RIA

Chip Momentum Is Fading Despite Strong Earnings

RIA Team — Tue, 28 Jul 2026 09:12:00 +0000

Last week, chip maker Intel delivered its seventh consecutive quarterly earnings beat with revenue growing 25% year over year, its fastest growth since 2011. Its non-GAAP EPS of $0.42 doubled the $0.21 consensus. Data Center and AI revenue surged 59%, and 18A foundry output exceeded internal targets by roughly 25%. Intel shares initially jumped as much as 13% after hours, but despite the outstanding earnings report, the shares gave up much of their gains. Furthermore, fellow chip makers Broadcom, AMD, and Micron were lower as well.

The lackluster price movement is a market tell. In late June, Intel was up over 250% year to date. Since then the stock has given up 30% from its high point. We saw a similar earnings reaction a day earlier with Alphabet. Their strong earnings were overshadowed entirely by spending concerns. The emerging thread in the technology and chip sectors is that market is no longer solely focused on potential growth, and appears to be questioning capex.

The recent history is not a chip sector rout. Fundamentals across AI infrastructure remain intact, and Intel's own numbers prove real demand exists. But the momentum trade, buy any earnings beat, worry about capex later, appears to be fading. Investors are now pricing execution risk into stocks that spent the first half of the year getting a pass on it. This is a narrative shift worth watching as earnings season continues.

What To Watch Today

Earnings

Economy

Market Trading Update

In our weekend report, we discussed the AI capex bill coming due. This week's hyperscaler prints tell us who can pay for it. Today, I want to read the part of the tape nobody is watching. The message underneath the index is very different from the one on the screen.

Start with the headline. The S&P 500 closed Friday at 7,411.98, roughly 0.8% below its 50-day moving average. That is its first decisive break of that line in months. Now here is what the headline hides. Through Friday, the equal-weight S&P 500 was up 11.5% for the year. The cap-weighted SPY was up just 8.4%. The average stock is beating the index by three full percentage points. Schwab notes that the percentage of index members above their 200-day moving average is at its highest level since December 2024. Nasdaq breadth, meanwhile, contracted.

Read that again. Breadth is EXPANDING while the index falls. We show this more visually in the next section.

Notice in the chart above that the equal-weight line bottomed on May 19 and has climbed since. It is not a fresh high for the year; March was better, but the direction is unmistakable. Money isn't leaving the market. It is leaving the top of it.

Last week's cohort returns make the point more bluntly.

The Magnificent Seven fell 5.6% in five sessions. Semiconductors finished higher. The equal-weight index held a small gain while the cap-weighted index lost 0.6%. That is not broad risk-off. That is a leadership problem, and a narrow one. That is more uncomfortable than it sounds. A cap-weighted benchmark cannot rally on the average stock alone, and a handful of names still decide the print.

That is the entire risk in front of us. Broadening participation is healthy for the market and painful for the benchmark, and, unfortunately, most investors only track the benchmark.

So what are we doing about it? Very little, and that is deliberate. SPY still sits 5.8% above its 200-DMA. This is a pullback inside an uptrend, not a break of one. We are holding the AI complex at the target weight while the consolidation/correction process erases current concerns over capex spending and depreciation. We are not adding ahead of this week's Megacap earnings or tomorrow's Fed decision. Buying risk into two binary events isn't analysis, it's hope.

Seven chip names report after today's close. They now trade on their own fundamentals rather than as a hyperscaler derivative, and that is worth watching closely. Where we are willing to lean is the side the money is already moving toward. We keep equal-weight and broad-market exposure at full weight rather than trimming it to chase the generals back.

Until then, manage risk at the line, keep the dry powder, and let the reports come to you. Capital preservation first. Trade accordingly.

Market Breadth Weakens But Not In The 'Usual' Way

The graphics below are from our new coming-soon version of SimpleVisor. We are now in the beta-testing phase and hope to roll it out to all users shortly. Stay Tuned!

