WSJ: "Wall Street has rested much of its optimism about the stock market on a surge in corporate earnings. The catch is that the profit growth is being driven by a handful of AI giants. Analysts expect companies in the S&P 500 to report a 30% jump in third-quarter earnings from a year ago, boosting investor confidence that the good times can keep rolling so long as businesses keep printing money. But just two companies—Nvidia and Micron—account for 34% of that growth. And only 10 companies—including Broadcom and Meta—account for roughly two-thirds of the profit growth." Especially as investor concern about debt levels and AI CAPEX levels intensifies, it's essential to recognize the role circular spending is playing in propping up profit growth. AI is not playing a role in boosting profitability outside of tech where competition for limited resources is inflating the cost of compute. To quote Torsten Slok: "Despite massive investments and widespread hype around artificial intelligence, the technology has delivered zero financial payoff to corporate America outside of tech. Revenue per worker is rising for the Mag 7 but is flat for the S&P 493. Profit margins are rising for the Mag 7 but are flat for the S&P 493. And there are still no signs of AI boosting productivity growth." As I warned in my September report on "The AI Trade" (sageroadresearch.com/collect…), the impact of circular spending will recede even if AI CAPEX doesn't contract. To quote the report: "Even before considering the viability of AI ROI, comps are a significant concern for US equities over the next 12 months. UBS has estimated that hyperscaler AI CAPEX will increase roughly 75% this year, 25% next year, and only 6% in 2028. That rate-of-change slowdown will certainly hit the semiconductor industry the hardest and that’s undoubtedly contributed to Nvidia’s stock performance this year, only slightly outperforming the S&P 500 despite blockbuster earnings growth (the company is expected to account for a staggering 18% of the S&P 500’s total YoY earnings growth in 2026). However, we also believe market participants have neglected the impact circular spending is having on hyperscaler growth and the trickle-down impact to companies across sectors. As the rate of increase decreases, we expect earnings growth to broadly slow. And that’s before considering how everything we’ve laid out in this report could lead to spending that falls below estimates." I do expect a pullback in CAPEX as rates stay higher for longer and AI ROI continues to fall short of investor expectations. The market is punishing plummeting FCF regardless of earnings growth--see Bloom Energy post earnings this week. In September, I told my clients to reduce, if not eliminate exposure to AI picks and shovels. I stand by that today. Message me if you'd like to learn more about Sage Road Research and our investment track record.