The Inflation Sucker Punch Is Already Priced In—Here's What Actually Matters

Friday's CPI number (0.2% month-over-month, 2.4% annualized) was supposed to be cathartic. A relief rally. The long-awaited signal that the Fed has permission to cut rates in June, maybe even April if the gods favor us.

What we got instead was 370 stocks rising on the S&P 500 while the index barely twitched. The Nasdaq lost 0.22%. Broadcom sank. The Magnificent Seven took turns getting punched. Treasury yields fell, sure—the 10-year and 2-year both dropped 5 basis points—but equity markets treated this "good news" like a hostage situation rather than a celebration.

This matters because it tells you something uncomfortable: markets aren't reacting to inflation or rate cuts anymore. They're reacting to the fear that the AI capital expenditure cycle is increasingly fragile and that this expansion comes with structural disruption costs that don't fit neatly into a typical "softer landing" narrative.

Watch what happened earlier in the week. Cisco slid 12% after guiding in-line, not the beats everyone had priced in during the AI boom. Cisco! A bellwether. A company that profits directly from the infrastructure buildout everyone keeps cheering about. And the market responded by saying: we don't believe the story anymore. Not because Cisco's guidance was bad, but because the AI narrative has rotted from the inside. Money sloshed into semiconductors and infrastructure providers for two straight years. Now traders are asking whether all that capex actually generates returns, or whether it's just a financial engineering exercise that props up valuations while companies quietly worry about utilization rates.

The real story of the past 72 hours isn't about inflation getting "under control." It's that we've shifted from one consensual hallucination (the AI arms race will justify any valuation) to another (the Fed will cut rates because inflation is beaten, so everything is fine). What's missing is anyone asking whether the economy actually needs those rate cuts, or whether they're just demanded by debt-laden equity markets that can't live with anything above 5% on the overnight rate.

China is now deploying its "national team" of state investors to actively cool down its own AI stock surge through selling intervention. Let that sink in. The world's second-largest economy is looking at its own tech sector and saying: we need to suppress this. Not because those stocks are terrible assets, but because the velocity of flows is unsustainable and systemic. If Chinese policymakers are stepping in to tamp down enthusiasm, how convinced should we be that U.S. markets—which are drunk on far more leverage and behavioral momentum—have found some kind of equilibrium?

Meanwhile, Trump is reportedly pushing for 15–20% minimum tariff floors on all EU goods, the yen is strengthening against the dollar after the LDP's election victory, and the Fed's rate cut expectations have shifted to July from June based on the stronger-than-expected jobs report. That jobs report, by the way, was +130,000 in January—massively above economist expectations of 55,000. Yet no one is talking about what that actually means for the Phillips Curve or the sustainability of employment gains. We just know that it pushed the Fed easing timeline further out, which means the real interest rate stays elevated longer, which is the precise environment where highly leveraged, cash-flow-negative tech companies get expensive to finance.

The market is pricing in a fantasy. It's the same fantasy it prices in every cycle: that central banks will always arrive just in time, that structural imbalances don't matter, that you can have AI-driven efficiency gains and disruption-driven layoffs and financial system stability all in one sandwich. The inflation data on Friday was genuinely softer than expected, which is good. But good news about inflation in a world where capex cycles are questioned and geopolitical tensions are rising and China is literally intervening to cool its own equity markets isn't actually good news—it's just news that gets repriceed in the next direction when the next headline drops.

The S&P 500 fell 1.39% for the week. The Nasdaq dropped 2.1%. Software stocks are now down 30% from their 52-week highs. That's not a rotation. That's a repricing of expectations. And we haven't even started the season where companies warn about AI disruption to their own business models.

Friday's market action wasn't a relief rally. It was a slow-motion acknowledgment that the easy part of this cycle is over, and the hard part—figuring out who actually benefits from all this capex and which industries get cannibalized—has only just begun.