It seems that poor market breadth recently was the result of technology, communications, and, at times, discretionary sectors being overbought and outperforming while safer, more value-oriented sectors were underperforming. Today's instance of weakening breadth is the opposite. The scatter plot on the left side of the first graphic below shows the dots have spread out over the last few weeks, favoring the more value-oriented, higher-dividend sectors, while yesterday's leaders are the most oversold.

For those not closely following the absolute and relative scores on a daily or even weekly basis, you may not appreciate whether breadth is improving or worsening. SimpleVisor allows you to put "tails" on the score. As we circle in the second graph below, we highlighted five sectors to show how they have rotated over the last six weeks. This ability is in the current SimpleVisor, but as we highlight with the red box, the new version will allow users to animate the movements over various time periods. This feature allows you to watch up to 12 weeks of rotations for all or selected sectors, factors, portfolios, and custom-made lists. The tool will help you better appreciate relationships and guide you in determining if there is a rotation in progress or one likely to occur.

Are US Treasuries Still A Safe Asset?

The 30-year Treasury bond closed last Thursday at 5.17%. Meanwhile, the 10-year touched 4.71%, its highest print since January 2025, while Brent crude pushed above $100 as the Iran conflict escalated. Add a Fed meeting this week, and right on schedule, the Treasury safe asset debate reopened. A careful new paper from Hanno Lustig and three coauthors is now getting cited as proof that the world’s reserve asset is finished. I’ve read the paper, and it is good work. It also doesn’t say what most of the people quoting it think it says.

Between June 26 and July 23, the long bond repriced up 30 basis points (bps). The five-year moved 34 bps, and the 10-year moved 33 bps. And the one-month bill? 12 bps. That distribution is the entire story, and almost nobody writing about this week’s yield spike bothered to look at it.

Here’s why it matters. If markets were genuinely repricing the odds that Washington fails to pay, the front end would move hardest. Default risk applies to the payment due in four weeks just as much as to the one due in 2056, and short paper carries no term premium to cushion the blow. Instead, the bill barely budged. Bond investors weren’t questioning whether they would get paid. They were demanding more compensation for inflation and duration, which is a completely different trade. Treasury safe asset status was never in question; only the price of duration was.

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Are US Treasuries Still A Safe Asset?

Lance Roberts — Mon, 27 Jul 2026 09:34:50 +0000

Every time interest rates rise, the "bond bears" flood the media with commentary suggesting US Treasuries are no longer a "safe asset."

The 30-year Treasury bond closed last Thursday at 5.17%. Meanwhile, the 10-year touched 4.71%, its highest print since January 2025, while Brent crude pushed above $100 as the Iran conflict escalated. Add a Fed meeting this week, and right on schedule, the Treasury safe asset debate reopened. A careful new paper from Hanno Lustig and three coauthors is now getting cited as proof that the world's reserve asset is finished. I've read the paper, and it is good work. It also doesn't say what most of the people quoting it think it says.

Start With What The Tape Actually Did

Here's why it matters. If markets were genuinely repricing the odds that Washington fails to pay, the front end would move hardest. Default risk applies to the payment due in four weeks just as much as to the one due in 2056, and short paper carries no term premium to cushion the blow. Instead, the bill barely budged. Bond investors weren't questioning whether they would get paid. They were demanding more compensation for inflation and duration, which is a completely different trade. Treasury safe asset status was never in question; only the price of duration was.

Regular readers know I have been making this argument for months. Back in May, with the 10-year at 4.60% and the same doom commentary running, I put fair value closer to 5.3% based on nominal growth near 6%. Only modest upward pressure remained, I argued. We're at 4.69% today, even though the "experts" suggest that rates have been “broken” for about three years now.

What The Treasury Safe Asset Paper Actually Argues

However, let's make sure to properly examine this topic. The sloppy version of the argument is easy to knock down, and the real version isn't.

