The AI Melt Up Meets Rates

Equity markets remain resilient despite an explosion in bond volatility and a collapsing equity risk premium. This AI-driven 'melt-up' is characterized by heavy rotation into semiconductors and massive impending IPOs, even as AI capex begins to show inflationary signals.

Key Takeaways

• 1.Equities are ignoring a massive spike in bond volatility (MOVE index), creating an extreme divergence.
• 2.The Equity Risk Premium has dropped to 2.2%, its lowest level since 2007, making the S&P 500 vulnerable to yields.
• 3.Contrary to typical assumptions, AI is proving inflationary due to high capex, software CPI, and capital goods inflation.

Table of Contents

• Immune SPX?
• The vol divide
• The Fed volatility trade
• Rates starting to matter
• The AI IPO mania
• AI is inflationary
• IGV brewing
• Semis, software and MAG
• Can't keep a good man down
• Using world's most inverted call skew

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