Excess Liquidity Dries Up: AI Earnings Stuck in Neutral

Despite strong earnings reports from AI companies, stock prices have remained stagnant for months. The disconnect between fundamentals and market performance is attributed to a decline in excess liquidity, which has been driven by slower money growth and higher inflation.

The current situation resembles the 'Kevin Warsh problem' compounded by an 'Iran problem'. Excess liquidity plummeted in June, coinciding with the start of the stock market's flat period. The hawkish stance of Fed Chairman Kevin Warsh led to a significant drop in money supply growth and excess liquidity.

The ongoing Iran conflict has further exacerbated the issue, causing oil prices to soar from $70 to $90. This has put upward pressure on inflation and inflation expectations, accelerating nominal economic growth and squeezing liquidity even further.