The stock rally has a SPOF problem. Several of them, actually.

Fewer than 10 US tech companies comprise around a quarter of global equity market cap. The fate of cap-weighted global equity benchmarks is thus inextricably bound up with the fate of those companies’ share prices.

Those companies counted among history’s best businesses prior to May of 2023, when Nvidia changed the world with one earnings report. Since then, the competition to claim pole position in the AI arms race has manifested in a single-mindedness across the US mega-cap C-suite.

The businesses are still differentiated — Amazon’s still an online retailer, Meta still runs social media platforms and so on — but there’s a sense in which all of these companies are now AI companies, or trying to become AI companies. “Magnificent 7” capex in 2022 was $173 billion. It’s seen at nearly half a trillion in 2026.

As the figure above shows, Amazon, Google, Meta and Microsoft alone are expected to account for a third of S&P 500 capex next year, up from just 14% five years ago. In 2015, those companies’ capex amounted to about 25% of their collective operating cash flow. That figure’s around 65% now.

The most pressing single point of failure problem is simply the prospect that demand for AI-enabled services and products underwhelms or, relatedly, that the provision of AI-enabled services and the production of AI-enabled products turns out to be so expensive that margins for the companies which provide and produce them collapse.

Those companies trade around 28x on a 24-month forward multiple. That’s not “crazy,” per se, but by definition (it’s a forward-looking metric) it assumes that AI demand will be strong and margins will prove resilient.

The chart above, from Goldman, seems comforting. Very much so, in fact. On a PEG basis, we’re not in a bubble at all. Indeed, tech trades in line with everything else. The issue’s the same, though. And Goldman didn’t dance around it. “Of course, the deficiency with the standard PEG ratio is that it uses analysts’ forecasts which may themselves be too optimistic,” Peter Oppenheimer wrote.

The SPOF problem goes well beyond basic questions about the viability of the superlative-laden AI narrative itself and well beyond the risks to a narrow global stock rally from a sharp de-rating for the names driving it. There are multiple single points of failure for a bubble built on AI in 2025, and more than a few of them are related to geopolitical competition, and specifically the fraught US-China bilateral.

On October 10, a US equity melt-up which produced 30 new record highs for the S&P 500 in less than four months hit a brick wall when Donald Trump lost his temper with Beijing over new Chinese restrictions on rare earth exports. After accusing Xi Jinping of a “sinister” conspiracy to monopolize the market for critical minerals and, importantly, magnets which depend on them, Trump announced a 100% additional tariff on China. For good measure, he threatened uncompromising curbs for “critical software.” The new measures are set to kick in at the beginning of next month.

Setting aside the self-evident fact that the US can’t sustain triple-digit tariffs on all Chinese goods (that’s a de facto embargo, it didn’t work when Trump tried it earlier this year and it won’t work now), the latest dustup between Washington and Beijing underscored the extent to which the AI revolution will be a fitful affair if it’s subject to the day-to-day vagaries of US-China strategic jostling.

Very long story very short, there’s just one company on the planet which produces the equipment needed to make the semiconductors at the heart of the AI revolution: ASML. Without ASML’s machines, TSMC (and a lot of other people besides) are in a real bind. And Beijing’s new restrictions would, if enforced strictly, throw a spanner in the works for ASML.

At the same time, China’s new export controls demand that foreign companies secure a license from Beijing in order to export any products containing Chinese rare earths. Setting aside the impossibility of assessing such a thing from a regulator’s desk in Beijing, any effort on the part of foreign manufacturers to comply with that decree could result in indefinite delays. Even if you assume Beijing’s sincere about creating a process whereby re-export licenses could actually be obtained (and I don’t think that’s a safe assumption at all), that process would be a Kafka nightmare, and anyway completely incompatible with any sort of “just-in-time” management protocols.

Obviously, China designed these curbs to look like US export controls on advanced chips. This was Beijing saying, “We can play this game too. We can put limits on what you can get directly from us, and we can also prevent you from getting those things through third parties by asserting extraterritorial jurisdiction.”

In theory — note the emphasis, because I don’t think China has any intention of actually implementing these curbs, or at least not on a sustained, no-exceptions basis — Beijing could effectively shut down the supply chain for the advanced chips at the center of the AI bubble.

But that’s not the goal. The goal, as emphasized here on Friday, is to secure the upper-hand in trade negotiations with the US. Trump suggested the restrictions may mean calling off direct talks with Xi, but as was the case in April and May, China has the cards. They’re already living with US restrictions on advanced semiconductors. Making those restrictions more draconian probably won’t yield much in the way of additional leverage. They don’t have a homegrown ASML, but they’re working on it, and the likes of Alibaba are trying to develop better chips.

Yes, the Chinese economy’s on shaky footing, but remember: The country’s more than an autocracy. It’s an outright totalitarian dictatorship. Xi doesn’t have to concern himself with public opinion, nor even with intra-Party politics, having years ago solidified himself as a leader on par with Mao in terms of consolidating virtually all power in his own person.

I expect the Trump-Xi tiff to be resolved in time for the two to meet next month in South Korea, which is to say I’m not especially concerned about the prospect of China actually attempting to wield its “sinister” rare earths monopoly to blow up the global advanced semiconductor supply chain.

That said, I am concerned about the extent to which a stock rally which finds the most important equity benchmark on the planet trading on some of the richest multiples ever witnessed, suffers from a lack of redundancies at every turn from the narrative level, to the stock level, all the way down to the actual logistics involved in creating and perpetuating the technological revolution behind the euphoria.