Zhengyang Jiang, Arvind Krishnamurthy, Hanno Lustig, and Robert Richmond published their work on July 20. They document three things. The convenience yield on public dollar safe assets has compressed from its 2022 peak toward zero. That erosion sits almost entirely in public debt, since the premium on private dollar claims held roughly steady. And the foreign share of public dollar bonds slid from about 45% to about 30% across the past decade.

Then they build a two-country model and ask the cleanest possible question. What happens if foreign demand for dollar safety goes to ZERO? Not declines, or softens, but vanishes completely and permanently. In other words, the entire premium foreign investors have paid for decades to hold dollar safe claims simply disappears from the global financial system and never comes back.

Their answer:

The real dollar depreciates 8.8%.

US real rates rise 87 basis points on government debt and 72 on private debt.

The lost seigniorage capitalizes to something near 107% of GDP.

Their own framing of the policy implication is that the bill gets paid “mainly in higher fiscal burden and lost wealth, not in a manufacturing renaissance.”

Read that number again. The complete, permanent collapse of the dollar's reserve status is worth 87 bps on Treasury yields.

The long bond moved 30 bps last month because of oil. So the apocalypse scenario, fully specified by the economists who built the model, amounts to roughly three of the moves we just absorbed for reasons unrelated to fiscal solvency. And in that scenario, every Treasury still pays every coupon and matures at par. That is a repricing of the Treasury safe asset, not a repudiation of it.

Duration Is The Risk, And It Always Was

Which brings us to the part of this debate that actually costs investors money. Not the reserve currency question. The maturity you bought.

A hundred dollars put into T-bills on January 2, 2020, is worth $119 today. The same hundred in 20-year-plus Treasuries is worth $74. Same issuer. Both carry identical statutory backing and default at exactly the same rate, which is to say never, and yet one of them never suffered a drawdown and sits at its all-time high this week, while the other peaked at $126 on August 4, 2020, and is down 41.7% from that mark even counting every coupon.

That's not a safety failure. It's arithmetic. TLT carries an effective duration of 15.08 years as of Thursday, meaning roughly 15% of the price for every 100 basis points of yield. Anyone buying the long end in 2020 at a 1.2% yield was making a leveraged bet that rates would fall further, whether they understood the position that way or not.

So when the headlines say Treasuries “failed,” ask which Treasuries. The people who got hurt owned the long end while needing their money back within a few years. If your goal is stability, bills are the Treasury's safe-asset sleeve, and duration is an entirely separate decision. Confusing those two roles is what produced most of the damage since 2020.

Where The Treasury Safe Asset Bears Have A Point

“But Lance, the foreigners are walking away.”

Partly true, and I'm not going to wave it off, because central banks and official institutions held $3.85 trillion of Treasuries in May, down 0.8% from a year earlier, and that aggregate holds up no matter how you cut the country detail. The foreign share of marketable debt has genuinely compressed, too, mostly because supply grew faster than foreign appetite. Lustig and his coauthors put that share near 30%, and the TIC data agrees with them, which counts for something when two independent methods land in the same place.

Where the bear case overreaches is the China line, and that's the number getting screenshotted most often. China's reported holdings fell by $73 billion over the past twelve months. Belgium, home to Euroclear, added $57 billion over the same window; Luxembourg, home to Clearstream, added $23 billion; and adding the three together leaves the bloc up $7 billion from where it sat a year ago. Flat.

As we walked through in February, the TIC tables are built from custodial data, and Treasury's own FAQ warns that a bond held in a third-country account won't reflect its true country of ownership. I can't prove every dollar that left the China line reappeared in Brussels or Luxembourg, since both hubs serve institutional clients worldwide. But the offset is nearly exact. It tracks the pattern Brad Setser at the Council on Foreign Relations has documented for a decade, and it means that the line item is measuring settlement venue rather than intent.

