A Fearless Market, AI Like It’s 1999 and Surging Electric Bills

Why have markets been so happy of late, the last week notwithstanding? Part of the reason is the fact that the Federal Reserve has begun lowering interest rates. In September, it cut rates by 0.25% to 4% and then by another 0.25% in October to 3.75%. By the end of 2026, the Fed projects a median federal funds rate of 3.4%.

Did the administration win the argument? No, they got the Fed to lower rates the old-fashioned way, by softening up the economy. As the chart below shows, the unemployment rate, claims for unemployment insurance, and inflation all ticked up in the summer. As a result, the Fed’s dual mandate came in focus again – full employment and price stability, whereas before, inflation was the overriding concern in the post-pandemic economy.

Wouldn’t a softening economy give investors pause? Theoretically, yes, however, the market seems to like lower interest rates more than it dislikes softening economic fundamentals in light of a still fairly robust underlying economy and enthusiasm around the AI narrative.

Another angle to consider, is that the stock market is not the economy. We often hear this phrase and I think there is some truth to it, but nuance matters. A booming stock market built on a teetering economic foundation screams “house of cards.” So to say that the stock market can happily chart its own course, irrespective of the economy, cannot be true indefinitely. However, if you think of the US as having several economies and further consider that the stock market is very concentrated in just a few tech stocks – the Magnificent Seven – then the disconnect between “the economy” and the stock market squares a little better. Alphabet, Microsoft, Nvidia, Amazon, Tesla, Meta, and Apple make up 37% of the market capitalization of the S&P 500 Index and 30% of its earnings, and 70% of the index’s return through September 30, 2025. If you further consider that most investors, myself included, think that these companies will keep growing in the next few years, irrespective of what the US economy writ large does, then by virtue of their market dominance, the stock market can do well despite economic weakness. 

However, and this is probably the key point, it is also possible that these companies’ stock prices have outrun their growth potential and that their future returns are going to be more muted as valuations catch up to reality. Or worse, that the AI boom turns out to be a bubble and that all the investment does not pay off to the extent anticipated. Considering that possibility, one would be wise to diversify broad market exposure in a way that tilts away from these tech behemoths and considers the rest of the US economy.

Gold Bugs

One thing I have found AI to be very good at, is to uncover information that is hidden in plain sight. I had it perform some analysis on my past newsletter coverage of gold and was surprised to learn how often I have written about it. I glanced in the mirror and asked myself: “oh no, am I a gold bug?” Upon some biased reflection, I concluded that I am not. Truth be told, however, I have 7% of my clients’ assets in gold and I am similarly exposed in my personal portfolio. Why the conviction? 

I have been bullish on gold for some time now, though it has far exceeded my expectations. Going forward, my strategy is to trim gains so that it doesn’t become too large of an allocation. Why is it up so much? People in suits will tell you that it has to do with central banks diversifying their balance sheets, high demand for safe haven assets in uncertain times, weakening confidence in the US dollar, perennial demand from Indian households – the world’s largest consumers of gold jewelry – Chinese consumers, and Western investors.  The main concern I have, is that it is difficult to ascertain how insatiable retail investor demand is. At the end of the day, many investors probably are buying it now because it is up a lot and they want a piece of the action. The narrative – central banks, inflation, dollar debasement, safe haven – is the justification, but the lure of quick riches is the motivation. For now, it feels like crypto is not digital gold, but gold is physical crypto, a paradigm I am not entirely comfortable with.

The Market Leaderboard

Last quarter I introduced the market leaderboard to highlight 2025’s top-performing asset classes. I don’t usually include it – it tends to put people to sleep – but this year’s shift in market leadership warranted a repeat. If I allow myself one prediction: international markets will keep outperforming U.S. stocks. That trade still has room to run, as investors remain underallocated but are starting to notice the strong performance.

Source: Y-charts.

Is AI to Blame for Higher Electricity Prices?

