From The Telegraph Editor
Good afternoon.

This week, Ambrose Evans-Pritchard outlines how today’s tech boom is different from that of 25 years ago; while Jeremy Warner argues that Britain’s rampant compensation culture is stifling economic growth.

Ambrose Evans-Pritchard
World Economics Editor

Wall Street equity bubbles do not end just because prices are stretched to extremes. They typically keep running until the US Federal Reserve turns off the credit spigot and forces capitulation.

It may be true that America’s AI boom is showing signs of mass delusion. Nvidia, Meta, Google, Microsoft, Palantir, Tesla or Strategy – take your pick, add au goût – are close to defying the laws of commercial and geopolitical gravity. We may already be deep into greater fool territory.

But that does not preclude a further parabolic rally over the next 12 to 18 months before resurgent inflation compels the Fed – even a captive Fed, once Donald Trump has completed his hostile takeover – to break the fever. A view is taking hold in hedge-fund land that the US is more likely to see an overheating blow-off in early 2026 than a stock market crash.

Every big bubble of the last century was popped by the Fed, either deliberately or by accident.

The New York Fed set out to kill the electrification and radio boom of the Roaring Twenties as early as January 1928, fearing that margin buying at 10 times leverage was feeding dangerous speculation.

The Fed “succeeded” but not until the Dow index had risen a further 65pc by October 1929.

It killed the telecom and dotcom bubble in 2000 by raising rates 175 basis points in the final year of the cycle. By then, US fiscal policy was also extremely tight. The budget surplus was 2.3pc of GDP.

It killed the subprime credit bubble by raising rates 425 points in two years, plateauing at 5.25pc in August 2006. By then, traders at the coal face could already see trouble in a slew of exotic “sliced-and-diced” mortgage securities. The party went on. Bear Stearns (RIP) and Lehman Brothers (RIP) kept rising to giddier heights. Wall Street did not peak until October 2007.

Lesson one is that a bull market with attitude can go on longer than most short-sellers can stay solvent. Lesson two is that it takes iron-fisted policy tightening to stop the stampede.

None of these market crashes has much in common with the monetary cycle of the Fed today or with the fiscal recklessness of Maga Washington. The Powell Fed is cutting rates even though inflation is above target. The budget deficit is 6.2pc of GDP.

“Financial conditions remain very accommodative,” said Pierre-Olivier Gourinchas, the International Monetary Fund’s chief economist. This is an understatement. The average risk spread on BBB corporate debt is near an all-time low of 100 basis points.

Dario Perkins, from TS Lombard, said Trump’s tariffs have temporarily tightened fiscal policy by 1pc of GDP this year: tax cuts in the “one big beautiful bill act” will offset this with loosening of 1pc in 2026.

“You’ve got this big fiscal swing from contraction to stimulus going into next year. The Fed is cutting rates again and that revives housing and construction quite quickly. It’s a big boost to small companies because of the way they finance their debt,” he said.

“All year, central banks around the world have been cutting rates and that is beginning to feed through to credit. You’ve got fiscal stimulus in Germany and potentially from China. All of this is reflationary,” he said.

Mike Wilson, the equity chief at Morgan Stanley, said the US has already been through a series of “rolling recessions” – one after another, hitting consumer goods, housing, manufacturing, transport and finally the Doge purge of the government itself.

“It has effectively rolled through the entire economy,” he said, arguing that the US is now in the classic early phase of a new business cycle.

The Bank of England’s Financial Policy Committee has flagged parallels between AI mania and the internet mania of the late 1990s, fearing an equity rout if AI fails to deliver.

It said the market share of the S&P 500’s top five companies has hit 30pc, “higher than at any point in the past 50 years”. The cyclically adjusted price-to-earnings (Cape) ratio is close to its lowest level in 25 years, “comparable to the peak of the dotcom bubble”.

It said lack of electricity could choke the AI boom, as indeed it might since Trump is waging a culture war on wind and solar – the fastest way to increase power in the US. It warned of supply chain bottlenecks and “conceptual breakthroughs” that suddenly change the AI business model – an allusion to the DeepSeek shock.

All of this is true but it is not yet imminent and the parallel with 2000 goes only so far. Dotcom stars mostly had shallow roots, thin revenues and were often little more than a website. The giants controlling most of the AI industry have deep pockets, real earnings, low debt and entrenched market share. They can take a big hit.

Stephen Jen and Joana Freire from SLJ Capital think the AI boom still has a long way to go.

“We are only at base camp compared to the price action in 1999-2000,” they said.

The P/E ratio of tech stocks was 72 in 2000, compared to nearer 30 today. They said AI is a national security imperative in an existential tech race with China. Nobody had a thought for China during the dotcom bubble.

What could spoil the picture? We could certainly see an economic “growth scare” before the next upward leg of the market.

The US is at the nadir of the policy cycle right now. The US government shutdown is dragging on and 100,000 federal employees are being laid off this quarter. The growth in private jobs has stalled.

JP Morgan’s proprietary credit card data show that retail sales hit a wall in September.

“There is a good chance real incomes will contract in the coming several months,” said the bank.

However, I strongly doubt that the Fed will let this metastasise into a self-feeding recessionary process or that it can even operate any longer as a scientific central bank. Trump is taking over the Fed Board and will progressively compel it to suppress rates far enough to drive a hot economy until the midterm elections next year.

He has appointed his guru Stephen Miran to the Fed with an easy money voodoo agenda – technically, Miran claims that the “neutral” rate of interest is two percentage points lower than Fed experts think. Trump is waging a war of harassment against legacy appointees, either to drive them out or to intimidate them into towing the line on premature rate cuts.

Trump will own as much of the Fed as he needs by mid-2026. I struggle to see how there can be a lasting stock market crash over the next year in this debauched politico-monetary setting.

In the end, re-accelerating inflation could – and will again – push up Treasury yields and short-circuit the asset boom. Should that happen, I have no doubt that the Trump treasury would strong-arm the Fed into capping yields by means of financial repression – as happened in the late 1940s.

If Trump is willing to commit $20bn (£15bn) from the US treasury’s emergency fund – or is it now $40bn? – to buy Argentine pesos and rescue the drowning Javier Milei, he will do anything.

Ultimately, Trump will run out of options and face his own intractable inflation crisis. But that is a story for the middle of his presidency.

It is too soon to bail out of AI mania. At the risk of sticking my neck out too far, I think any further sell-off on Wall Street should be treated as a fresh chance to buy. Keep your nerve.