The Dividend Cafe - Five Things I Worry About and Five Things I Don’t

Episode Date: July 17, 2026

Today's Post - https://bahnsen.co/4fhExhw From the Newport Beach studio ,David outlines five market concerns and five items he is not worried about. His worries are: extreme S&P 500 concentration (top 10 near 39% and semiconductors rising to ~20% weight), speculative retail behavior (surging ETF inflows, levered ETF growth, and elevated options/0DTE activity), a “right pocket vs left pocket” dynamic where hyperscaler AI spending transfers free cash flow to semiconductor/data-center suppliers, an S&P earnings narrative he sees as circular and priced to perfection with margin risks, and counterparty risk tied to OpenAI—especially the possibility of government “nationalizing” AI. Not worried: imminent AI job destruction (headcount rising at AI adopters), volatility, the politicized inflation narrative, near-term energy price swings, or “software is dead,” arguing AI creates winners and losers requiring due diligence; he closes noting long-term concern over government debt and preference for dividend growth. 00:00 Welcome and Setup 01:10 Market Concentration Risk 04:36 ETF and Options Frenzy 08:52 AI Capex Winners and Losers 10:46 S&P Earnings and Margins 13:25 OpenAI Counterparty Risk 16:43 AI Jobs Fears Debunked 19:15 Why Volatility Helps 20:17 Inflation Narrative Nuance 23:39 Energy Beyond ESG 25:26 Software Valuations Reset 27:03 Recap and Big Picture Close Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Hello and welcome to this Friday's Dividend Cafe where today I am going to talk about five things I am worried about in the markets and five things I am not. And I am doing this back from our beautiful, comfortable studio in Newport Beach. is my first time here since the very beginning of summer. And I had a tremendous time writing this week's Dividing Cafe because it does cover a lot of topics. There's a lot of areas of, well, I think newsworthiness and noteworthiness, but just relevance to investors and how we're thinking about these subjects at this time. And I'm going to basically provide my perspective of certain things that some people might think are positive that I'm going to suggest or not. And certain things

some people think are negative that I'm going to suggest or not. So there's plenty of contrary viewpoint here on several points, as is usually the case. It requires nuance. But I really believe there's some takeaways here that are very important in the current investing moment. And we're going to dive in and address each of these topics wherever they may take us. It's going to be a lot of charts today. We're going to have a lot of fun. The five things I'm currently worried about. We're going to put these in the negative comments. One should be no. surprise. I talk about the concentration in markets. This is not a new topic. We've been talking about for some time. And you can get into the valuation discussion. We can get into AI froth and we can

get into the semiconductor stuff, which we're going to talk about more in a moment. But I don't think that getting into the subject of why there are these problems out there is all that important if people hear it and say, yeah, but that doesn't affect me. I mean, I talk all the time as I grew up as a young adult investor in the 90s excess in the tech boom, but it is totally true that I didn't know a lot of people that owned the Munder Net Net Net Fund. Now, the Munder Net Net Fund blew the people who owned it to Smithereens, but it wasn't that widely held. There was tons of NASDAQ trading. There was tons of margin buying. but like a broadly diversified investor who considered themselves separated from tech excess felt somewhat justifiably that they had mitigated a lot of that risk back then.

However, I'm going to put a chart up right now. The top 10 constituents in the S&P you see right now equaling 39% that's down from about 40. We've talked in the past that if you combine the tech and communication services sectors together, because back in the 90s you only had a tech sector, they had a tech media telecom, so the categorizations are different. But right now, the tech and communications together is about 50%. It was at a peak in the 20s before you see from this chart right now, the top 10 constituents, that you were at around 25% of the top 10 back.

in that late 90s peak. Now, look, we'll pull that chart off, but my point is, many can say, look, David, I don't consider the top 10 thing a big risk because some of those top 10 names are sure winners. And so the fact that the S&P owns a lot more of it is totally fine. It isn't like the whole semiconductor space is taken over the S&P. And yeah, we know there's some froth there. But now look at the second chart of the semiconductor weight in the S&P, where you see, it essentially, as a subsector of a subsector in a lot of ways, went in the 90s from like 2% to 8%,

came back in that 2 to 3% space, and it's just absolutely skyrocketed in the last 5 minutes to 20% of the index. And therefore, everything else went from close to 100% to down to 80%. So a broadly diversified investor who owns a cap-weighted S&P 500, meaning trillions of dollars of retail investors, that believes I don't own the Munder Net Net Net Exposure to use the equivalent back to the 90s. They're now sitting with a lot of vulnerability that I don't think they know they have. This is an area of concern. Now, second in our list today is this behavior, the masses, crowding, activity, and the way it all rhymes with history. And it just is a general catch-all for investor behavior right now.