This question is top of mind for people, as electricity prices have gone up in much of the country over the past year, and in certain states at double digit rates. It is also a salient question for investors, as it would inform the investment opportunity in power generation, infrastructure, and utilities. The idea that AI is driving up electricity rates, is perhaps also one of the reasons that renewable energy stocks are up, despite headwinds from the loss of subsidies, cancellation of projects, and revocation of permits.

According to Bain & Company, by 2030 U.S. data centers could consume as much as 409 TWh of electricity—twice their current consumption —with AI driving most of the increase, accounting for 9% of total electricity use. To give some context, 409 TWh would power about 34 million U.S. homes for a year, or approximately 25% of all U.S. primary residences. But are today’s high prices already a result of AI’s ferocious electricity consumption? The short answer is “mostly, no.”

From 2019 to 2024, retail electricity prices have risen 23% nationally in nominal terms, but 0% adjusted for inflation, according to a recent Lawrence Berkeley National Laboratory study. Therefore, the increase can be fully attributed to inflation. To be sure, some states have seen sharp increases, like California, and about half the states have seen rates increase above the rate of inflation, whereas the other half has seen rates decline in real terms. If AI were the main driver of rising electricity rates, however, you’d expect a clearer link between regions hosting AI data centers—like the Midwest, Texas, and Arizona—and the areas with the fastest price increases.

If AI is not to blame (yet), is renewable energy the culprit? Neither. Though the picture is nuanced.  For example, in the prairie states, abundant wind energy has resulted in lower electricity prices. Similarly, in sunny states like Nevada, New Mexico, and Arizona, abundant solar energy has been a driver of lower electricity prices. In the Northeast, however, renewable mandates have raised electricity prices since utility regions often aren’t particularly sunny or windy. That is not to say that none of those investments will break-even, but so far they have led to electric bill surcharges that have not yet been recouped by ratepayers.

California is in a league of its own when it comes to electricity rate hikes, with prices increasing 33.7% from 2019 to 2024. However, the same Lawrence Berkeley study finds that 40% of that increase is due to grid repairs and improvements as a result of wildfires. If you take that out of the equation, you are looking at a 22% increase over that same period, in line with the national average and with inflation. If you further consider that California has been paring back its solar subsidies – which benefit wealthier households at the expense of poorer ones who end up disproportionately footing the bill for grid maintenance and improvement – electricity rates would have actually declined in real terms with a quicker subsidy sunsetting.

If AI is not primarily responsible for today’s high electricity prices, is the thesis of investing in power generation, infrastructure and utilities on the basis of AI power demand invalid? No. The prospect of a doubling of US data center power demand in a few short years is enticing. Utilities will see demand growth and opportunities to make profitable power infrastructure investments. On the generation side, both clean and legacy developers will benefit from strong pipelines and long-term visibility, while the transmission side will see demand surge for technologies that make the grid smarter, more resilient, and more secure. The forward-looking nature of markets is rewarding investors for taking notice, with 2025 being a stellar year for clean energy and utility stocks.

Fall is relentlessly marching towards the holidays, making this my last newsletter for the year, though marketing voices are whispering in my ear to be a more frequent writer; perhaps in 2026. With Halloween in the rearview mirror, do you venture to guess what was this year’s most popular costume? Yes, correct, it was Rumi from K-Pop Demon Hunters. A global pop culture phenomenon, which my children made sure I was not totally oblivious to. In fact, I was impressed when I started peeling back the onion of Korean pop culture’s influence on America. One thing led to another and soon I was staring at a Korean stock market chart that showed an 88% year-to-date return for 2025 (iShares MSCI South Korea ETF). Are we on the verge of some Korean age? My interest has been piqued, but for now I am signing off and wishing you a strong finish to this unpredictable year – may the final innings bring a joyful winning streak.

Kindly,

Jan P. Schalkwijk, CFA – JPS Global Investments