Joe Tigay The AI Boom: Are We Riding the Next Great Liquidity Cycle?
By Joe Tigay, Former VIX and SPX Pit Options Market Maker
Looking at the market action from 1995-1998 shown in the chart above, I’m struck by a familiar pattern emerging today. The steady climb in the S&P 500 (black line) paired with periods of elevated volatility (red VIX line) tells a story that seasoned traders recognize: we’re potentially in the early stages of a major liquidity-driven cycle.
As I write this, the VIX sits comfortably under 16, yet pre-market indicators show both stocks and volatility moving higher—a combination that speaks to the underlying tension in today’s AI-dominated market. Having spent years as a VIX and SPX pit options market maker, I’ve learned to read these tea leaves, and what I see suggests we may be following a playbook written in the late 1990s.
The AI Concentration: Real Money, Real Infrastructure
The dominance of AI-related stocks isn’t just hype—it’s backed by quantifiable fundamentals that separate this boom from typical speculation:
Since ChatGPT’s launch, AI stocks have driven an unprecedented concentration of market performance:
- 75% of S&P 500 total returns
- 80% of corporate earnings growth
- 90% of CapEx growth
But here’s what makes this different: the infrastructure buildout is real and measurable. Data centers now outspend office construction, representing a fundamental shift in how capital flows through our economy. This isn’t just financial engineering—it’s physical infrastructure that’s supporting GDP growth across the broader economy.
Why This Isn’t 1999 (Yet): The Capital Structure Difference
Many investors reflexively compare today’s AI boom to the dot-com bubble, but the comparison misses a crucial structural difference—how the infrastructure is being funded.
In the 1990s: Telecom companies like Qwest and Global Crossing built broadband infrastructure largely on debt. When demand didn’t materialize fast enough, these highly leveraged companies collapsed, leaving behind “dark fiber” with limited alternative uses.
Today: The AI infrastructure buildout is funded primarily by cash-rich mega-cap tech companies—Microsoft, Alphabet, and Amazon. These “hyperscalers” own and control their data centers, eliminating the external asset risk that plagued the telecom boom.
Perhaps most importantly, these AI data centers have a clear “second life” as cloud infrastructure once initial AI training phases complete, giving the massive CapEx investments greater long-term utility.
Following the Fed’s Playbook: The 1995/2024 Parallel
The macro backdrop suggests we’re not at bubble extremes but rather following a predictable liquidity cycle. In 1995, the Fed cut rates, launching a multi-year bull run that didn’t peak until 2000. In 2024, we saw the Fed cut rates again, potentially marking the start of another extended liquidity phase.
This isn’t just a U.S. phenomenon—central banks globally are lowering rates, creating the kind of worldwide liquidity surge that can fuel extended asset price appreciation.
Looking back at the 1990s pattern, the real acceleration came after the 1998 crisis (Asian Currency/Russian Debt/LTCM), when emergency Fed cuts provided the final liquidity surge that pushed markets to astronomical highs. If history rhymes, we could have significant room to run before reaching true bubble territory.
The Fragility Factor: Key Tests Ahead
While the AI infrastructure story is compelling, the trade remains contingent on broader economic stability. The overall economy remains fragile, and several key tests lie ahead:
- Jobs Report: This Thursday’s employment data represents a critical test for the bulls
- Geopolitical Risks: New tariffs announced over the weekend, ongoing global conflicts, and potential government shutdown scenarios all pose threats to the narrative
- GDP Support: Last week’s strong GDP number provided encouragement, but consistency will be key
My Investment Strategy: Long Stocks, Long Volatility
As portfolio manager of the Rational Equity Armor Fund, my approach reflects the paradox we face: it feels dangerous to buy tech stocks at current valuations, yet missing the potential final rally would be catastrophic.
The solution isn’t to be all-in or all-out—it’s to be strategic with a “Long Stocks, Long Volatility” approach:
Long Stocks to Capture Growth: Ensuring participation if the liquidity surge takes markets to irrational extremes, just as we saw from 1998-2000.
Long Volatility as Insurance: Protection against the inevitable correction when valuations finally snap or economic fragility surfaces.
The Investment Hierarchy
1. The Hyperscalers (Core Holdings): Microsoft, Alphabet, and Amazon control the data center assets and have the balance sheets to survive any downturn. They’re the structural difference-makers in this cycle.
2. The Enablers (The Toll-Takers): NVIDIA remains the “shovel seller” in this gold rush, dominating AI training infrastructure. Broadcom provides the critical custom chips and networking gear that power the entire ecosystem.
3. The Hard Asset Plays: With global liquidity surging, hard assets look increasingly attractive. In the AI world, that means utilities and energy companies strategically positioned near data center hubs—they have the sticky, growing demand that provides durable, non-tech profit streams.
The Bottom Line
The chart from 1995-1998 reminds us that great bull markets don’t die quietly. They often accelerate in their final phases, driven by liquidity and FOMO. While today’s AI boom has better fundamental underpinnings than the debt-fueled telecom bubble, the macro setup suggests we may be in the early innings of a similar liquidity-driven surge.
The key is preparation. Position for both outcomes—the continued rally and the inevitable correction. In markets like these, the biggest risk isn’t being wrong about direction; it’s being wrong about timing.
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Learn more about Joe Tigay and his market experience here.
