Steve Eisman — The AI Trade, Rising Rates, and Why the Market Is Still Standing

0:05 Cold open — two market-wide strategists on a "tumultuous" year

• Eisman's framing: "war, AI, private credit, private equity, situational awareness hedge fund blowing up. If I thought for another 10 seconds, I'm sure I could come up with another 15 things."
• The guests are chosen for breadth: "these guys don't cover a particular sector. They cover the entire market." Jason Trennert (founder) and Chris Verrone (market strategist), both of Strategas.
• Recorded "the beginning of August" and published Aug 17 — like Ep 72, this is a banked interview, so every "this week"/"last week" is roughly two weeks stale.

1:45 Trennert's gathering storm — war, tariffs, hyperscaler capex, the Fed

• "There's a gathering storm a bit, which is the war, tariffs, which people forgot about, but they're back… then you have this debate over hyperscalers and whether they're spending too much or too little on CapEx. And so those are the thing and the Fed, of course… is really the big issue."
• Against that: "the last 72 hours people are saying it's a boulevard of green lights for the hyperscalers now because it doesn't look like demand for AI is slowing anytime soon."
• His own posture: "I'm personally nervous because the market is so concentrated" — not because demand is weak.

2:39 Concentration, quantified — 39% in the top ten, over 50% counting tech-adjacent

• "If you look at the top 10 holdings of the S&P 500, I think that's 39%. If you look at the tech sector, I think it's 36%." Add the tech-adjacent names — "like an Amazon" — "you're up over 50%."
• The anomaly he wants explained: Situational Awareness blew up "with the VIX below 20 and a modest increase in interest rates, to 15, 20 basis point increase in long-term interest rates… how can somebody lose that much money in what seems to be a very quiet market?"

3:30 The buggy-whip lesson — a correct trade that still kills you at 4× leverage

• Eisman's worked example: "imagine it's 1900 and you're very bullish on autos taking over the world. So, you buy every auto and auto parts company that's public and you short every buggy whip company that's public… given what we know about history, obviously that trade is going to be correct."
• "But if you're four times levered, and let's imagine there's a bad auto accident… the problem is you're long X and you're short Y, but it's the same thing." When the trade reverses, "as South Park said in the classic Margaritaville episode, and it's gone."
• The naming aside: the famous blowups are "a little preachy" in their names — Long-Term Capital, Situational Awareness — "it's not like Iceman Capital Management. It's like, I know better than you management. And anyway, pride leadeth to fall." (Strategas economist Don Rissmiller's observation.)

5:13 The 30-50% drawdown nobody noticed — and internals that improved through it

• "We just had a 30 40% decline in some of the leading stocks, whether it was the semis or the hyperscalers" — "some 50%," "basically from mid-May… through last week."
• The breadth data is the argument: "You only had about 50% of the S&P above the 200-day average on June 2nd. Today… 75% of the S&P above the 200-day. So, even as the market has churned for the last 8 weeks, the internals have gotten better, not worse."
• Conclusion: "Money doesn't want to leave the asset class of equities… we're in this remarkably rotational tape."

6:14 What rate actually competes with equities — "higher than most people think"

• Verrone: "I don't think we have yet to find the rate of interest that gets money to leave equities." Eisman: "Have a guess as to what that is?" — "It's higher than most people think."
• Both had used 4.50% ("in 23, 24, 25, it was largely 450… but now it seems higher"), and "you got corrective periods from when we hit 450 in the past, but… if we're really going to end the cycle, it's a level much higher than people think. It's not 470."
• The historical brief: Japan '89 — JGBs "went four to eight that year as the Nikkei was melting up"; Nasdaq '99 — "US 10s went four to seven that year"; '87 — "long rates went from six to nine percent while the stock market was up 30%," and the year still finished up ~3%.
• Trennert's warning inside the same fact: "that's the worst sign, when stocks are going straight up, and they don't care at the same time long-term interest rates are going up… that's the point at which you have the most risk."

