Wall Street veteran analyst David Woo: With AI trading and high interest rates, there must be a first “surrender” in the second half of the year.

In the first half of 2026, global financial markets played out a brutal game of asset trading: traditional defensive safe-haven assets collectively plummeted, while global real yields surged ahead. Former Wall Street top macro strategist David Wu pointed out that the current macro market is caught in an irreconcilable life-and-death tug-of-war: AI trading has pushed up real interest rates, and stubbornly high interest rates are now eating away at AI trading. The market in the second half of the year has reached a tipping point where one must give in; the contradiction between the two must have one side "surrender" to the market first.

Wall Street Sights summarizes the key points as follows:

• Core Market Conflict: The second half of the year will see a critical turning point. Either the AI bubble bursts under its own pressure, giving defensive assets a breather; or real yields continue to climb driven by strong economic data, forcing a halt and destroying risk asset trades like AI.

• The Real Driver of High Interest Rates: The unusual stubbornness of real yields this year is not due to term premiums or inflation fears from high oil prices, but rather to economic activity data that has significantly exceeded expectations since April.

• "Good News is Bad News" Regime Intensifies: The market is currently deeply entrenched in this logic regime. Stronger economic data and hiring mean higher real yields, which directly translate into heavy downward pressure on stocks and credit assets.

• AI Trade's Achilles' Heel is "Homogenization": The biggest risk facing AI concepts is not capital flows, but "commoditization (homogeneous low-price competition)." The rapid rise of new models from countries like China and Japan is quickly approaching Western top-tier levels, severely weakening the super-profits of tech giants.

Real Yields Surge, Defensive Assets Get "Slaughtered"

The first half of 2026 was extremely brutal for defensive assets. Bitcoin became the worst-performing major asset, followed by gold with a lackluster performance, while the Japanese yen fell to its lowest level against the US dollar in six decades.

David Wu believes this weakness does not stem from a rebound in risk sentiment (the VIX panic index and interest rate volatility remain high), but is driven by the crazy repricing of real yields.

Since the start of the year, the US 10-year real yield has surged by 33 basis points. Even with the recent sharp collapse in oil prices, real yields remain stubbornly high. This indicates that either real yields are about to undergo a sharp downward correction, or stocks, credit assets, and emerging market currencies will face even heavier downward pressure.

Economic Data Beats Expectations, High Rates Not Supported by "Tax Refunds"

Many economists attribute the surprising resilience of the US economy to the massive tax cuts and refund stimulus from the Big Beautiful Bill. However, IRS data shows that total refunds issued during the 2026 filing season increased by only about $50 billion year-over-year, which is a drop in the bucket for an economy approaching $30 trillion.

David Wu states that the real driving force lies on the corporate side. Since January, the growth rate of US core capital goods orders has doubled, and the pace of job creation has nearly tripled. This is mainly due to two policy forces:

2. Business Tax Provisions: The bill allows companies to immediately expense 100% of qualifying equipment investments and domestic R&D, significantly reducing the after-tax cost of business investment.

3. Declining Policy Uncertainty: Entering early 2026, as political fog cleared, companies began to concentrate on previously shelved and delayed projects, directly triggering capital expenditures and lagged large-scale hiring.

This pent-up momentum will continue to support the economy in the third quarter. Upward inflation pressure will also force the Fed to maintain a hawkish stance, pushing real yields higher until they eventually blow up the AI bubble.

The Ultimate Second-Half Choice: The Life-and-Death Tug-of-War Between the AI Bubble and High Real Yields

Before real yields rise further, the AI bubble could potentially burst first due to its own weight.

Currently, the AI trade is facing its toughest test since inception. OpenAI is considering delaying its IPO, while the capabilities of new AI models emerging from China and Japan are rapidly approaching Western top-tier levels. "Commoditization (homogeneous low-price competition)" has become the biggest downside risk facing the entire AI trade. With major hyperscalers about to release earnings, the market will face its first rigorous test regarding real demand for AI in the "post-token-maxing" era.

