The AI Story You Might Have Missed

Everyone knows about AI's first act. That was the semiconductor boom, the data center buildout, the race to throw money at anything with "neural network" in the pitch deck. But the second act is here, and it's got a different cast of characters taking center stage.

Big banks are quietly positioning themselves as major winners in what comes next. This isn't about banks building their own large language models or competing with OpenAI. It's simpler and potentially more profitable: using AI to slice enormous chunks out of their cost structures.

Think about what banks spend money on. Compliance and regulatory processes that require armies of people reading documents. Fraud detection systems that could be dramatically more effective. Customer service call centers. Credit underwriting. Back office automation that still relies heavily on humans doing repetitive tasks.

All of these represent massive opportunities for AI-driven cost reductions that flow directly to earnings, particularly at the scale these institutions operate.

Bank Earnings Roll In

Bank of America (BAC) reported earnings roughly in line with consensus but slightly below whisper numbers. The stock initially spiked then fell into support territory in premarket trading at $53.70.

Citigroup (C) delivered better results, beating both consensus and whisper expectations. The stock traded at $117.98 in premarket action.

For investors not already positioned in bank stocks, Citigroup stands out as particularly interesting right now. The stock trades at a discount relative to other large banks while the company is executing well on three critical fronts: simplifying the business, exiting lower return operations, and improving efficiency and capital discipline.

Morgan Stanley (MS) and Goldman Sachs (GS) report tomorrow morning, which will round out the picture for the major investment banks.

The Credit Card Interest Rate Wildcard

There's headline risk swirling around President Trump's proposal to cap credit card interest rates at 10%. Here's the reality check: this represents a manageable risk for large banks, not an existential threat.

Enforcement would face significant legal challenges. Any lasting cap would likely require congressional action, which is a heavy lift. If credit card-related headlines trigger a significant selloff, that's more likely an opportunity than a fundamental thesis change. In that scenario, trading around existing core positions makes more sense than panic selling.

Multiple Tailwinds at Banks' Backs

Beyond the AI cost story, big banks have several favorable dynamics working in their favor right now.

President Trump wants to run the economy hot, and there's a high probability he'll succeed at that. Hot economies are generally good for big banks. Capital markets remain strong. Net interest income has stabilized. Cost management continues improving.

For those who prefer the ETF route, State Street SPDR S&P Bank ETF (KBE) provides broad exposure to the banking sector.

One more thing worth noting: most portfolios right now are heavily weighted toward AI stocks. Prudent diversification suggests looking beyond just the semiconductor and tech names everyone owns. Banks offer a different angle on the same theme while providing portfolio balance.

Economic Data Comes In Mixed

The Core Producer Price Index came in cooler than expected, with headline PPI at 0.2% matching consensus but core PPI at 0.0% versus 0.2% expected.

Meanwhile, retail sales data shows consumers are still spending aggressively. November headline retail sales jumped 0.6% versus 0.4% consensus. Retail sales excluding autos rose 0.5% against 0.3% expected. This matters because the U.S. economy is 70% consumer-driven.

Supreme Court and Iran Jitters

Markets are on edge this morning about two potential catalysts.

First, the Supreme Court may rule on IEEPA tariff powers today. The consensus expectation is that the Court will find a way to support President Trump's tariff authority. But here's the wrinkle: companies are already lining up to seek refunds of tariffs they've paid, just in case the Court rules against the tariffs. If that happens, the decision could be seriously market-moving.

Second, there's growing concern that President Trump might decide to strike Iran. This is driving aggressive buying in both gold and silver. Silver is trading over $91 as of this writing, caught in what looks like the second leg of a vicious short squeeze.

China's Export Machine Keeps Humming

China's December trade surplus came in at $114.1 billion versus $114.3 billion consensus. The data shows that the Chinese export machine continues running strong despite U.S. tariffs.

Separately, stock exchanges in Beijing and Shenzhen are changing margin requirements to curb what they see as rampant speculation by Chinese retail investors.

Magnificent Seven Money Flows Turn Negative

Given how concentrated most portfolios have become in the Mag 7 stocks, early money flows in these names matter for overall market direction.

In early trading, money flows turned negative across all seven: Apple (AAPL), Amazon (AMZN), Alphabet (GOOG), Meta Platforms (META), Microsoft (MSFT), NVIDIA (NVDA), and Tesla (TSLA).

Money flows also turned negative in SPDR S&P 500 ETF Trust (SPY) and Invesco QQQ Trust (QQQ).

Commodities and Crypto in Motion

Silver: The white metal is experiencing a second leg of a brutal short squeeze, pushing prices above $91. The most popular silver ETF is iShares Silver Trust (SLV).

Gold: Also seeing aggressive buying on potential Iran strike concerns. Investors typically track gold through SPDR Gold Trust (GLD).

Oil: Being bought on the prospect of a U.S. strike on Iran. API crude inventories showed a build of 5.27 million barrels versus consensus expectations of a draw of 2 million barrels. The popular oil ETF is United States Oil ETF (USO).

Bitcoin: Bitcoin (BTC) is seeing buying due to a technical buy signal, with the initial trigger being optimism about new favorable crypto legislation.

Portfolio Positioning

Consider continuing to hold quality long-term positions. Based on individual risk tolerance, a protection band consisting of cash, Treasury bills, or short-term tactical trades makes sense, along with appropriate hedging strategies. This approach lets you participate in upside while maintaining downside protection.

You can determine your protection bands by combining cash with hedges. The high end of the protection band is appropriate for older or conservative investors. The low end suits younger or more aggressive investors. If you don't hedge, total cash levels should exceed the stated minimums but remain significantly below cash plus hedges combined.

A protection band of 0% would indicate very bullish positioning with full investment. A protection band of 100% would signal very bearish positioning requiring aggressive protection or short selling.

Remember: you can't take advantage of new opportunities if you're not holding enough cash. When adjusting hedge levels, consider using partial stop quantities for individual stock positions and allowing wider stops on remaining quantities, especially for high beta stocks that move more than the overall market.

Bond Allocation Considerations

For traditional 60/40 portfolio advocates, probability-based risk reward adjusted for inflation doesn't currently favor long duration strategic bond allocation.

Those committed to the traditional 60% stocks and 40% bonds split may want to focus exclusively on high quality bonds with five-year duration or less. More sophisticated investors might consider using bond ETFs as tactical positions rather than strategic allocations at this time.