8:01 The economy is good — PMIs, full expensing, and the reason to tighten

• "The PMIs show you that the economy is still expanding and actually pretty rapidly."
• The forgotten stimulus: the one big beautiful bill "is a big incentive for any company that's making capital investments" in the US, "because you get to write off the entire amount."
• Verrone's reframe of the Fed debate: "this may be what people have wrong about the Fed here… it may wind up being they have to tighten because of growth," not inflation — "a very different message than second half '21 into '22."
• Trennert agrees on the diagnosis and disagrees on the outcome: "the backup in interest rates has largely been in real rates. It hasn't been in inflation… that argues for not tightening, even though I think the Fed will tighten."

9:06 The "new" Fed regime is the old one — no statements before 1994

• Trennert: "It's an old regime… before 1994, there were no statements regarding policy… You had to intuit it from open market operations. Then in '94 they started a statement and then only in 2019, 7 years ago, did they start the press conferences after every meeting."
• Warsh's view, which Trennert shares: forward guidance "has been too big a free pass for the financial markets and capital to basically just take as much risk as they can." Eisman presses for the mechanism — why does a press conference license speculation? — "you're taking largely the risk out of… the press and financial market participants have gotten very used to being spoon-fed what the answer is going to be… Now they're saying, listen, you're on your own."
• Warsh's stated reaction function, from the prior week: "when you're at full employment [it] is inflation. What more information do you need?"
• The distributional argument both agree on: "QE was much better for Wall Street… and wealthy people than it was for the average person," who "just has a savings account" and "for a good part of the last 16 years… got zero."

11:22 "It's been about the E, not the P/E" — the alpha market and the asset managers

• Verrone: "if you look at 2026, it's been about the E, not the P/E. The PE is down maybe two or three turns from where it began the year. So, you've entered this environment where it's much more earnings dependent, much more cyclical, which is a return to that prior Fed regime."
• The label: "We've called it an alpha market… a market where stock picking and active matters a lot more than passive."
• The confirming tape: "you're seeing all these asset managers start to break out here for the first time in years… everything from State Street to T. Rowe to Invesco… Ben's been a great chart" — names that "have been on the wrong side of the passive trade for the better part of the last 15 years in this QE environment."

12:22 Private equity's monetization problem — seven years, and Notre Dame's 50%

• Trennert: "I can't think of an industry that benefited more from near zero percent interest rates than private equity… they have so much money they don't know what to do with it."
• Eisman's number: "in private equity, the monetization time frame is now like 7 years." Institutions bought it for the smoothing — "less volatility because you don't have to trade. It doesn't trade" — "So, now they're sleeping, but they ain't getting their money back."
• The concentrated case: "Notre Dame, I believe, has 50% of its endowment in private equity and venture… if you build an infrastructure around, I don't know, a $10 billion endowment, and now… it really is not very liquid. You have to tighten your belts a little bit."

13:55 The war, oil, and the metals tell

• Trennert "was shocked at how quickly oil prices came down" after the memorandum of understanding, "because a lot of the supply issues… are going to be there whether the war ends tomorrow or not. So, you're going to have a bid in the price of oil." On the headline whipsaw: "it's a tennis match… one day it's on, one day it's off," and a client's line — "it takes two to taco."
• Verrone localises it: Europe has "a lot more reflexivity to higher oil prices… where they don't have this AI capex story underway," whereas in the US "the war or oil is just not the main event. It is still the CapEx spend." The recent rally in crude was "pretty tepid… here we are back under 80."
• Eisman repeats his own guest's oversupply case: "China has completely withdrawn from purchasing oil… and these pipelines that are being built to obviate the Strait are almost all done."
• Verrone's corroborating data point, and the sharpest macro line of the episode: "copper new high, zinc new high, tin new high, Chinese iron ore is collapsing right here… the strength in the base metals that you would traditionally look to for China for some signal is not a China message here at all. It's AI and CapEx… So, this seems to be a China demand problem, not an AI CapEx problem." Iron ore "made 52 week lows this week."

17:03 "We got fired by a client" — the dilution sentence, and the cash-flow scoreboard

• The sentence Trennert thought was anodyne: "it's going to be hard to continue to grow AI investments without further dilution of shareholders" — written "mainly cuz you saw Google issue 85 billion dollars in equity and all the hyperscalers are issuing debt now. Oracle was just downgraded."
• "And to make a long story short, we got fired by a client… He said I don't want to read the work anymore." Not the firm — him. "The guy was long, clearly, and I suggested that it might not work out or that you might have further need for debt and equity capital to do it."
• The worry stated plainly: "the cash flow of the hyperscalers over the next couple of years looks like it's going to be negative."
• Eisman's supporting statistics: "Meta's cash flow for the quarter was 785 million dollars. Microsoft's, which was the best of anybody, was about 19 billion but it was down around 25% versus last year. And Amazon was negative for the 12 months."

