Veteran investor Dan Niles says the stock market is poised to hit new highs in the coming weeks as investors pile into what he calls an inflating AI bubble.
In a new post on X, the Niles Investment Management founder says he remains positioned to benefit from a potential rally but warns that the higher the market climbs, the sharper the eventual downturn could be once valuations collapse.
“In an interview on Friday, I said, ‘Unfortunately, the market is going to keep melting higher,’ and I wanted to expand on that statement. I said unfortunately because the higher the AI bubble takes stock valuations, the more painful the decline is going to be ultimately for investors on the other side… It is important to be positioned for the road right in front of you while contemplating what turns might be ahead. Turning too early can put you in a ditch.”
Niles says the stock market rally will be fueled by the Fed shifting to quantitative easing (QE) after two regional banks disclosed issues with bad and fraudulent loans, amplifying concerns in credit markets.
The Fed is planning to spike the punchbowl before the holidays despite inflation being above target for four years…. In addition, they will probably end quantitative tightening given recent credit events at the upcoming meeting at the end of October.”
The veteran investor adds that the upcoming tech earnings season, along with AI optimism, could send the market to greater heights.
As for the timeline of the rally, Niles expects it to start tapering by Q4 of next year.
“Finally, in May of 2026, we are likely to get a new head of the Federal Reserve appointed by President Trump, who wants rates much lower than current forecasts. These additional rate cuts will also probably happen before the end of 2026. But this is also when my concerns over AI come in.”
He predicts that by the end of next year, AI revenues will not be enough to justify the massive capital expenditure (CapEx), igniting investor panic.
“It is a good approximation to assume that the five biggest hyperscalers (AMZN, MSFT, GOOGL, META, ORCL) are about 2/3rds of the global spend on AI capex. Spending of these five is expected to reach $800B over the past three calendar years and over $400 billion, up 60% year over year in this year alone. But the revenues generated by the AI native companies such as OpenAI, Anthropic and Perplexity are only expected to reach ~$20 billion this year.”
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