Podcast Summary: Animal Spirits - "Talk Your Book: The Bubble Will Get Bigger"

Date: November 17, 2025
Hosts: Michael Batnick & Ben Carlson
Guest: Michael Arone, Chief Investment Strategist at State Street Investment Management

Episode Overview

This episode dives into the state of today's markets, particularly the powerful trends pushing risk assets—most notably, the AI boom. The hosts and guest Michael Arone examine the roles of government spending, fiscal deficits, interest rate policy, and how these create a market environment some might call a "bubble." Arone’s provocative thesis is that, while markets may indeed reflect bubble-like characteristics, this bubble is far from popping—and may get much bigger before any meaningful correction occurs.

Key Discussion Points & Insights

1. Bubbles, Bear Markets, and Defining the Current Cycle

• Bubble vs. Crisis:
  • Michael Batnick (02:01): “You always know when you're in a crisis... but you never really know for sure when you're in a bubble. There isn’t a checklist.”
  • The current cycle, unlike bear markets or clear crises, is characterized by uncertainty. AI is the dominant narrative, but whether it’s truly a bubble is hotly debated.
• Arone’s Call:
  • Michael Arone (02:45): “Yeah, I think this is a bubble. I think the bubble is going to get bigger. ...Fed cutting rates, deregulation, tax cuts — all these things are lining up.”

2. AI Mania & Market Attitudes

• AI’s Dominance:
  • Ben Carlson (01:08): “AI has just eaten everything since then, right?”
  • AI news and innovation have entirely overtaken macro narratives such as inflation or Fed balance sheet changes.
• Speculation on Mega-cap Growth:
  • Carlson (03:15): “Nvidia’s going 10 trillion.”
  • Batnick (03:19): “At this point, would that surprise you? Of course not.”
  • The scale of market expectations for AI-related stocks keeps growing.

3. Deficits, Fiscal Policy, and Market Tailwinds

• Deficits as a Tailwind:
  • Arone (04:39): “Easy monetary policy and permanent fiscal deficits has been a tailwind for risk assets. ...The governments that spend the most, the risk assets do pretty well.”
• Concerns and Complacency:
  • Despite larger deficits, markets remain untroubled as long as fiscal stimulus continues and does not immediately force higher long-term rates.

4. Monetary Policy, the Fed, and Market Sensitivity

• Why Haven’t Higher Rates Hurt More?
  • Arone (06:26): “Consumers and businesses were effectively able to lock in lower interest rates... powerful fiscal policy has offset some of the decline in the Fed’s balance sheet.”
  • The Fed’s signaling an end to quantitative tightening keeps conditions loose.
• Collective Market Worries:
  • Batnick (07:41): “The market only has room for one worry at a time.” Currently, AI eclipses concerns over macro policy or debt.

5. Labor Market, AI, and Demographics

• Structural Changes:
  • Arone (13:39): “The labor market… both the supply of labor and demand for it are slowing at the same time. ...Immigration, AI, and demographics.… You don’t need as many new jobs to keep the unemployment rate low.”
  • The labor market’s unusual resilience is a result of deep structural shifts, not just cycles.

6. Market Calm & the “Rigged” Game

• Explaining Complacency:
  • Arone (15:27): “Every time there's a market problem you have the plunge protection team steps in... Why would I be nervous?...that complacency reflects that.”
  • There’s a widespread belief that central banks and governments will always step in to prevent extended bear markets.
• Historical Context:
  • Batnick (16:44): “Stock market is just so much more important now... Each crisis, the government response becomes more aggressive.”
  • Bear markets may still happen, but they are likely shorter-lived.

7. Credit Markets and Private Credit

• Private Credit’s Role:
  • Arone (18:57): “Private credit markets have distorted credit markets... They have increased fourfold in the last decade.”
  • Growth in private lending has changed how market risk appears, pushing lower-quality companies away from public high-yield markets; core credit metrics remain solid.

8. AI: Best Case vs. Bubble Risks

• Best Case for AI:
  • Arone (21:44): “The best case scenario is this general purpose technology gets widely adopted... and that elusive return on investment begins to manifest itself.”
  • But history shows that massive tech investment often precedes some sort of bubble bursting—before the healthy long-term benefit is realized.
• Beyond the Mag 7:
  • Equal-weighted tech indexes, small-caps, and international equities are ways to “lean in” to growth while not overexposing to the same mega-caps.