However, look at what the same data says about the total. Foreign holdings hit a record $9.37 trillion in May, up from $9.02 trillion a year earlier, with private investors adding 7.4% while official institutions trimmed. The marginal buyer is now a private balance sheet rather than a foreign central bank. That's a real structural change, and it belongs in the term premium; however, it does not belong in a solvency debate.

Auction demand backs that up. Bid-to-cover ratios in June ran 2.72 on four-week bills, 2.40 on 10-year notes, and 2.30 on 30-year bonds, all above the 2.0 line that signals healthy demand. The average interest rate across the entire marketable debt sits at 3.411%, against 3.375% a year ago.

Where exactly is the funding crisis in those numbers?

Treasury Safe Asset Failure, Or Plumbing Failure?

Of course, March 2020 gets cited constantly as the moment the Treasury safe asset broke. Yields rose while stocks collapsed, spreads gapped, and settlement failures jumped.

What actually broke was the plumbing. Dealer balance sheets couldn't warehouse the risk fast enough while leveraged players unwound into margin calls, and the Treasury market's intermediation chain seized up even as the underlying obligation stayed exactly as good on Friday as it had been on Monday. Policymakers still debate microstructure fixes for this market. They don't bother debating microstructure fixes for irrelevant ones.

The practical lesson is narrower than “Treasuries are unsafe.” Plan for liquidity to gap. Keep cash buffers so you are never a forced seller of duration into a drawdown. And never fund a long-duration position with financing that can be pulled at the worst possible moment. The asset survives that episode. A leveraged holder of it may not.

What Investors Should Consider

If you own treasuries, you need to make two separate decisions rather than one blended bet. The liquidity sleeve holds the bill exposure and does the work people mistakenly ask the long end to do. The duration sleeve stays deliberately small, sized as recession insurance rather than as a conviction call on falling inflation. That distinction matters right now, with crude above $100 and July prices-paid data firming. Here are some steps to follow:

Match maturity to your spending horizon.

If you need the cash inside two years, build a ladder of bills and short coupons and stop there.

Set rebalancing bands in advance and execute them without consulting your feelings, because the most expensive mistake in this asset class is selling long Treasuries after the drawdown and buying them back after the rally.

So, what would change my view? That is a fair question, and it's one the doom crowd never answers about its own thesis. Such is why I'll put my falsification conditions on the record rather than leave myself room to reinterpret the data later. Here are the triggers:

Bid-to-cover ratios on 10s and 30s broke below 2.0 across consecutive auctions, with primary dealers absorbing a rising share of the takedown.

The front end started rising more than the long end, since that inversion of today's pattern is the actual signature of credit fear.

Sustained US sovereign CDS trading wide of comparable sovereigns would do it too.

None of those conditions show up in the July data. Until they do, a 5.17% long bond is a repricing, and a repricing improves forward returns for the next buyer while punishing the last one.

Treasury safe asset status was never a promise about price. It was a promise about payment, and that promise is intact.

Sources and notes

Treasury yields by maturity: Federal Reserve H.15 constant-maturity series via Massive Market Data, pulled July 25, 2026. Curve data through the July 23 close, cross-checked against Trading Economics and the Forbes daily Treasury table.

Total return series: adjusted daily closes and cash distribution history via Massive Market Data, reinvested. Indexed to January 2, 2020. Prices as of the July 24, 2026 close, market closed. TLT close cross-checked against Yahoo Finance and TradingView.

TLT effective duration of 15.08 years and average yield to maturity of 5.23%: iShares fund page, as of July 23, 2026.

Jiang, Z., Krishnamurthy, A., Lustig, H., and Richmond, R., "Dollar erosion: The macroeconomic consequences of losing reserve currency status," CEPR / VoxEU, July 20, 2026.

Acharya, V. and Laarits, T., "Tariff War Shock and the Convenience Yield of US Treasuries: A Hedging Perspective," NBER Working Paper 34640, 2026. Finds the short end retained its safe-asset hedging property while long-bond convenience yield covariance rose.

