The day Substack moved the S&P tape, trading fiction in a fractured tape

We walked out of the tariff fire and straight into the AI scare frying pan, and the tape wasted no time reminding everyone that narratives change faster than positioning. One minute, investors were gaming Supreme Court rulings and 15% blanket levies under Section 122, the next, they were pricing in the possibility that code writes code and legacy business models become museum pieces.

The artificial intelligence scare trade did not tiptoe in. It kicked the door down. International Business Machines Corp. fell 13% in its worst day since 2000 after Anthropic suggested its Claude tool can modernize COBOL.

The AI disruption theme did not suddenly discover new facts. It rediscovered attention. A Citrini Research note, which said little that was not already in the public domain, was passed around like wildfire and racked up more than 20 million views. That virality mattered more than the content.

What if our AI bullishness continues to be right...and what if that’s actually bearish?
What follows is a scenario, not a prediction. This isn’t bear porn or AI doomer fan-fiction. The sole intent of this piece is modeling a scenario that’s been relatively underexplored. Our friend Alap Shah posed the question, and together we brainstormed the answer.
Hopefully, reading this leaves you more prepared for potential left tail risks as AI makes the economy increasingly weird. The 2028 global intelligence crisis.

The Substack note merely reemphasized what everyone already knows but prefers to forget during rallies: artificial intelligence is not just a margin enhancer for megacaps; it is a margin compressor for anyone sitting directly in the path of automation.

But once that reminder hit the trader's bloodstream, traders did what traders do. They moved from valuation debate to survival math. If AI can compress coding cycles, automate back-office workflows, displace customer service layers, and streamline logistics, then the addressable labour pool becomes a cost centre waiting to be rationalized. Payments firms, delivery platforms, legacy software vendors and even parts of private credit underwriting suddenly look less like secular compounders and more like optionality on whether disruption arrives in three years or ten.

But nothing in that note changed the near-term earnings trajectory. What has been changing behind Wall Street's golden doors is the discount rate applied to future cash flows.

That was enough to send traders sprinting for the exits on anything that smelled even faintly of legacy software, payments plumbing, or delivery infrastructure. The message from the tape was brutal and simple. If a machine can do it faster, cheaper, and at scale, your multiple is on borrowed time.

But here is where the trader's brain needs to separate signal from structure.

Yes, the S&P slid 1% and cracked its 50-day moving average before finding buyers near the 100-day. Yes, the IGV ETF is careening toward its worst month since 2008 even as inflows pour in, which suggests this is as much forced repositioning as a fundamental reassessment. Yes, small caps and financials were treated like collateral damage in a cross-asset risk trim.

Positioning was the accelerant. Friday’s OpEx left the street swimming in negative gamma. When dealers are short gamma, they sell weakness and buy strength. That mechanical reflex turns a shove into a stumble and a stumble into a slide. The AI note was the match. The options book was the oxygen.

Macro then added its own layer of fog. The White House's pivot from the struck-down reciprocal tariffs to a 15% across-the-board levy under the 1974 Trade Act injects a fresh dose of policy uncertainty. Add Middle East tensions, Mexico headlines, and a market that has been conditioned to trade geopolitics as a volatility impulse rather than a growth thesis, and you get what we saw. A market struggling to find a valuation anchor. When investors cannot find the hook, they reduce exposure.

Flows tell a more nuanced story. Mutual funds are nearly fully invested. Hedge funds are only at average net leverage. In other words, the real money is long and comfortable, the fast money is not wildly extended. That is not the anatomy of a crash. That is the anatomy of a market vulnerable to air pockets but not yet structurally broken.

Credit is where the yellow lights are flashing brighter. Private credit names were hit again, and comparisons to 2007 are starting to creep into conversations. When financing terms become more creative than the assets themselves, you know the cycle is aging. Financials rolling over alongside software is not about AI replacing bankers. It is about the risk premium rising across the stack.

Rates, meanwhile, were the adults in the room. Treasuries were bid across the curve with the belly leading. The 10-year yield probed toward the 4.00% Maginot Line, its lowest since Thanksgiving. Front-end rate cut expectations crept higher. Bonds do not trade science fiction. They trade growth and inflation math. The bid in duration says the bond market sees more disinflationary drag than productivity miracle, at least for now.

The dollar ended unchanged after overnight weakness was absorbed. That tells you global stress is not yet dollar positive in a disorderly way. It is more rotation than panic.

Gold, however, was emphatic. Spot pushed back above $5200. That is not just a technical breakout. That is capital seeking a store of value in a world where trade policy shifts by tweet and algorithms threaten incumbents overnight. Bitcoin could not keep up, slipping back below $65k and dragging the BTC to gold ratio to new cycle lows. When gold rises, and crypto falls, the market is voting for certainty over speculation.

Oil pumped and dumped to finish little changed, which feels right. AI does not burn crude, and tariffs do not immediately shut off supply. Oil markets are waiting for the next up or down signal from the Middle East before returning to the normal grind of supply and demand calculations.

Underneath the wreckage, there is a potential twist. Equity skew is near extremes. Traders are paying up aggressively for downside protection while showing little appetite for right tail exposure. When everyone crowds into puts and ignores calls, the decay clock starts ticking. If Nvidia prints clean numbers midweek or tariff rhetoric softens, dealers will be forced to buy back deltas as those puts bleed. That is how short-term panic morphs into face-ripping rallies.

