AI Markups Distorting 'True Earnings Power of S&P,' Says Larry McDonald

The convertible bond market serves as a critical leading indicator of credit stress, currently signaling that high-yield markets are shutting off access for speculative issuers. AI-driven companies are increasingly relying on off-balance sheet financing to protect free cash flow, creating a depreciation trap as competition intensifies and barriers to entry vanish. Beneath the surface of index-level highs, market internals reflect a 1987-style internal crash, with numerous world-class brands suffering significant drawdowns. This concentration of capital into a few hyperscalers poses a severe fiduciary risk for long-term investors, especially as AI-related assets increasingly dominate the S&P 500. While the Federal Reserve balances tightening credit conditions against resilient nominal GDP data, the underlying leverage remains opaque, suggesting that the current market structure is masking systemic vulnerabilities that could trigger a broader correction.