Wow! What a start to the year.
The stock market’s performance in the first half of 2025 was like a duck: calm on the surface but paddling like hell underneath.
Over the first six months of 2025, the S&P 500 was up a respectable 5.5%. But this doesn’t tell the whole story. From the highs on February 19 to the April 7 lows, the S&P plummeted 21%, only to get back to all-time highs to start July.
All of this was caused by one of the most uncertain geopolitical coliseums we’ve ever stepped foot in.
Are you not entertained?
Macro Recap
The year started with a notably bullish tone. One of the most pro-business administrations was about to take over at the same time that a technological revolution was underway: the build-out of artificial intelligence. Stocks were rocking and rolling, making record highs while we cruised through the inauguration, the establishment of DOGE, the announcement of Stargate, and the continuation of the structural AI theme that had powered the bull market since ChatGPT debuted in late 2022.
Then we crashed into a wall. We should’ve read the tea leaves more when Trump said that his protectionist hero was William McKinley. McKinley once said, “I am a tariff man, standing on a tariff platform.” And Trump did his best impersonation of this when he actually stood on a platform holding a Bristol board with tariff rates plastered beside country names. This sticker-shock sent the market tumbling over 10% in two days, followed by a steeper drawdown, only to bounce back just as violently. This was due to a “90-day pause” in what seemed like a fever dream during this manufactured chaos.
Only a couple of weeks after this knee-jerk reaction, the tone shifted towards much more optimism. It looked like a soft landing was achievable: that we aren’t actually at peak capex for data centres yet, that there’s tangible AI revenue, and that the new acronym of TACO (“Trump Always Chickens Out”) meant that the world wouldn’t completely shut off trade networks.
That’s how we ended Q2. As I write this, in early July, it looks like we just remembered that the 90-day pause (ending July 9) had an expiry date, and those big ugly numbers on Trump’s Bristol board are now coming back for certain trading partners. As soon as this note gets published, the tides will likely shift again, as the trajectory of trade policy is more chaotic than a tipped-over fireworks bucket on the Fourth of July.
While the macro cannot be ignored, I instead choose to focus on long-term secular themes, and none are more prevalent than AI. We got a BUNCH more tea leaves this quarter, so let’s take a look.
AI Theme: The Party Is Back On
Remember when that one analyst came out and said that we are drastically overbuilt on data centres, and everyone freaked out? Yeah, me neither.
I think that whenever you get these capex cycles, it’s natural to question it, and no doubt we should. But what a lot of people missed is that even though there was a lot of front-padding of the order book for data centres on Microsoft’s front, even when they walked, the other guys picked back up the incremental demand.
To me, it still looks like we have multiple years of significant runway when it comes to capex buildout here. Is it three more years? Five more years? Ten? I don’t know. The unit economics are still being figured out in real time, and until those evolve (and they need to evolve because you can’t burn cash forever), this is still a land grab. So grab your picks and shovels (a.k.a. NVIDIA stock).
Now, everyone was asking in the early stages, “Uhhhh, where’s the revenue?” Well, buddy boy, now we’ve got it. Azure’s AI revenue run rate is now $17B, while OpenAI’s is $10B. “Well, that’s nowhere close to the capex being spent!” Correct. But. Both of these figures were zero two years ago. Name something else that goes from zero to $10/17B+ in 2 years? Tough to find. While it does give me flashbacks to terrible startup decks, OpenAI is now projecting hockey-stick revenue growth to north of $125B by 2029.
While this is wildly optimistic, I’ll tell you why it might be achievable. I’ve never seen so many companies hit revenue milestones this quickly. Startups are now reaching $100M ARR faster than any other platform shifts before them: faster than the internet, faster than mobile, and faster than enterprise SaaS.
This is all because there is a massive potential install base for AI companies: traditional cloud. Those with massive troves of data can instantly see the ROI on a lot of these products. The company mentioned below, Cursor, makes it so that one software engineer can do the job of 10. Look at their revenue ramp:
All of this brings me to my next point: eating your own cooking.
What to Watch for Over Earnings: Operating Leverage
What we’re starting to see here is that a lot of the megacap tech companies are telling us that they don’t need more headcount. They are implementing their own tools internally to reduce headcount. Microsoft recently announced a 4% reduction in its labour force, in addition to $500M in savings from implementing AI tools internally.
Amazon CEO Andy Jassy also came out and said that AI will shrink Amazon’s workforce in the coming years. Let me say that again: Amazon’s workforce will be smaller in the coming years. The number of robots that Amazon uses in their distribution facilities will soon be more than the number of factory workers. Amazon is the second-largest private employer in the US. If you don’t think this will structurally alter the labour market, you are not paying attention.
The way that this is going to show up over the coming earnings period is improved operating leverage at these megacap companies. Lower headcount with more efficient employees equals operating leverage. However, this also comes at the same time that they are spending like cowboys on capex (~$350B+ for 2025). What this leads to is an economy where, over the longer term, we may have a more capital-based economy rather than a labour one, as knowledge workers get commoditized away. As the marginal cost of intelligence moves towards zero, those with capital and distribution (the megacaps and OpenAI) will win.
Wrapping Up…
We’re still only getting started when it comes to AI. If you stopped all frontier model advancement in its tracks today, we would still have 10-15 years’ worth of implementation to do. That is where I believe the opportunity is today. Implementing this into real workflows and unlocking the next era of digital workers.
This technology is going from a gimmicky anniversary poem writing chatbot to a full-time collaborative deep research machine that can replace a team of analysts. But we still need those who ask the right questions.
AI will reward those with infinite curiosity and high agency.
It will replace everyone else.
Strong convictions. Loosely held.
– Nick Mersch, CFA
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