And as a contrarian, I don't have a way to say what will happen or when will happen. And I've always acknowledged contrarians can be, if they're successful, very lonely. for a period of time because there are times when bad behavior looks like good behavior until it doesn't. But for example, this first chart here, just the general, absolute exponential growth of inflows in ETFs, this risk on temperament where you see all of a sudden $1.2 trillion of inflows into ETFs in 26, we appear to be well on track to double last years. This is just an enthusiasm that as a contrarian, I think you're supposed to say, wait a second, okay? Now, people go, hey, it's great. People are going into the market. Markets good. What's wrong with that? Well, all right.

Now, the second chart, I just again want to point out a 460% jump in levered ETF assets. that we're now looking at $220 billion in various shiny, frothy versions of indices. And these are things that are basically bought by retail investors. I poured in this week to a pretty lengthy report from Citadel Securities on first half of the year. This is not only known as a very large, large, large multi-strategy hedge fund, but then there's to Citadel Securities. securities business is one of the largest market makers on earth. A massive amount of trading volume goes through Citadel. And they put out all of their data regarding trading flow and so forth. And I want you to look at this chart here of retail options, investors using

derivatives and all of the speculation that goes there with a daily amount of $6.8 billion of options premiums in June from retail investors. That is 65% higher than the average in 2025. It is double the historical average. Highly speculative option activity skyrocketing. What could go wrong here, right? Anecdotally, without putting another chart up, I just want to make the point that the options that I'm just referring to, people buying call options or selling put options or whatever. whatever they're doing in this sort of speculative activity. In semiconductors, it was over six times its historical volume in June. In the space sector, whatever in the world that is, it was almost

six times, 5.6 normal volume. I love some of this data about single day, zero day options, zero day expiration options kind of came out. Cliff Asniss, who's a friend of mine in the CEO of AQR tweeted, what fresh hell is this? Because just the concept of it is so just despicable to someone like Cliff and I frankly share his view here. 30% of all options traded last month were zero day expiration options. Basically an investor making a one day bet on whether or not a stock price would go to a certain number or not in a given day. Ignoring this seems to me, to be unwise, that there is something indicative in all this of tremendously bad behavior. I can't tie any of these things to a specific prediction or a specific timeline. It's my rational concern

in response to what I feel is a glut of irrational activity and some may call it exuberant. All right. Number three, the right pocket fighting the left pocket. The way in which markets have been set up where many investors feel that all these things are going to work out, but they are absolutely pitted against one another. If you believe the semiconductor thousand percent move higher is all okay because the growth rate of CAPX is going to stay the same. There is that much growth coming, that much real life revenue, real cash flow for the seller of the, shall we call it, AI components that there is going to be a continued growth in that space. Now, of course, that can only happen.

The sellers have the buyers. The buyers are the hyperscalers. The hyperscalers have already spent over 100% of their free cash flow. So where does this money come from by those hyperscalers having to dilute their own equity holders with a ton of new equity issuance? The real phrase here is and or new debt issuance by levering up balance sheets. So you can say, no, the hyperscalers are going to get sober. That is a death knell to those who are waiting for the purchase orders,

the pick and shovel companies, the semiconductors, the data center. You can say, no, the hyperscalers are going to continue spending. But then we already have seen our markets have responded to that. I'll put a chart up here right now, this generational transatlantic. for in free cash flow. From one hands to the next, it is not that both are winning. It is that one is spending on the other. There could be outcomes into the future.

