Good morning, investors. We are kicking off a relatively quiet trading week with some Fed chatter and a thin line up of corporate earnings.

That said, we still have plenty of bubble fears to unpack.

The AI bubble probably won’t pop because demand for new technology slows down. History says a flood of new shares in the market is the likelier pinprick.

Between SpaceX’s lockup expirations, IPOs from Anthropic and OpenAI, and hyperscaler share issuance, total US equity supply could surge nearly 5% over the next year, a reversal from the usual annual decline of 1%.

GMO strategists estimate each 1% rise in shares has historically cost the market about 4% over the following 12 months. 

“For the first time in twenty years, with the brief exception of the [Great Financial Crisis], we are seeing net dilution in the U.S. stock market (i.e., share issuance exceeding share buybacks) as the hyperscalers continue their capital expenditure spree,” wrote Ben Inker and John Pease of GMO’s Asset Allocation team.

By their math, that could leave returns roughly 20% below normal over the next 12 to 18 months.

And that's before valuations and geopolitical risks enter the picture.

Most investors either believe there is no AI bubble or see fatal flaws in how AI companies do business. Few are watching the risk of rising equity supply, but the scale of what’s unfolding should be drawing more attention: 

Meanwhile, more than half of equity assets now sit in passive funds, up from roughly 10% in 1980. Inker and Pease noted that leaves only about 30 cents of every dollar willing to buy or sell opportunistically, which means fewer investors are around to absorb new shares.

To be clear, I do not subscribe to the view that the AI boom is another dot-com. But 1999 does offer an insight on share issuance. 

IPOs peaked at roughly 5% of total market cap during the internet boom, and that flood of new stock — rather than disappointing demand for the internet — appears to have kicked off the initial bear market.

It was only after that catalyst that stretched valuations and shrinking corporate margins accelerated the crash.

“Nothing tells us a similar event is off the table for today’s market,” said Inker and Pease.

It is possible that the market’s resilience continues to defy the bears for some time. 

Demand for equity could grow with supply for a while, but as that invites more issuance, the same pinprick could continue to loom for years.

That means even if AI becomes the most beloved and practical technology ever, a market bubble could still meet its end.

Partner content:

Michael Proffe has spent 30+ years beating the market and identifying powerful market trends. 

He turned $30,000 into $3 million with his trend-following strategy.

Now, he’s zeroed in on three stocks he believes could be major beneficiaries of AI’s next phase — and they’re not the names you’d expect.

📊 September payrolls stalled at 29K Friday. The soft hiring print pushed the 2-year Treasury yield down 10 basis points and lifted every major US index as traders cut Fed rate-hike expectations. (CNBC)

🛢 Iraq routed 2 million barrels of crude beyond the Strait of Hormuz for the first time in decades. The state tanker company said the shift aims to reach refiners that avoid the strait and lock in better prices as regional tensions escalate. (Bloomberg)

🏘️ Berkshire bought another $54 million of Lennar stock but slowed its pace of purchases. The latest filing lifted Buffett's homebuilder stake above 11% even as the share count added this time fell short of recent buys. (CNBC)

🎯 Trump handed out partial checks and reiterated his $5,000 payment pledge. The president tied the full stimulus to Republican control of Congress with midterms five weeks out in a campaign-trail cash push. (CNBC)

🗓 October 5, 2011: Apple’s Steve Jobs died at age 56, closing an era for Apple whose market cap had just surpassed Exxon Mobil to make it the most valuable company in the world.

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