The markets are starting to act seriously weird. Blame AI

On the surface, the markets seem stable. Stocks are near record highs, and bonds are right about where they've been for the past couple of months.

But check under the hood, and you'll see signs that investors are growing increasingly nervous — mostly because of AI.

This time, the anxiety isn't because AI is going to kill us all (that was SO last month). The latest concern: AI may be a financial quagmire.

And if the air is starting to come out of the AI bubble, it could threaten to knock over the foundation supporting America's economic boom.

The stock market is so big and diverse that it's sometimes useful for investors to measure it in creative ways, comparing two measurements to figure out if there's a trend that the headline numbers can't show you.

For example, you can measure the benchmark S&P 500 stock index in a number of ways. The most common way is to weight each stock by its market value — giving gigantic tech companies worth trillions of dollars considerable influence over the ups and downs of the stock market.

But if you look at the S&P 500 another way, weighting each stock equally, you can sometimes get a clearer picture of how the market is performing across industries. Equally weighting stocks ensures companies in smaller industries aren't drowned out by massive ones, like Big Tech.

When comparing those two measurements on October 22, the result was seriously bizarre — so strange it had only happened twice before in the past three decades.

The main index, weighted by market value, fell 1.2%. But the equal-weighted index gained 0.5%. Since 1995, that massive divergence in the two measurements had happened only twice before: April 14, 1999, and March 30, 2000, noted James Reilly, senior markets economist at Capital Economics.

What does it mean? A clue can be found in another weird thing that happened that same day.

Also on Thursday, the 10-year Treasury yield slammed on the brakes and went into reverse, falling below 5% and tumbling in the largest single-day decline since March 10, 2023 — the day that Silicon Valley Bank imploded.

So investors were pouring money out of tech and into Treasuries and non-tech stocks at a historic pace.

It's a sign that AI is making some folks on Wall Street kind of nervous.

Bonds had been tumbling (and yields, as a result, had been surging to multi-decade highs) for three core reasons:

The Iran war sent inflation on a serious rebound, cutting off the world's oil and fuel supplies and sending prices through the roof. Bond investors, when confronted with rebounding inflation, demanded higher yields to compensate for the chunk of their investment that inflation has been eating into.