There is expected ROI. But in this immediate place here, this notion that these things play out with everyone winning in equal proportion strikes me as utterly preposterous. I think that chart right there is graphically clean, illustrative, and easy to understand what it is I'm referring to. All right. Then number four is the S&P profits story. I am just candidly not as sanguine about S&P profits as many appear to be. Now, I am not saying the profits are not growing and the profit levels are not wonderful and I'm not saying that the growth will not be sustained. The margins have expanded. There's a lot of wonderful news and profitability and

corporate profits are the mother's milk of stock markets. However, The challenge here is that earnings in the S&P 500 have been skewed by other income and invited a circularity where people say, this isn't all just AI hype, this is real life earnings, but then you realize that a substantial amount of the real life earnings or other income from marking up the value of this AI, there is still the expectation of a self-fulfilling prophecy around AI hype. I don't think you can avoid that circularity in the narrative. At some point, the expectation of all these things just lining up perfectly in perpetuity, I think gets disappointed. And the best case scenario, in my opinion, will prove to be a multi-year range-bound market, which is one as a dividend growth investor I would feel very confident about, but I think a lot of index investors would not. And that would be a best-case scenario, and I think a worst-case scenario would be worse. Okay. Let me say this about margins. You cannot have margins continue to expand if the underlying issue is succeeding at scale.

Okay. With if there's competition. At some point, the success of it breeds downward pressure on margins. That's a universal law of economics. It's going so well. Everyone wants a piece of the action and they come in and start pushing prices lower. and margins then get compressed as part of the competitive drive to sustain market share. This is what has played out in every successful thing ever. And I guess you could say, well, that won't happen here because it won't be successful. That strikes me as a much worse outcome. But the idea that margins can stay at this level when it is democratized, when it is at scale, when it is competitive, is just unprecedented. All right. The fifth one is the one I think is kind of most interesting to be candid with you and where I'm getting the most specific. But I want to quote here. I read a report from Peter Bookfar this week where he was talking about the S&P's credit downgrade of Oracle. And in quoting that story, it's not about Oracle per se. I mean, the fact that there are a lot of these hyperscalor companies, that there's changing business models when you look at companies that

are going more into cloud infrastructure versus, in Oracle's case, it was an enterprise software database type company. But anything that's going to have a greater CAPEX need requires a totally different use of cash flow than a company may be used to. We've talked about this quite a bit. You see hyperscalers right now seeking to lease some of their excess compute capacity. It makes them formidable competitors to some of these infrastructure, computing infrastructure companies.

but I think that a lot of this still comes down to counterparties. And I am obsessed with counterparty study because I did take it upon myself to try to become a vigorous student of the financial crisis that is now nearly 20 years old, which was largely a story of counterparty risk when everything hit the fan in September of 2008. From the S&P credit story, Open AI remains a key credit risk. We estimate that OpenAI makes a key credit risk. We estimate that Open AI makes up roughly half of the $638 billion in remaining performance obligations. Open AI's ability to meet its contractual obligations and raise external financing will be contingent upon AI tailwinds continuing and its models being market leaders. If Open AI were unable to pay Oracle, we believe Oracle would be left with massive data center leases that it might be unable to exit or have to re-lease to new tenants under less favorable terms. Fair enough. a statement about Nvidia. There's not a statement about S&P 500, and it's frankly not even a statement

about AI or IPOs, about valuations, about Oracle particularly, about the big cap growth sector. All those things are legitimate subjects for discussion. But what they're doing is inviting something that I can expand upon with many other nine figure purchase order illustrations. And that is a very specific statement about a very specific company, Open AI, who you hopefully know is the maker of ChatGPT. Most Americans have never heard of Open AI, even if they have heard of the flagship product they have. But what I believe is becoming an interconnectedness in the U.S. economy with no real

revenues at this time, no real ability to meet obligations other than to raise external financing with a company that is asking the U.S. to basically become a business partner by U.S., I mean the U.S. government. And of everything I've said in my sort of five items here today, okay, there is nothing more of my mind than if the U.S. were to nationalize AI, were to become an AI equity holder. This to me is probably the biggest concern I think about day by day. All right, let's shift gears to the five things I'm not currently worried about, all of which are items that are going to be on other people's other list, things that they are