21:26 Capital intensity is unarguable — and he still won't short it

• "One thing that is not arguable is that the business has become incredibly capital intensive. That's unarguable."
• The client anecdote: "I've never heard a more bullish conference call in my life than Amazon last night… And it's true, but I don't see how you do it without hitting the bond and equity markets… it's not going to come out of cash flow."
• Google's raise as the marker: "$85 billion in equity is shocking given the fact that the last time they actually raised equity capital was in the 2000s."
• Yet the position is not a short: "I wouldn't short it. We're market-weight technology, and I do think the demand is exceeding the supply for artificial intelligence. Whether they can provide an appropriate return for the shareholders of the hyperscalers, I'm not so sure." His preference instead: "a little more bullish, believe it or not, on the semiconductors," because the spending continues even if it becomes "a little bit of a race to the bottom at least for some of them."

22:33 Sentiment whipsaw — cash-flow monsters that need a new valuation method

• Verrone: "this rotational market we speak of is rotational at the sector level as well, and it's so sentiment driven. The attitudes towards some of the hyperscalers reached a fever pitch of negativity maybe two or three weeks ago" — Eisman: "When Oracle got to like 120."
• The diagnosis: "for so many years, you viewed these as these cash flow machines" — Eisman: "that actually is a euphemism… cash flow monsters" — "and now what the analyst community or the PMs or the investors have been searching for is the right way to analyze them today cuz it's different. And I think that's been mistaken for some deterioration in AI fundamentals."
• The tape since: "Google's basically back at the highs here. Amazon just made new highs. The 5-day change in Microsoft is the best we've seen since the IPO in '87.… at a minimum I think they're tradeable. Whether or not they reclaim the baton of leadership over the longer term I think is to be seen."

23:57 The concentration under the concentration — two labs, 70% of the revenue

• Trennert splits the stack the way Eisman does: "you could argue the hyperscalers have a real business and there are real moats around it, but it's a lot more capital intensive. The Anthropic's or Open AI's of the world, that's where it's most questionable… they're totally negative cash flow," with "the Chinese… competing with them."
• The number: "something like 70% of the AI hyperscaler revenue is from just those two companies. So if this is the big if, if Open AI and Anthropic ever get in trouble, the ecosystem is in trouble." Eisman: "I think it's undeniable."
• The index joke that makes the concentration concrete: "the hyperscaler index — UBS has one — it's five companies… It's an index. It's five stocks."
• What the whole thing rests on: "everything right now is a big bet on productivity. The one big beautiful bill is really a bet on productivity to bail you out of inflation. And all of this CapEx spending is a bet on productivity, that companies will continue to spend hand over fist to get an edge."

25:29 The build-out names already corrected — and have responded

• Verrone: "after deep corrections in what I would call AI-adjacent or build-out type names, Quanta, Emcore… these probably down 30% from the highs. Caterpillar had a pretty big quarter. They've all responded over the last couple weeks." Eisman: "Quanta was up like 15% on earnings day last week. It was amazing."
• The trading rule attached — a falsifiable one: "you have to give these the benefit of the doubt until they attempt to rally, don't make new highs, and fail. And we haven't seen that yet."

25:50 Meta — the tape says one thing, the income statement another

• Eisman picks it as "one that maybe you don't have to give the benefit of the doubt to." Verrone has "no strong view" but remembers 2022, when a 50-60% decline "got Zuckerberg to change course" on the metaverse and the stock bottomed near $90: "was that enough of a market signal to get change [this time]? I think we'll learn over time." (Eisman's own trade then: "I bought it at 100 and I sold it at 110 and thought I was a genius.")
• Verrone respects only the price action: down 10-12% after earnings and "3 days later it's recovered the entire loss. As someone who does prices and charts I have to respect a move like that."
• Eisman went through the numbers himself: "the revenue grew 28%, which is powerful, and the expenses grew 55%… we want the reverse," with "no indication that that's going to change anytime soon given how much money they're spending" — and "the depreciation is starting to really explode… from like 4 billion to 6 billion, it'll go to 8, then 10, then 12. It's like a weight on your shoulders."
• The Washington overlay: Meta's new president is Dina Powell (ex-Bush 43, ex-Goldman Sachs partner), "very apparent to me she was there for PR and government relations… increasingly it's going to be Washington" and its "propensity to try to slow it down in some way."