Foreign holdings, including the Belgium and Luxembourg custody detail: U.S. Treasury International Capital (TIC) Table 5, May 2026 data released July 17, 2026. Treasury notes these holdings are collected primarily on a custodial basis and may not identify beneficial ownership.

Custodial bias and the Euroclear / Clearstream routing: Is China Really Dumping US Treasuries?, RIA Advisors, February 23, 2026, drawing on Brad Setser, Council on Foreign Relations.

Marketable debt outstanding, composition, bid-to-cover ratios and average interest rate: Joint Economic Committee Monthly Debt Update, July 8, 2026, drawing on Treasury data.

Prior RIA analysis: Rising Interest Rates: Why The Narrative Fails Against The Data and Treasury Bond Yields Don't Lie: But Wars Don't Drive Them.

The post Are US Treasuries Still A Safe Asset? appeared first on RIA.

Small Caps Are Quietly Winning While Mega Caps Wobble

RIA Team — Mon, 27 Jul 2026 09:30:57 +0000

Thursday's selloff, led by Alphabet down 7% and Tesla down nearly 15%, was a great example of a story that has been unfolding throughout most of the year. While the largest stocks led the market lower last Thursday, many other stocks, especially small caps, were flat to higher on the day. That divergence has been a defining feature of 2026.

This year, the most followed gauge of small caps, the Russell 2000, has gained roughly 17% year to date, on pace for its best annual performance since 2003. Over the same period, the S&P 500 has climbed by 8%, weighed down by the Magnificent Seven, which are up less than 5%. For the first time in a while, small caps are meaningfully outperforming megacap and other AI-related stocks.

Earnings forecasts are supportive of the outperformance of small caps. Consensus forecasts for Russell 2000 companies' 2026 earnings growth have climbed to 38% from about 23% at the start of the year. Per LPL Financial: "reflecting growing optimism that profit growth is broadening beyond the largest technology companies."

While performance has been good, the impact of higher rates is worth considering. Small caps carry more floating-rate debt and have greater refinancing needs than large-cap companies. To wit, Bank of America estimates every additional 25 basis point rate hike would reduce Russell 2000 operating earnings by roughly 2%.

A market that can absorb mega-cap underperformance without the average stock flinching is telling you that overall sentiment and conviction remain strong. It also highlights how flows are rapidly rotating from sector to sector or style factor to style factor.

What To Watch This Week

Market Trading Update

The S&P 500 spent most of the year riding above its 50-day moving average, and we have warned for the last couple of weeks that a break lower would be worth paying attention to. That break occurred on Thursday, as the index closed the week at 7,411.98, roughly 0.8% below the 50-DMA at 7,467, marking its first decisive break below that line in months.

Momentum has clearly rolled over. The 14-day RSI sits in the mid-40s, below the neutral 50 line but not yet oversold, suggesting there is room for further downside before the tape gets stretched. The MACD agrees with the signal line crossing bearish about a week ago, and the histogram keeps widening to the downside. This is what the early innings of a pullback look like, not the middle or the end.

One encouraging detail sits beneath the surface. The tight link between the hyperscalers and the semiconductors has broken down, and the chip complex actually held up on the week, even as the megacaps were sold. Decliners still outran advancers by roughly three to one on the New York Stock Exchange during Thursday's rout. This was a real risk-off session, not a quiet drift. A theme that rotates internally behaves very differently from one that investors are abandoning wholesale.

The bigger trend is still intact. The 200-day moving average sits at 7,001, and the index remains almost 6% above it. A slide to the 50-DMA or even the July closing low near 7,354 would be entirely normal inside an ongoing uptrend. The line that matters is the 200-DMA. Lose that, and the conversation changes.

In our own models, we continue to hold the AI complex at target weight rather than above it. We are not adding to them, given next week's hyperscaler prints; instead, we would rather let the reports clear and buy confirmation than pay up for a guess. That discipline has kept risk contained through every one of this year's AI-driven air pockets.

