The party can’t last forever.

Friday’s rally in stock markets — particularly in chip stocks — surprised me. The Fed was hawkish and stock market sold off during the FOMC press conference as bonds priced in a more-hawkish rate path. That all made perfect sense but then stocks immediately turned after the close and hit records on a few fronts on Thursday.

The market is closed today and futures are a tad lower but it was a surprising reversal. The only visible catalyst was Trump signing the MOU with Iran but the market has rallied on that same headline dozens of times.

What has me worried is valuations. Here’s a worrisome chart from Grant’s:

What’s even-more worrisome is that the P/E of the S&P 500 is about to spike because earnings are going to crater in 2026 because of the capex boom from the hyperscalers. Now, much of that spending will trickle down to other names but the big earnings from mecacap tech are gone so long as they keep spending more than they’re making on data centers and chips.

The problem is that companies are beginning to question AI spending. The mania around it is fading in part because even developers are hitting walls. Talking to contacts in Silicon Valley, the code that comes out of Claude and Codex is close-to-great but never great. It’s like they’re reaching for the rainbow but can never quite grasp it.

That close-to-great has been seductive for managers but they’re now finding out that it can never get to the finish line and is a perpetual tease. Moreover, bringing people into the loop to fix it is often just as expensive as doing it the old-fashioned way.

I also think we’re at the point where some of the capex gets reigned in. For starters, there is a tremendous amount of overspending and that never lasts but we could also see someone — probably META — bow out of the race. Now that could be next month or next year but I think it’s the catalyst that causes a tech bear market.

For now, I retain some skepticism on this post-Fed rally but we will see what Monday brings.

This article was written by Adam Button at investinglive.com.