Additionally, geopolitics (the difficulty of maintaining an Iran deal) could push oil prices and interest rates higher again after July. Overall, in the second half, either the AI bubble bursts first due to homogeneous competition or demand falsification, or high real yields will point to higher unknown territory until they halt all risk assets. Until the AI bubble truly bursts and pulls down real rates, blindly bottom-fishing for gold or shorting the dollar is premature.

The following is the full text of the speech, translated with AI assistance:

The artificial intelligence (AI) trade previously pushed up real yields, and now, higher real yields are in turn threatening the AI trade. If the AI bubble bursts first, defensive assets will get a breather; but if real yields continue to climb, risk assets will be in big trouble. What is the market missing? Let's make some predictions now.

The first six months of 2026 are over, and they have been extremely brutal for defensive (safe) assets. Bitcoin became the worst-performing major asset, followed by gold. Meanwhile, the Japanese yen plunged to its lowest level against the US dollar in six decades. Typically, poor performance in defensive assets means a significant cooling of risk aversion and reduced demand for safe havens. However, this was not the case in the first half of 2026. Although the VIX has fallen from its highs, it is still above levels at the start of the year; interest rate volatility and oil volatility also remain elevated.

In fact, the weakness in defensive assets was mainly driven by the repricing of risk-free rates—specifically, real yields. Since the start of the year, the US 10-year real yield has surged by 33 basis points, approaching the highest level since the current economic expansion began. This repricing is not unique to the US. Since the first US-Israeli strike on Iran at the end of February, real yields in bond markets of almost every major developed country, except Canada, have been climbing.

During the war and the early stages of the ceasefire, real yields were closely linked to oil prices, as the market expected that high energy prices would force central banks to adopt tighter monetary policies to prevent second-round inflation effects. However, this logic has broken down in recent weeks—oil prices have collapsed significantly, but real yields remain stubbornly high. This raises two possibilities: either real yields themselves are due for a correction (in which case defensive assets will see a significant rebound in the second half), or a new force is strongly supporting them. If real yields continue to grind higher, the consequences for risk assets will be severe, with stocks, credit assets, and emerging market currencies facing increasing pressure.

Real yields depend on real economic growth expectations, the monetary policy outlook, and term premiums. Given that term premiums have fallen this year, we can first rule them out as the culprit behind higher real yields. What about growth expectations? Market consensus forecasts for US GDP growth in 2026 have been revised down from 2.4% at the start of the year to the current 2.1%. However, since April, actual economic activity data has frequently surprised to the upside. In fact, our team's "Index-Weighted US Economic Activity Surprise Index" is near its highest level in the past five years.

My analysis suggests that when inflation is above the Fed's 2% target (as it is now), the link between stronger-than-expected economic activity and rising real yields is particularly tight. This is not surprising—with inflation high, the Fed reacts more aggressively to positive growth data. Therefore, I believe that while current real yields are high, they are not unjustified. This also aligns with the market's current pricing in of expectations that the Fed will hike at least once more by the end of the year.

At this moment, the market is in a "good news is bad news" logic regime. Stronger economic data means higher real yields, and higher real yields mean lower stock prices. So the million-dollar key question for the second half is: Where are real yields headed? This will undoubtedly depend on whether economic growth continues to surprise to the upside and the outlook for inflation. Let's make some predictions.

Like many economists, I am surprised by the remarkable resilience shown by the US economy over the past three months. A popular explanation is that consumers have weathered the oil price shock thanks to the large tax refunds provided by the Big Beautiful Bill. However, the data does not support this story. According to the IRS, total refunds issued during the 2026 filing season as of May 8 were only about $50 billion higher than the same period in 2025. In the context of a nearly $30 trillion US economy and about $20 trillion in annual consumer spending, this is purely a drop in the bucket.

So what is driving the surge in corporate capital expenditure and hiring since January? Since the start of the year, the growth rate of core capital goods orders has doubled, and the pace of job creation has nearly tripled. AI is obviously a major driver of the capex surge, but it is hard to argue it explains the explosion in hiring (in fact, the tech sector as a whole is still laying off workers). I think, aside from AI, two other forces have played a key role:

First is the business tax provisions in the Big Beautiful Bill, which allow companies to immediately expense 100% of qualifying equipment investments, domestic R&D, and certain manufacturing buildings. This significantly reduces the after-tax cost of investment and improves the economics of capital expenditure. These provisions should have taken off in the second half of 2025, but at that time, companies delayed investment and hiring due to extremely high uncertainty over trade wars, a prolonged government shutdown, and Fed policy.