Here is the setup for next week. First resistance is the 50-DMA at 7,467, then the early-July high near 7,566, and the record close at 7,612. On the downside, watch 7,354, then the June closing low at 7,266, and the 100-day average at 7,172. A close back above the 50-DMA would repair most of the technical damage. A close below 7,266 would put the 200-DMA in play and argue for a more defensive posture.

The Week Ahead

In addition to earnings from many of the largest S&P 500 companies and many other companies, this week will feature the potential for a plethora of market-moving news.

The Fed's FOMC meeting concludes Wednesday, with the rate decision at 2:00 PM and Chair Warsh holding his press conference at 2:30 PM. The market puts the odds at 34% that they raise rates from the current 3.50% to 3.75% range. If they don't increase the Fed Funds rate, the big question will be whether any members voted for a hike. It will also be interesting to see if Warsh's view has become more hawkish with energy prices up over 20% in the last two weeks, or if the recent CPI and PPI data tamed his hawkish view.

On Thursday, we get our first look at the second-quarter GDP. The forecast is for 1.8% growth. Also that morning we get the PCE price index, the Fed's preferred inflation gauge. The price index is expected to be flat on the month, after rising 0.4% last month. While PCE is released a day after the FOMC meeting, there is a good chance the Fed will have the data in hand when debating policy.

AI Capex Depreciation Risk Is The Catch To Record Earnings

S&P 500 earnings are up more than 20% for a second straight quarter, and for once, Wall Street keeps raising its estimates instead of trimming them. Sounds great — until you look at what's sitting just off the income statement. The five biggest AI hyperscalers are set to spend $760 billion on infrastructure this year while expensing barely a quarter of that. The rest doesn't vanish. It's a bill that's already been run up and just hasn't arrived yet.

We call it the "golden window," and it's the setup behind the market's current confidence — chipmakers and buyers all looking strong at the same time, for reasons that won't last. Free cash flow at those same companies is projected to crater 91% this year even as reported profits climb. The bull case needs a clean, on-schedule handoff from spending to revenue that these companies haven't managed once yet. Here's what happens when the window closes — and what it means for your portfolio.

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The AI Capex Bill Comes Due

Lance Roberts — Sat, 25 Jul 2026 13:07:52 +0000

🔎 At a Glance

The AI Capex Bill Comes Due

Market Brief & Technical Review

From Lance's Desk: AI Capex Depreciation Risk Is The Catch To Record Earnings

Market stats, screens, and risk indicators

🏛️ Market Brief - Eight Sectors Higher, Index Still Lower

The S&P 500 finished the week at 7,411.98, down about 0.6%, as an AI capex scare and an oil shock collided into its second straight weekly decline and the first back-to-back down weeks since March. The headline number hides what actually happened. Underneath a falling index, the average stock held up just fine.

Eight of the eleven S&P sectors rose on the week. Energy led, up 3.4% as crude spiked, and the more defensive and cyclical corners of the market, utilities, industrials, materials, and real estate, all gained ground. Equal-weight RSP actually finished higher, up 0.09%, while the cap-weighted SPY fell 0.59%. That gap tells the story. The damage was surgical, concentrated in exactly two places: communication services, down 3.9%, and consumer discretionary, down 5.2%. Those are the buckets that hold Alphabet, Meta, Amazon, and Tesla.

Thursday was the event. The Magnificent Seven shed roughly $800 billion in a single session, the worst megacap day since the April 2025 tariff shock. The triggers were Alphabet raising its capital spending plans again and Tesla's profit sinking. As we warned in Momentum Meltdown Catches Traders By Surprise, the market's narrow leadership was always the biggest risk to the tape. This week, the generals took the hit while the troops did not. The Nasdaq Composite lost about 2% on the week, the worst of the major averages, while the Dow and the small-cap Russell 2000 barely budged.