worried about. I've written a full Dividy Cafe in the past about my view of the imminent AI destruction of jobs. I want to put a chart up right now about the AI adoption intensity that where companies are more utilizing AI, you'd expect to see them therefore laying off more people, but in fact, that's where the greatest increase in headcount is that you are creating, dating more entry-level jobs where there has been more adaptation of AI, and there's a lot of reasons this could be. But total hiring is up over 10% at the AI adopters and entry-level jobs up 12%. Basically, the other line that is sort of flat is of low AI or no AI adoption. I can't say this will fully continue. I do believe the burden of proof that AI is going to destroy

jobs and not create new ones is on people that are arguing against the testimony of history. But what we see right now is a basically flat, if not modestly declining unemployment rate. You have not seen unemployment go up in the first four years of AI's adoption. And in fact, business formation, new business formation is up 30%. I think a lot of those businesses will fail, but some will succeed. And a lot of people will try and do the normal things you're supposed to do as an entrepreneur swinging is as give it a go. These are great numbers. Now, all I can tell you is this does not take away the fact that there will be people lose their jobs. And on an individual basis, I think that that is a tragedy. And yet, I am talking in a macro

aggregate sense that one person may lose their job from a technology disruption. Other jobs will be created. And one person who loses their job may either have to reintegrate. vent or move to something different. This process has played out forever and ever, and I absolutely believe that it will be more informative this time around there. There's going to be a lot of more profound numbers, but I am not in the camp that says we're about to face 25% unemployment. And there are plenty of people that can be projecting it or predicting it, but they certainly are not analyzing it. It's just not there. There's no analysis to be done reflecting anything of the sort. In fact, it reflects the opposite. The second.

thing I want to get to us to do with market volatility, I do want to make the point that we do not view market volatility as a bad thing. If someone says, yeah, I'm really concerned volatility's picking up or going to be picking up, look, if you are a cap-weighted index investor and that volatility exceeds the bandwidth you understood because concentrations are different, that's one thing. But for us as dividend growth investors, I first of all, just in any sense, accept volatility, and embrace it as a contributor to the risk premium that we are wanting to get as a means of enhancing our return. But secondly, I believe dividend growth contains a built-in offense, basically the defense of dividends turning into offense through reinvestment compounding effect. And so the volatility realities of markets are not things that I am afraid of, but things that I accept and, in fact, embrace.

The inflation story, as it is being told, is not something I am presently concerned about. That is not because I like high prices. I do want to point out, I think it is important to remember the crazy way that this inflation stuff is discussed now. The politicization of all of it, the using it as a cudgel to make a political point on either side, depending on what's going on or what data point is being harped on, has really caused and incoherence in the whole conversation. And I am reminded to Milton Friedman's point that in any topic, there's someone who's selling something who likes inflation and there's someone buying something who doesn't. But the issue is if you're talking about inflation properly, everyone dislikes it because even the people

selling a product at a higher price, they then have to go buy other products at a higher price. It presupposes a rising price level and you may be selling a product at a higher price, but then you had higher input prices, you had higher wage cost. So inflation is supposed to have a lot of losers. But when someone says house prices are high, I promise you that there is someone who doesn't like it and there is someone who does. And to me, right now when we say, okay, well, oil prices are up. What's the Fed going to do about inflation?

Or tariffs made inflation go higher or tariffs didn't make inflation go higher. and cherry-picking given products or whatnot, I think that we are having an utterly ridiculous national conversation about inflation, when we should be having four or five different conversations that hit each of these points on their own merits. Shelter prices, I promise you are coming down. Ask anyone to put a forced sales sign up in the state of Florida in the last six months. look at all the real-time market indicators on rent prices. But there is not a political point to say, oh, yay, we got rents lower. You had an oversupply.

You had prices get too high. And then they have to recalibrate in the old adage of the cure for high prices is high prices. But then goods prices have inflated higher. And there is an impact from tariffs there. And yet we're talking about the. supply shock from Strait of Hormuz, goods prices, which are largely tariff-affected, shelter impact and the services component to CPAC. We're talking about all these things that they're one and the same and they're all completely different.

