Back in my January post where I made my predictions for 2026, I mentioned the idea of distortions being created by extended periods of high liquidity and little lasting volatility. I believed and still do that we are late cycle and when you get late in a cycle ideas that are plainly untrue not only are believed to be true but are actually calcified into universally accepted truths. So by the time you are late in the cycle things that should be considered major potential risks to the market and economy are still believed to be buying opportunities.

Recently there has been a major upheaval in energy markets and oil has surged to around $100 a barrel as I write this. I think that this is a major issue for markets and one that as much press as it’s received is not really being taken all that seriously by most people or believed to be all that serious.

Many people don’t seem to realize how insanely well things have lined up over the past several years to enable the situation we are in now, where the S&P has gone up sixfold since the GFC.

You’ve had two events that resulted in unprecedented liquidity creation through stimulus and zero rates. Another part of the story that hasn’t gotten as much attention, or perhaps has been taken for granted, has been the shale revolution and the incredibly low price of oil and gasoline throughout this run. We as a society have taken $2.50 gas as the standard despite the cost of nearly everything else going up. Fuel simply hasn’t kept pace because the United States has maxxed out its own oil production and, this is key, actively drained the strategic petroleum reserve. This occured first under Biden due to a short term spike in gas prices and the government never re-upped the supply. We’ve been running everything hot but when you do that for too long, it becomes accepted as the norm.

I don’t think there is any part of the economy that will be untouched by higher oil prices. I talked about oil being a major potential risk to the ride-sharing and food delivery apps like Uber and I think those are great areas to short given the resolve of the investor base and unending bullishness. But there are many others.

The hyperscalers for example have been given enormous leeway to bet on AI and spend all of their FCF on chips. But what happens if that suddenly changes? What if interest rates rise and cash becomes more scarce? Even just a little wobble will likely make a huge difference in what the market chooses to reward. I do think it’s a bit telling that recently stocks that are betting on software, automation (essentially the opposite story as software), hyperscalers and chip companies have all been performing varying degrees of not great. What this seems to be suggesting is that suddenly the market is implying that AI won’t be an immediate tailwind to any sector.

Why? Well because software could benefit from AI but starting last year was assumed to be getting killed off by coding assistants at which point automation stocks soared but now those too have stalled out. NVDA has been in a flat trend for months and yawned at the latest announcement at GPC that revenues were projected to double to over a trillion. Hyperscalers who are spending all the money on chips also have been performing poorly. If one were to assume a ROIC even approaching what NVDA and the hyperscalers have been hyping those stocks should be going up along with earnings estimates. But they aren’t. The fact that not one previously-annointed beneficiary sector is performing well could well be an early warning sign about this trade that has provided a massive tailwind to the S&P over the past three years.

The market has had pretty bad breadth recently too with the VALUG solidly in a downtrend and on a sell signal. I can’t see a reason to like US equities here and think we have a lot of pain left in time and price ahead.

A last word on distortions

I’ve noticed lots of distortions today that I don’t think have a parallel- an enormous number of people heralded as geniuses, way out of proportion with historic percentages, mediocrity in the workforce being accepted because AI masks deficiencies because companies for now are no longer focused on technical excellence but rather leveraging AI. One in particular is that things that are genuinely useful on a small scale are believed to be many multiples of useful and are predicted to have outsized impact on the world. In other words, mountains are made out of mole hills. I’m obviously referring to AI here.

While AI chatbots and agents are cool and definitely useful, I do believe that their projected impact in the near term has been blown way out of proportion. I use multiple AI tools a day. I’d say it’s allowed me to learn new skills at hyperspeed. That’s amazing. But it hasn’t resulted in an enormous increase in concrete output in my view. Rather its enabled me to become surface level competent in a much wider array of areas. I am still in the camp that this trade is going to reverse because the tools just aren’t there.