29:09 "The lawsuit is the punishment" — IBM, Microsoft, and now Meta

• Trennert's precedent: IBM's 1970s antitrust suit "lasted 12 years. IBM won, quote unquote, but they really lost because it consumes so much of their time and effort that they missed personal computing. They were distracted. And Microsoft in the '90s, very similar story."
• Eisman supplies Judge Richard Posner's formulation — "the lawsuit was the punishment… didn't have to win" — plus the discovery anecdote: the government demanded documents and IBM "showed up with like 10 trucks with boxes upon boxes completely uncorrelated," which meant litigating the format for "another 2 years."
• Applied: Meta faces "hundreds" of social-media suits claiming the algorithms make users mentally ill, two already decided against it. Individually small against "hundreds of billion dollars of revenues" — "but it's adding up," and the real cost is the distraction.
• Trennert's free-markets caveat, via Strategas' DC head Dan Clifton: "the lobbying stuff is very important. It can be an alpha generator."

31:38 Banks at new highs everywhere — deregulation, and private credit as regulatory arb

• Verrone: banks "just continue to carry the football here and it's not just US. Japanese banks, even with yen intervention and JGB yield, continue to lead. European banks have been absolutely exceptional… The brokers have been excellent here… Morgan Stanley and Goldman Sachs, but even some of the smaller ones."
• What the tape says about the private-credit scare: "it never was a message of some systemic threat pulsing through the banking system. Public credit remains very benign. Double B spreads I think made new cycle lows last week."
• Dan Clifton's call that Verrone calls astute: "we are in an extreme period of financial deregulation… you can't really shrink the balance sheet of the Fed until you deregulate the banks. And I think the charts know it and the stocks know it."
• His own discomfort: "I just can't think of too many times in my career or historically where you're on the verge of a big problem and every bank stock around the world is at new highs. It seems a little out of step."
• Trennert's structural explanation: "with Sarbanes-Oxley and Dodd-Frank… private credit was largely a regulatory arb. The banks were not allowed to do certain things and private credit stepped in." The consequence if it turns: "it won't be that systemic, but it could be big… it was disproportionately good for wealthy people and now it might be disproportionately bad for wealthy people if it goes the other way."
• His own bank view: "the curve is going to steepen… the economy is strong, so the credit losses should be pretty minimal… And then Chris tells me the charts are just fantastic. So… looks pretty interesting to me."

35:37 Europe is cheap for a reason — and Trennert is invested in Japan

• "Some of our clients have really been hot and heavy on Europe, mainly because it's cheap. And my view is that they're cheap for a reason… they're not dynamic economies. They don't have AI… they basically are just trying to stay in the game. They're not trying to do anything special."
• "I'm not a big fan. I would rather stay here at home. I like Japan a lot better as an investment, and I'm invested there."
• The two Japan pillars: breaking out of deflation "for the first time… over the last couple of years — but decades"; and a corporate-governance conversion — "they've really gotten religion on this idea that you shouldn't go for market share, you should go for return on equity… right now they're delisting companies that don't make certain minimums in terms of price to book or return on equity." His aside: the old market-share-over-ROE Japan is "a little bit reminiscent of what's happening in tech here in the US."
• The Europe epilogue: "it's the greatest place to spend money… but it's a very hard place to make money," and "the richest families in Europe are largely the same richest families in Europe from 400 years ago," versus America's "shirt sleeves to shirt sleeves in three generations… messier, but far more dynamic."