9. Concentration Risk in Indexes

• S&P 500 and the Mag 7:
  • Arone (24:28): “About 38%...means 62% of the S&P 500 is in something other than the Mag 7... Equally weighted technology... has beaten the AI thematics, beaten cap weighted tech... in the last year.”
  • Small caps could benefit from rate cuts, fiscal stimulus, and ending quantitative tightening.

10. Mega-Caps: Efficiency, Scale, and the Case for ‘The Bubble Getting Bigger’

• Mega-cap Fundamentals:
  • Carlson (29:19): “The iPad did as much revenue as AMD… iPhone alone did more than Meta. Is that nuts?”
  • Arone (30:44): “The top 10 contributors... have 30% free cash flow margins and ROIC of 33%... these are remarkable, especially for their size.”
  • Never before have companies at such scale been so efficient.
• Are We at The Top?
  • Batnick (32:10): “It’s hard to avoid the comparisons to the railroad bubble and the dot com bubble… But we’ve never seen companies this big and this efficient before.”
  • Arone (32:54): “You are going to have a bursting of the bubble at some point. My argument is that the bubble is still inflating.”
  • The combination of ongoing stimulus, deregulation, and easy money means this bubble can get much bigger.

Notable Quotes & Memorable Moments

• On Real-time Bubbles:
  “You always know when you’re in a crisis... but you never really know for sure when you’re in a bubble.”
  — Michael Batnick, 02:01

• On AI Mania:
  “AI has just eaten everything since then, right?”
  — Ben Carlson, 01:08

• On Market Complacency:
  "Why would I be nervous? Every time there’s a problem, they step in and either issue checks or massive fiscal spending or... lower rates..."
  — Michael Arone, 15:27

• On Bubble’s Longevity:
  “Central banks are easing rates. That's why this bubble has longer to go, in my humble opinion. The pinprick is when the Fed starts raising rates.”
  — Michael Arone, 34:37

• On Mega-cap Scale:
  “The iPhone alone did more revenue than Meta. Is that nuts? Just the iPhone.”
  — Ben Carlson, 30:44

Important Timestamps

• [02:01] — Bubble vs. crisis; what makes a bubble so hard to spot
• [03:15] — Speculation on Nvidia and AI stock returns
• [04:39] — Fiscal deficits as a market tailwind
• [07:41] — Markets focus on one worry at a time (AI over macro)
• [13:39] — Contrarian view on labor market and AI
• [15:27] — Market calm and ‘rigged’ game discussion
• [18:57] — Rise of private credit and effect on credit spreads
• [21:44] — Best-case scenario for AI investment
• [24:28] — S&P 500 concentration and diversification tactics
• [30:44] — The staggering scale of mega-cap company revenues
• [32:54] — Bubble: why it could keep getting bigger
• [34:37] — What ultimately bursts bubbles? The role of rising rates
• [35:35] — What counts as a “real” bubble burst
• [36:57] — Final thoughts on risks and tailwinds for the market

Final Takeaways

• Bubble may not pop soon:
  With ongoing fiscal and monetary stimulus, deregulation, and massive excitement around AI—markets could go much higher before any correction.
• Risk is ever-present, but so is complacency:
  Investors have become accustomed to government/central bank interventions. This makes them more comfortable with risk and pushes valuations.
• AI: transformative or hype?
  While AI's boom could fizzle in the near-term, the lasting legacy of these massive investments could reshape industries—mirroring previous tech waves.
• Diversification still matters:
  Moving away from cap-weighted mega-caps—through equal-weight, small caps, or international—offers a way to participate beyond just the Mag 7.
• Market structure has fundamentally evolved:
  Never before have companies at such vast scale delivered such exceptional efficiency and profitability—setting this cycle apart from previous bubbles.

Guest Resources:

• Michael Arone’s research, "Uncommon Sense," available at State Street Investment Management website.
• LinkedIn: Search for "Unconventional Investment Strategist"

For listeners wanting a sharp but accessible look at today’s equity market, its drivers, its risks, and the possibility for further ballooning, this episode is both insightful and highly relevant—particularly if you’re wondering whether to fear or embrace the current AI-fueled exuberance.