David Woo: AI Trade vs. High Real Rates — One Must Break in H2
N.R. Finch
Former top Wall Street macro strategist David Woo argues the AI trade and high real interest rates can no longer coexist — one must capitulate in H2 2026, driving a sharp rise in overall volatility.
Why did defensive assets collapse in H1?
David Woo says gold, bitcoin and the yen were crushed not by returning risk appetite but by a violent repricing of real yields — the return investors earn after inflation.
The U.S. 10-year real yield has surged 33 basis points since January, nearing its highest level of the entire expansion. This means → the opportunity cost of holding non-yielding assets has been pushed to the limit.
Bitcoin became the worst-performing major asset, gold was close behind, and the yen fell to a sixty-year low against the dollar.
Why won't real rates come down?
Woo rules out term premium and oil-driven inflation fears, pointing instead to economic activity data that have beaten expectations since April.
His team's "index-weighted U.S. economic activity surprise index" sits near its highest level in five years. In plain terms = the market keeps underestimating U.S. economic resilience, and the data keep proving it wrong.
Many attribute the resilience to tax-rebate stimulus from the Big Beautiful Bill. Woo cites IRS data showing rebates rose only about $50 billion year-on-year — negligible against a nearly $30 trillion economy.
What is really happening on the corporate side?
The real driver is business spending: core capital-goods orders have doubled their growth rate since January, and job growth has nearly tripled.
Woo attributes this to two forces: the Big Beautiful Bill's "immediate expensing" provision — letting firms write off 100% of qualifying equipment and domestic R&D in one year instead of depreciating over many — which sharply cuts after-tax investment costs; and a wave of projects shelved during the policy-uncertainty period now being executed at once.
This means → pent-up momentum will keep supporting the economy into Q3, inflation pressure will force the Fed to stay hawkish, and the market is pricing at least one more rate hike before year-end.
Where is the AI trade's fatal weakness?
Woo argues the biggest downside risk for the AI trade is not funding but commoditization — new models from China, Japan and others are rapidly closing the gap with Western leaders, threatening to drag AI products and services into low-margin, undifferentiated competition.
This reflects a deeper tension: Big Tech's excess profits rest on moats, but in AI those moats are being filled in fast.
OpenAI is considering delaying its IPO, and the hyperscalers are about to report earnings — giving the market its first hard test of real AI demand in the post-token-maximization era.
How should investors position for H2?
Woo lays out two scenarios: ① the AI bubble bursts first — via commoditization or demand falsification — giving defensive assets room to breathe; ② real yields keep climbing on strong data and choke off all risk assets.
He is explicit: until the AI bubble actually pops and drags real rates down, buying gold or shorting the dollar is premature.
In plain terms = the market is approaching a fork where either the AI trade or high rates must break first — and when it happens, volatility will spike.
Content is for reference only, not financial advice.