Eye on the Market

Latest edition · October 8, 2026

Cembalest

Michael Cembalest addresses investor concerns regarding heavy market concentration in AI, the sustainability of corporate profits amid higher interest rates, and mounting US federal debt. He also examines rising shadow stress in private credit markets and structural deindustrialization pressures facing European manufacturers against China.

In this edition of Eye on the Market, Michael Cembalest assesses key vulnerabilities across the global economy. He highlights that while AI stocks account for 60%–80% of S&P earnings growth, price returns, and capex, their valuations are supported by actual earnings growth rather than multiple expansion. Corporate profits remain protected because net interest costs as a share of profits sit at all-time lows. However, longer-term threats loom: US federal debt is projected to require 100% of tax revenue for entitlements and interest by 2030–2031, private credit stress reaches ~15% when including PIK and debt-to-equity conversions, and European automakers face profound cost disadvantages versus Chinese competitors.

Key takeaways from the latest edition

• 1.AI concentration is extreme in US markets and growth: a basket of 42 AI stocks accounts for 60%–80% of S&P earnings growth, returns, and capex since January 2024, yet gains are underpinned by earnings growth rather than pure multiple expansion.
• 2.Private credit stress varies dramatically by definition: while headline default rates show 1%–3% and Cliffwater's non-accrual plus PIK metric sits at ~5%, broader BDC stress encompassing restructurings and extensions reaches nearly 15%.
• 3.The US federal deficit exceeds 5% of GDP during an economic expansion for the first time since 1970; by 2030–2031, CBO projects 100% of tax revenues will be consumed by entitlements and debt interest, pointing to eventual budget restructuring.

What this series covers

• Califoreboding
• One trick pony: the concentrated contributions of AI to US markets and growth
• More foreboding from Anthropic on cyber risks from open weight models, and a new AI word to learn
• US Federal debt: are rising yields a foreboding of future budget restructuring options?
• Foreboding in private credit: measuring stress is a combination of art and science

Edition archive

• Cembalest

  October 8, 2026

• libertarians at the gate amv

  September 10, 2026

• Cembalest Rear Window Sept 1

  September 1, 2026

• rear window amv

  September 1, 2026

• JPM Cembalest

  July 22, 2026