My own view is that policy of price stability is needed, and that not only would involve avoiding the manipulation of money supply, but avoiding the manipulation of the cost of capital, but that the supply-oriented nuances that we're talking about with these other components are outside the purview of monetary policymakers. So you will see inflation on any data point that allows it to be talked about monolithically and as a story for the midterms or as a story for administration, either a good or a bad one, or as a story for what Kevin Warsh and the Fed ought to do. And very likely is that there's actually three or four.

different stories going on at once. Number four, the energy sector at the peak of ESG insanity. The predominant narrative five, six years ago was that we were going to get to a point where there was no more need for oil and gas whatsoever. It would be extinct. It was just a matter of when, not if. And I don't hear a lot of that anymore, not from super credible people. There's a pretty big focus on on cleaner production and extraction and and transportation of oil and gas. But most people in the more reasonable and sensible, serious conversations about this stuff have walked away from the idea that we're in a position to avoid what is such a massive and efficient producer of energy for our world.

And I fear right now what's going on is people have. have made a kind of current tense conversation around energy connected to Strait of Hormuz. I view the story of profitable production of oil and gas and especially profitable transportation of it and preparing for exporting of it and all of the kind of adjacent market stories that go along with this. I see all of these things as very structural, secular, long-term stories rooted to geopolitical, we're going to do economic objectives of the United States.

And I do not fear, like, what are we going to do if oil goes back to $64? So what we're going to do is celebrate. And I promise you that the U.S. energy story transcends whether oil is at 60 or 80 at a given point in time. Then finally, the software as dead story, I'm going to put a chart up here real quick.

You see the multiple being put on the free cash flow of the software industry is basically at a 12-year low right now. And the reason for this is the general expectation that that cash flow coming out of software as a service will be worth less next year than this year as AI competition erodes the value proposition of the software companies. And yet there is a very, very telling counter-narrative to the chart I just put up, which is that the average median price, the average median valuation in a stock of the software sector is far higher than the sector at large, that there is, in other words, a real Darwinian

thing playing out, that some of the larger companies are dragging the whole space, but that at the end of the day, some companies are going to massively benefit from AI. and some companies are going to massively suffer from AI, and some are going to suffer and then end up benefiting. And some have a moat and a brand, and some do not. And some have owned the data of their customers, and some do not. And to try to evaluate the software sector without those nuances of those four or five different points I just brought up is crazy. But the inconvenient truth here is that this cannot be done in an aggregate narrative that one just leans on. It requires the actual hard work of real due diligence.

And I do believe success in investing in this space is going to go to those who study for the test. So by quick recap, the five things that I said here today that I am currently worried about, the concentration changing in the markets, some of the unruly excessive behavior that we see from a lot of retail investors. The internal battle within markets, primarily around the free cash flow that is a benefit to one and an expense to another and everyone acting as if it is all one and the same. The S&P profits story, not being quite as clean as people understand it and being priced to perfection and this open AI becoming too big to fail. Those are my five things I'm very willing to put in a list of concerns. The five things that I would not have in that list, the imminent AI

destruction of jobs, the market volatility as an inerently bad thing, the inflation story as it is being told, the energy sector and what happens if Hormuz reopens and software as dead. These are all five narratives that I do not lose sleep over. At our dividend cafe.com, there is a new section that is in every Monday and every Friday of the dividend cafe called More to Chew on. A few links there this week that came into my inbox or reading or research throughout the week that I wanted to draw to your attention. And I will just conclude with this. Anyone who has read the dividend cafe for any period of time knows that if you're talking about long term and secular stories, the multi-decade stuff I most care It is not about the straight-of-form moves today or the software sector last year. I fundamentally

believe the major economic story of our time of the next couple decades of my adult life are the excessive government indebtedness and our ability to grow at the way we're used to growing as an economy in light of the heavy level of government debt and government spending. That's the major economic narrative that I am concerned about. That's a secular story. The five things I talked about today are more cyclical stories. The fundamental secular story that I am hopeful about and active on and implement on behalf of clients is the ability of companies to overcome the various negative things that they have to deal with, whether it is a macroeconomic condition of excessive government spending or anything else that might be. cyclical and generate profits nonetheless and share those profits with us, that dividend growth story.

So if you wanted, instead of my five and five cyclical, my one and one structural is the same things that they have been for a long time and will be. And all of this will be continued to be captured in the dividend cafe week by week. Thank you for reading it. Thank you for watching it. Thank you for listening to it. Have a wonderful weekend and we will indeed see you on Monday. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, and with Hightower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered through Hightower Advisors, LLC. This is not an offer to buy or sell securities.

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