Two other forces pressed on stocks. Oil surged with Brent briefly tagging $100 for the first time since May on fresh attacks in the Red Sea. WTI booked its biggest weekly gain in months even after slipping to about $89.57 on Friday. Rising crude prices pushed the 10-year Treasury yield up to 4.67% midweek before easing on Friday as oil retreated. A new round of tariffs also took effect, but none of them triggered panic. The VIX rose about 12% on the week but still closed under 20, near 18.6.

So we head into a loaded week with the index below its 50-day moving average, the momentum names wobbling, and breadth quietly improving. The question is whether that broadening is the rally getting healthier or the last leg before the leaders drag everything lower.

📈Technical Backdrop - Below The 50-Day, Testing Support

🔑 Key Catalysts Next Week

Next week is the most consequential stretch of the summer. The Federal Reserve makes its decision on Wednesday, and four of the five largest companies in the index report within about 48 hours of that decision.

Start with the Fed. The FOMC meets July 28 and 29, with the decision at 2:00 p.m. Eastern on Wednesday and Chair Warsh's press conference at 2:30. There is no new dot plot at this meeting, so the statement language and the press conference are the whole show. The funds rate has held at 3.50 to 3.75% all year on sticky inflation. This week's oil spike does not make the case for a cut any easier. Watch how Warsh frames the inflation risk coming from energy.

Then the earnings deluge. Microsoft and Meta report on Wednesday after the close, and Apple and Amazon follow on Thursday after the close. FactSet has S&P 500 earnings growing about 24.7% in the second quarter, marking the second straight quarter above 20%. The bar is high, and the market's patience is thin. Companies that have missed this season were punished harder than usual, falling an average of 4.2% against a historical norm closer to 2.9Z%.

The macro calendar fills in around those events. Consumer Confidence and home-price data land on Tuesday. The advance reading of second-quarter GDP and the June PCE deflator, the Fed's preferred inflation gauge, both print Thursday morning at 8:30. That lands right on top of the Apple and Amazon reports that evening. Friday brings the Employment Cost Index and the final read on consumer sentiment. There is no monthly jobs report this week, so the Fed and the megacap prints will set the tone on their own.

For portfolios, the sequencing matters more than any single release. Wednesday afternoon delivers the Fed plus Microsoft and Meta. Thursday delivers growth, inflation, and the other two megacaps. By Friday's close, we will know whether the AI capex trade can absorb both a cautious Fed and its own cash-flow math. Position sizes should reflect that this is a week built for surprises.

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💰 The AI Capex Bill Comes Due

On Friday, I laid out the accounting catch hiding inside this year's record earnings in AI Capex Depreciation Risk Is The Catch To Record Earnings. The short version is simple. The AI capex boom has flattered reported profits while quietly draining cash, and next week, four of the five biggest spenders report at once. This is where the theory meets the tape.

The five biggest hyperscalers are on track to spend north of $725 billion on capital projects in 2026, up from roughly $412 billion last year. Yet only about $211 billion of that will show up as depreciation on 2026 income statements. The rest, more than half a trillion dollars, sits on the balance sheet as a long-lived asset and gets expensed over the years ahead. That timing gap is why earnings can grow more than 20 percent while the cash going out the door explodes higher. The capex is REAL.

There is nothing improper about any of this. It is how companies book capital assets, and it always works this way. What is different this cycle is the sheer scale of the spending and the speed at which the deferred bill will land. As Todd Castagno at Morgan Stanley put it, this is "a golden window where everybody looks good." The window does not stay open forever.

Free Cash Flow Is Draining, Not Disappearing

Here is where investors get the story half right. Depreciation is a non-cash charge. It lowers reported earnings, but it does not touch the cash a business actually generates from operations. So when you watch a hyperscaler's free cash flow collapse, you are mostly watching capital spending outrun everything else, not a business falling apart.

Amazon is the clearest example. Its trailing free cash flow fell to $1.2 billion from $25.9 billion a year earlier. That looks alarming until you remember why. The company is pouring roughly $200 billion into data centers, chips, and power. Cash leaves today, and the asset it buys is designed to produce revenue for years.

