It’s artificial!

That’s the lament from equity market bears these days. If we’re being honest, that’s always the lament from bears, or at least in the post-Lehman era, defined as it was by the slow death of price discovery at the hands of central banks.

In 2023, though, you can take bears’ protestations about “artificial” markets both figuratively and a measure of literally. This year’s gains for US equities are attributable entirely to A.I. optimism. At this point, that’s not an exaggeration. So, it’s indeed “artificial.”

“The broad tape is so quiet that speculators are all crowding into the small subset of names that have some A.I. claim,” JonesTrading’s Mike O’Rourke remarked, after Nvidia became just the ninth company in history to achieve a trillion-dollar valuation. “The optimistic nature of bubble behavior means it prematurely labels nearly everyone a winner in a speculative frenzy.”

Nvidia and Microsoft together account for a very large share of this year’s S&P gains. The velocity of the equal-weighted versus cap-weighted collapse now borders on the absurd. Market breadth, measured in that simplest of simple ways, narrowed sharply as Nvidia soared.

Ostensibly, that means the rally is unsustainable, but shorting bubbles is among the most perilous endeavors known to economic man. It’s not even clear, given the defensive characteristics that some tech stocks exhibit, that a mild recession would be enough to pull the rug out, although a downturn would presumably expose more in the way of “hidden” cyclical risks embedded in the business models of growth stock titans.

Note from the figure below that on another simple metric, tech has never been more dominant.

The ratio of the tech sector to the index now eclipses the dot-com bust by a considerable margin.

Arguably, that’s not as perilous now as it was back then. After all, we’re talking about good companies this time around, and as Bloomberg’s Sebastian Boyd noted on Wednesday, tech is synonymous with our lives in ways it wasn’t two decades ago. “It makes sense that it will continue expanding,” he wrote, of tech dominance, adding that as the Fed winds down its tightening cycle, bond yields can retreat, “boost[ing] tech valuations mathematically.”

Over the last couple of years (the inflation years), many market observers suggested the “old economy” was finally poised to exact its revenge amid an epochal macro shift favoring “inflation assets” over everything that flourished during the age of the acronym (i.e., ZIRP, NIRP and LSAP). It was time, some said, for a rethink.

Now, A.I. is forcing a “rethink of the rethink,” if you will, even as the important questions will remain unanswered for years. For example, the new technology may well be disinflationary, but can it offset the inflationary impulse brought on by de-globalization, war and the demise of key structural forces that worked to suppress developed market inflation over the last three decades? Who knows.

I’d note, in closing, that true technological epochs are often synonymous with macro epochs. If A.I. is indeed a personal computer moment or an industrial revolution moment, humanity will have witnessed three world-changing events in the space of three years: A pandemic, the first major war of pure conquest since World War II and the realization of an A.I dream which many worry could rapidly become a nightmare.

Speaking of epochs, on Wednesday, a team of scientists known for the development of the “planetary boundary” framework issued a new warning about the sustainability of human life on Earth. In the very first sentence, they offered a brief recap that doubled as a stark reminder of how tenuous the situation is.

“Humanity is well into the Anthropocene, the proposed new geological epoch where human pressures have put the Earth system on a trajectory moving rapidly away from the stable Holocene state of the past 12,000 years,” they wrote, noting that the Holocene is “the only state of the Earth system we have evidence of being able to support the world as we know it.”