The right tail has been systematically crushed. Index call skew is in full crash mode. Yield enhancers have been monetizing complacency by selling upside premium. Overwriters have leaned into the belief that rallies will be capped. Calls are written. Premium is harvested. Upside is treated as low probability.
But if spot lifts and trades through those strikes, the mechanical reaction flips. Overwriters who assumed a ceiling suddenly find themselves in open air. They must hedge their exposure. That is how low probability upside morphs into forced demand. The right tail is orphaned.

This is not a market choosing between humans and machines. It is a market repricing of time horizons. AI may well be a secular headwind for certain business models. It may also be a productivity tailwind that justifies the capex binge. Both can be true. The error is assuming the impact is instantaneous.

For now, the tape is trading amid fear of displacement, layered on top of trade and geopolitical policy uncertainty, and amplified by options structure. That is a lot to strip away before blue skies form.

In markets, as in storms, the loudest thunder is often structural rather than fundamental. When the machines rattle the tape, the tape rattles back. The trick is knowing when you are trading a revolution and when you are trading fiction

My opinion

Whether you agree with the premise of the latest viral Substack broadside or not, you cannot deny the growing market impact of these long-form thought pieces. They are no longer fringe commentary drifting around the edges of finance. They are catalysts. In a world where a note can rack up tens of millions of views before lunch, distribution has become a macro variable.

At the same time, there is a legitimate debate about proportionality. I have to caution that the market is extrapolating too much from this Citirni Research piece

The scale of the reaction is extraordinary. We have watched this market absorb wars, sticky inflation, banking tremors and tariff theatrics with a shrug, yet a widely circulated Substack thought piece is enough to knock it sideways. That tells you less about artificial intelligence and more about the ecosystem we now trade in.

We are in a brave new world of AI narrative washing, where distribution speed rivals data quality and where a well-written speculative scenario can compress multiples faster than an earnings miss. The tape is no longer reacting purely to cash flow reality. It is reacting to future state storytelling delivered at scale.

That does not mean the disruption risks are imaginary. It means the transmission mechanism has changed. When positioning is crowded, and options books are fragile, a viral narrative becomes a volatility catalyst. The content may say nothing new. The reach is what matters.

Markets used to move on confirmed deterioration. Now they can lurch on projected displacement. That is the adjustment investors are grappling with. Not just how AI will reshape industries, but how AI discourse itself is reshaping price action.

Nothing in that note altered the near-term earnings trajectory. Guidance did not collapse. Orders were not cancelled. Cash flow statements did not suddenly implode.

What is changing behind Wall Street’s gilded doors is far more subtle and far more powerful. The discount rate moved.

When investors start to question the durability of cash flows five years out, they do not wait for the earnings miss to show up in black and white. They raise the hurdle rate today. They demand more compensation for uncertainty. They pull forward competitive risk. And that simple mathematical adjustment can erase billions in market cap without a single revision to next quarter’s EPS.

This is the quiet mechanics of multiple compression. The numerator remains intact. The denominator rises. Duration gets punished. Long-dated growth gets repriced. Stocks that were treated like perpetuities suddenly trade like assets with an expiry date.

Yet after today's faceplant, the deeper question is durability. Viral fear can force repricing in the short term. Sustained bear markets, however, require sustained earnings erosion. Until that materializes, episodes like this look more like positioning resets than structural breakdowns.

In conclusion

Artificial intelligence may be the secular overhang, but it is trading inside a far noisier macro theatre. The Middle East simmers, Mexico flares up in the headlines, and US foreign policy shifts tone with uncomfortable frequency. When geopolitics and tariff architecture are in motion, bottom-up earnings models lose their grip. Macro uncertainty can dwarf micro inputs in an instant, leaving investors without a firm anchor for valuation. And when the market cannot find an anchor, it reduces sail.

What we are seeing feels less like a broad liquidation and more like selective pressure points. The S&P is still flat for the year. That is not capitulation. That is siimply multi year AI fatigue setting in. The pain is concentrated in pockets rather than systemic. The market is not screaming. It is coughing, and at times, badly, on any excuse.

Positioning adds another layer. Mutual funds are effectively fully invested, sitting near historical lows in cash. They are long because that is what they are paid to be. Hedge funds, by contrast, are only running average net leverage. There is no wild speculative overextension to unwind, but there is very little incremental long buying power from the real money crowd. When everyone who must be long is already long, marginal flows matter more.

The intraday price action captured the mood perfectly. A brief push back to unchanged at the US cash open was met immediately by supply. Every attempt to stabilize was sold. An afternoon bounce tried to build, then headlines crossed about Senate Democrats introducing a bill seeking tariff refunds, and the air came out again. In this tape, politics is not background noise. It is order flow.

Small caps and the Dow took the brunt of it, cyclicals and domestics wearing the heaviest weight of policy ambiguity. The S&P, relative to the rest, was simply the cleanest shirt in a dirty laundry basket. Not strong, just less weak.

This is what a market looks like when secular disruption, geopolitical crosscurrents and crowded long-only positioning collide. It is not panic. It is a search for footing in shifting sand.