markets and the economy. Market-based signs now point to slowing growth, but there is no fundamental corroboration yet, so the regime view is still rising growth with rising inflation. The more robust conclusion is that the inflationary regime is persistent regardless of which growth regime dominates.

“it seems fairly clear that an inflationary regime is here to stay.”at 12:56

Aahan Menon · Prometheus Research

Labor drag comes from falling immigration and participation, not weak hiring; this weighs on wages.

Menon splits the labor market into population growth, participation, and hiring. Hiring is fairly strong and unemployment is low. The real drags are a population decline driven by lower immigration and a sharp fall in participation, which is partly immigration-driven and partly demographic as the workforce ages. Those secular forces weigh on wages, which combined with a relatively tight cycle produces weak income growth alongside strong balance sheets.

“What's really dragging on the labor market today is a decline in population, which is driven by a decline in immigration, and a very dramatic decline in participation”at 20:30

Bob Elliott · Unlimited Funds

No macro evidence yet of AI-driven productivity; real GDP per worker sits on its pre-ChatGPT trend.

Elliott says there's no evidence of a meaningful macro productivity increase from AI. Real GDP per worker is consistent with the trend that existed just before COVID, the post-COVID trend before ChatGPT, and the trend from the nineties and early 2000s. Many people say AI makes them incrementally more productive, but that is not the test. The real question is whether AI creates an acceleration in productivity, which is what the extraordinary investment and earnings already priced in would require. Nothing he sees at the macro level is meaningfully changing that.

“It is consistent and in line with the trend line that existed just before COVID”at 36:34

Aahan Menon · Prometheus Research

Profit growth depends on business capex or household dissaving, and both look unsustainable over 6-12 months as tightening bites.

Following Kalecki-Levy logic, profits are built on savings. Corporate profits today split roughly evenly between business investment and household dissaving. Dissaving is at its highest contribution to GDP on a medium-term trend in decades. To keep profit growth at its current pace, businesses would have to double down on capex, or consumers would have to dissave even further. Over six to twelve months, both look questionable. Tightening monetary policy slows equity returns, and since the sources of funds for household dissaving and corporate investment depend on rising equity prices, the support for profits becomes more at risk.

“as you start to look out over six to twelve months, it becomes really questionable whether you can continue to have business to just do CapEx at this ongoing pace, or consumers continue to just [dissave] at this ongoing pace”at 45:11