Stocks Set for Air Pocket as ‘Irrational Exuberance’ Grows
The major banks kicked off the third quarter earnings season on Tuesday.
JPMorgan Chase & Co. ($JPM) came in light in terms of revenue but did raise net income guidance slightly. The stock was off 1% on the day. Wells Fargo ($WFC) also posted mixed Q3 numbers and fell 3% on Tuesday.
Even though most stocks in major banks are in correction territory, I am not worried about their quarterly results. Wall Street is heading toward record bonuses this year as they have gorged on a surge of AI related debt and equity issuance. The amount of proceeds raised via IPOs, converts, SPACs, etc. have roughly doubled over 2025’s levels. Equity issuance looks like it will surpass that of 2021, which holds the current record.
Of course, these bouts of “irrational exuberance” usually don’t work out as well for investors, who tend to get stuck with the hangover. Bonds peddled on behalf of Space Exploration Technologies Corp. ($SPCX) in June are trading at 85 cents on the dollar. And record equity/SPAC issuance in 2021 was followed by the NASDAQ dumping by a third in 2022.
I am much more interested in what regional banks post within their quarterly reports than I am the major banks. Names like KeyCorp ($KEY) and Bank OZK ($OZK) are significantly more exposed to the struggling and deteriorating commercial real estate sector. And a big chunk of roughly $5 trillion in loans tied to commercial real estate matures in 2027. In addition, regional banks are more impacted by the health of mid-market firms as is private credit. And this is as corporate bankruptcies are running at their highest levels since 2010.
Energy prices remain elevated as the current hostilities with Iran are looking more and more like it could become a wider regional conflict. I continue to believe, as I have from the beginning of this latest adventure in the Middle East, that this situation will take much longer to resolve than the market consensus is factoring in. This is why the energy sector is one of the few areas of the market that remains overweight within my portfolio.
Another thing I am also keeping a close eye on is the quick reversal in the semiconductor sector, which has been in the vanguard of the market’s advance throughout 2026. The Philadelphia Semiconductor Index ($SOX) is now down just over 8% from its record highs last week and close to correction territory.
In my view, there are two things that are keeping the economy and equity markets afloat. The first is AI infrastructure spending. And it is hard to see AI related capex spending growth not slowing significantly in 2027 from this year’s blistering 90% plus pace. Hyperscalers’ free cash flow has plunged, and the credit markets are starting to choke on all the AI related debt issuance. Interest rates have surged to nearly the highest levels in this century.
The second thing bolstering the economy is the “wealth effect” that is keeping spending robust on the upper tier of this K-shaped economy. Obviously, if equities reverse in the coming year, that will ebb considerably. All this said, I can see the markets ending 2026 on a high note. However, signs are pointing to equities hitting an air pocket in the coming year.
In Friday’s column and my weekend covered call trade idea, I will highlight the rare recent additions to my portfolio in this increasingly challenged market backdrop.
At the time of publication, Jensen had no positions in any securities mentioned.
