Published October 3, 2025
With the stock market having come through the infamous month of September in fine fashion, investment analyst talk of a bubble in stocks, and in AI-related companies, has returned full force. Delta Research outlines below the supporting structures for higher stock prices. Afterward, we link to an article on the AI bubble thesis. As Trend-Followers, we follow the market’s price moves, up or down. Regardless of AI bubble fears, price continues to move up.
“The positive investment themes of the third quarter are accelerating as we head into the fourth quarter and into 2026. The S&P 500 returns have been driven by a combination of:
- Better than expected earnings growth,
- No recession,
- Global fiscal policy easing, and
- An enormous investment in Artificial Intelligence (AI)
Two months ago, the Federal Reserve Bank of Atlanta’s estimate of GDP growth in the third quarter was roughly 2%. Today, it has almost doubled to 3.8%.
When Oracle (ORCL) reported earnings on September 9, it talked about a 359% increase in its backlog of business. Much of this is tied to AI and cloud services. On September 10, Oracle announced that OpenAI agreed to purchase $300 billion of cloud computing from Oracle. If Oracle were our only measurement of investment in AI, there is convincing evidence of early-cycle spending acceleration.
But we see the same intensifying growth consistently across the largest technology companies. Microsoft, Meta, Google and Amazon are expected to spend $364 billion this year on AI capital projects. That is a sixfold increase from 2020. It is larger than the budgets of NASA, the Department of Energy and the Department of State. It is equivalent to 1% of the United States’ GDP.
The first Fed Funds rate cut this year was in September. With the government shutdown, the Non-Farm Payrolls Report will not be released today, the first Friday of the month. The most current data the Federal Reserve will have regarding the overall condition of the labor market will be the ADP employment report released on Wednesday. In September, the goods-producing sector lost 3,000 jobs, and the service-providing sector lost 28,000 jobs. Small and medium establishments combined shed 60,000 positions, while large establishments added 33,000 jobs. The August employment numbers were revised down. In the absence of the employment report from the Bureau of Labor Statistics (BLS), the Fed is likely to move forward with another 0.25% Fed Funds rate reduction this month.
“But it’s not just base rates that are coming down. Here we have high-yield spreads. Back in ‘22, when things looked scariest, high-yield spreads were nearly 600 over. They’ve come down basically in half to 290 over. This, of course, drives down borrowing costs for companies and is very good for the transaction environment.” – Blackstone President Jon Gray
Lower borrowing rates for non-investment grade corporations are fueling an acceleration in merger and acquisition activity. Global deal values have topped $1 trillion in the third quarter for only the second time on record, according to data compiled by Bloomberg, thanks to transactions like Monday’s roughly $55 billion take-private of video game maker Electronic Arts Inc.
Since the start of August, companies that borrow using floating rate interest are up 12% (GS basket of stocks with high shares of floating rate debt) versus 3% for the equal-weight S&P 500. Goldman Sachs estimates that every 1% decline in the cost of borrowing boosts the earnings of companies with high floating rate debt (many small-cap companies) by about 5%.
Business activity and stock valuations are performing well. This is partly a phenomenon of the U.S. dollar losing value. Inflation erodes the value of uninvested dollars at a rapid rate. To maintain and build wealth, individual and institutional investors have to put dollars to work in appreciating assets.”
As for articles about a possible AI bubble, here’s one:
While Bank of America’s Michael Hartnett notes that bubbles typically only pop when the Fed raises interest rates, which doesn’t appear likely anytime soon
Market Update
While the federal government’s latest shutdown drove news headlines, stocks continued their march upward this week, unphased by the Washington debates. Stocks tacked on +0.3% to their rally in Monday’s session and added another +0.2% Tuesday to close the best month of September in 15 years. The resumption of Federal Reserve interest rate cuts earlier in the month added new fuel to the market’s upward thrust. Stocks kicked off October with another fractional push (+0.3%) Wednesday to a record high. A dip in private employment sent interest rates lower. Long-suffering pharmaceutical stocks rushed higher on news of what amounts to a deal with the Trump Administration. Pharma companies will make some drugs available at cheaper prices via a direct-to-consumer website while increasing domestic manufacturing as a way to skirt possible tariffs. Another fractional gain Thursday with semiconductors once again the hot sector on news of a deal between ChatGPT maker OpenAI and two large Korean companies on further AI infrastructure development. Chip stocks are seen as beneficiaries of the massive AI infrastructure investment. Friday brought mixed trading with the Nasdaq pulling back while the S&P was flat.
Stocks pushed further into record territory this week to kick off the final quarter of the year. The S&P 500 (SPY) rose +1.12% while the Nasdaq 100 (QQQ) gained +1.21%. Small cap stocks (IWM) posted a +1.86% lift.
Warm wishes and until next week.