Second is the decline in policy uncertainty. As the policy fog cleared in early 2026, companies began moving forward with previously shelved projects. This directly ignited capital expenditure and led to lagged hiring. All else being equal, as this backlog of investment and hiring moves to higher levels, these two forces will continue to support the economy in the third quarter. And this does not even account for the impact of most of the yet-to-be-distributed tariff refunds. In this context, inflation will face upward pressure, forcing the Fed to continue hiking rates. This means there is room for real yields to rise further, until they eventually blow up the AI bubble.

However, "all else being equal" is a strong assumption. The AI bubble could very well burst under its own weight before real yields rise further. There are reports that OpenAI is considering delaying its IPO, while new AI models emerging from China and Japan are approaching the capability levels of Mistral. This further reinforces my long-standing core view: commoditization (homogeneous low-price competition) is the biggest downside risk facing the AI trade. We will soon receive Q3 guidance on AI demand in the post-token-maxing era from the major cloud hyperscalers, but we still have about three weeks before these earnings are released.

And on the geopolitical front, I continue to firmly believe that the current agreement cannot survive the planned 60-day negotiating period. If this view is correct, oil prices will likely head higher again (perhaps right after July 4). And higher oil prices will, in turn, exert upward pressure on real yields. My overall assessment is that either the AI bubble bursts on its own, or real yields will point to higher unknown territory. That is why I am not yet ready to start buying gold or selling the dollar until the AI bubble truly bursts. However, we may soon approach a tipping point where "something has to give," which will undoubtedly be favorable for overall market volatility. Thank you for listening.

Explanation of Key Terms:

Real Yield: This is the bond return after deducting inflation expectations. It is a core indicator measuring the true cost of social borrowing. When real yields rise significantly, it means the opportunity cost of holding non-interest-bearing assets becomes higher, putting heavy pressure on them.

AI Trade: Refers to the stock market uptrend driven by a massive influx of funds concentrated in the AI-related industry chain.

VIX (Panic Index): Compiled by the Chicago Board Options Exchange, it reflects the market's expectation of the implied volatility of the S&P 500 index over the next 30 days. A higher index indicates that investors expect greater market volatility and panic in the future.

Term Premium: The extra compensation investors demand for bearing the risks of holding a long-term bond (such as uncertain future inflation, interest rate changes, and liquidity risk).

"Good News is Bad News" Regime: A specific macro-economic and market interaction pattern. In this regime, strong economic data makes the market worry that the central bank will maintain high interest rates or hike further, thus becoming bad news that causes stocks to fall sharply.

Capital Expenditure (Capex): Funds spent by a company to buy, upgrade, or maintain fixed assets. It is a barometer for observing the entity's confidence in future development and the intensity of expansion.

Big Beautiful Bill: A major fiscal bill mentioned in the video background. Its core is providing extremely aggressive corporate tax cuts and fiscal stimulus, especially allowing companies to immediately expense 100% of equipment and R&D investments, thereby greatly reducing their tax burden in the short term.

Commoditization: Refers to a product or technology that was once of high technological barriers and high profit margins but, as competitors surge in and technology becomes widespread, gradually loses its uniqueness, becoming a homogeneous, low-margin product that anyone can make and must compete on price.

Hyperscalers: Specifically refers to the tech giants that provide hyperscale cloud computing, data center, and network infrastructure (such as Microsoft, Amazon, Google, etc.). They are currently the core buyers of AI computing power and chips.

Token Maxing: In the context of large language models, a token is the smallest unit of text processed by the model. This term refers to the industry's frenzied pursuit of maximizing computing power usage, desperately consuming and producing a massive number of tokens in an explosive, even somewhat extensive, phase of commercial expansion.

Risk Warning and Disclaimer

Market risk exists, and investment needs to be cautious. This article does not constitute personal investment advice, nor does it take into account the unique investment goals, financial situations, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Invest accordingly at your own risk.