37:02 What actually took the Euro Stoxx to a new high — and why JGB yields aren't the story

• "Believe it or not the Euro Stoxx is at a new high right now… but it's much more focused into a few groups or names. The European auto industry is in a multi-year bear market. European luxury remains in a multi-year bear market."
• "So, what's gotten you to new highs? It's been stocks like Schneider Electric — AI buildout. It's been names like Siemens Energy turbines… plus banks." Autos and luxury — "parts of the economy that rely on Chinese demand" — are "in prolific bear markets."
• Japan vs Europe: "equally energy sensitive yet one acts very different than the other… Japan has so many more of the themes that the market has craved, whether it's chips, whether it's AI buildout, a bigger defense industry as well."
• On the JGB scare: "one of the mistakes that people have made in analyzing Japan is mistaking the move in bond yields as the start of some big seismic world event. Higher JGB yields entirely reflect this reflationary animal that's been unleashed there… yields fell for 30 or 40 years. It wasn't particularly good for Japanese stocks. So let's try higher yields." The tripwire he watches: "until the Japanese insurance stocks or… the Japanese bank stocks start to really weaken here, I'm not concerned."
• The two data points that close the Europe case: German GDP "has basically not grown for the last four five years, not a dollar," and "Japanese 10-year yields are about to cross German 10-year yields for the first time in decades."

39:34 Defensives ranked — utilities politicized, staples bottoming, health care on top

• The complication: "everywhere there's this AI theme that runs through so many of these," so the defensive sectors have to be taken name by name.
• Utilities — the loser. "Regulated utilities have traded poorly all year… as a group they're making new lows here. The unregulated ones, the more power producers, the CEGs and the Talons and the Vistra's have also started to weaken here." The diagnosis is Trennert's: "the politics are starting to consume the utility sector… cuz the unregulated [names] what you would expect to be great in this environment are really starting to weaken."
• Staples — hints of life. "After a just devastatingly bad couple years… Kraft Heinz, Hershey's all starting to bottom here. I think they're worth a look" — but "I would hardly call the sector leader in the market," and staples stay "probably still near the bottom."
• Health care — the top of the pile. "Pharma and biotech and life sciences have been leadership. They remain the leadership. They act great… these reversals in some of these left for dead life science stocks are particularly notable. The thermos and the Danaher's and the Illumina's, which haven't been looked at in years — I think they put in major major bottoms."
• Managed care — a miss he owns. "These put major lows in. I missed it… late last year early this year. The UNH's of the world, the Signas. I got too dogmatic on those and I missed it. We try not to do that."
• Trennert's political overlay on all of it: "anytime you get any sort of pricing, it's going the other way… the politics in this country is increasingly getting populist… there is a reaction against big anything. Big media, big academia, big pharma, big banks" — and that morning, big oil, "even though big oil companies really don't control prices at the pump."

42:26 The narrowest 400-day range in 10-year yields ever — and the whining about guidance

• Verrone's closing statistic against the hyperbole: "If you look at the 400 days since Trump was inaugurated, this is the narrowest range in 10-year yields that we've ever seen. The range of the 10 years 85 basis points over the last 400 days… It doesn't feel like it for some reason. I just don't think this move in yield is as explosive yet as it's going to need to be if it's going to disrupt the equity market."
• Trennert on the forward-guidance complaints: "there are people that have a big self-interest in the Fed giving forward guidance… people in the media that now [are] going to have to work a little harder. And it's also some of the hedge fund community which is saying… I want a green light all the time."
• His verdict: "you reap what you sow, and the Fed sowed a lot of certainty into relatively low rates, but it's changing now… it's not going to be as easy. There'll be more volatility. Good companies will still get rewarded… and I don't think Kevin Warsh minds that whatsoever."

44:01 Lessons learned — a strong economy, and a threshold that keeps moving up

• "My biggest takeaway from the conversation with Jason and Chris is that the economy is actually quite strong despite all of the volatility… Until then, the economy is, without question, quite strong."
• The open question: "the big issue is whether all this money being spent on AI is going to prove to be good, but we won't know that for a while."
• The surprise that reframes the whole year: "they thought that if the 10-year got above 4.5% that would really put a kibosh on the stock market because bonds would be much more appealing. That has not happened, and so their view now is that the 10-year really has to go significantly higher… before this market really has a correction or the AI story really falls apart."
• "If those two things don't happen, I think they're pretty bullish on the market for the rest of the year."