The mistake is treating compressed free cash flow as automatic evidence of waste. Falling FCF is far more defensible when it funds reinvestment than when it funds buybacks. Betting on permanent cash-flow impairment is a bet against the best capital allocators of the past two decades.

Negative free cash flow tells you a company is spending. It does not tell you whether the spending is smart. That answer shows up later, in the revenue the assets produce.

The honest caveat is that a GPU is not a railroad. If the useful life of these assets turns out shorter than management assumes, the depreciation bill arrives faster, and the payback window compresses. That is the real debate, and it deserves to be settled company by company rather than with a single scary headline.

Four Companies, Four Different Bills

Four of the biggest AI spenders report next week, and they sit in very different places on this map. Microsoft reports on Wednesday with consensus at $4.22. It is spending heavily, roughly $190 billion in calendar 2026, and the strain already shows. Free cash flow fell to $15.8 billion last quarter on $31.9 billion of capex, down from $25.7 billion two quarters earlier. The number that justifies the bill is Azure, which management guided to 39%-40% growth. Hold that line, and the spend looks bought. Miss it, and the cash-flow math gets uncomfortable in a hurry.

Amazon reports Thursday with consensus at $1.82. Its story is the same shape, only larger. The roughly $200 billion capex plan drove trailing free cash flow down to that $1.2 billion figure. But AWS reaccelerated to 28% growth last quarter, its fastest in over three years, with a backlog north of $360 billion, and is the entire tell. If cloud growth holds, the buildout is converting. If it stalls, the market will ask much harder questions about the check Amazon wrote. It did exactly that when the stock fell 8% after the spending plan was first announced.

Meta also reports on Wednesday, with a consensus at $7.23, and it is the odd one out. Meta is pouring a comparable fortune into AI, with 2026 capex guidance just raised to $125 billion to $145 billion, yet it has no cloud division to sell that capacity to (which is why we don't own it).

For Meta, the payback has to show up inside its own business, in sharper ad targeting and deeper engagement, with Reality Labs and the new Meta Compute effort as longer-dated options. That makes Meta the purest test of the four. Its operating margin has already slipped from the peak as spending ramps up, and free cash flow could turn negative if capex keeps climbing. Watch whether AI is visibly lifting ad revenue. If it is, the spend defends itself. If not, Meta has the least coverage in the group.

Apple is the counterexample, and that is exactly why it belongs here. It reports Thursday with a consensus at $1.89, and it is barely part of this story. Apple's capital spending is a fraction of its cash generation, and it still throws off enormous free cash flow every quarter. Its risks live somewhere else entirely, in the iPhone upgrade cycle, Services growth, China, and the perception that it has fallen behind on AI. This is also Tim Cook's final earnings call before John Ternus takes over, which adds a layer of narrative that the numbers will not capture. Apple is the reminder that not every megacap is running the same capex gauntlet, a point we made in Mag 7 Stocks: Risk Or Opportunity.

The Market Is Treating The AI Capex As Dead Money

Watch how the tape reacted this month, and you'd think the AI buildout had already failed. Alphabet beat on revenue, grew Google Cloud 82%, and still fell about 5% after hours because it raised capital spending again. As I posted on Thursday:

Amazon got the same treatment earlier this year. The market is pricing the bill and ignoring the asset. That is usually where opportunity hides.

Be honest about the near-term risk first. Valuations are not cheap. The broad market still trades well above its long-term average multiple, and the megacaps carry a premium on top of that. Free cash flow is under real pressure, and Alphabet just posted negative free cash flow of $5.9 billion and paused buybacks to fund the buildout. Capex guidance keeps getting revised higher, not lower, which means the deferred depreciation bill I described earlier is still growing. Add a tape below its 50-day average and the worst three-month stretch of the calendar dead ahead. More downside over the next quarter or two would not surprise me.

The AI Capex depreciation risk is great for bearish headlines, clicks, and views. However, it misses a critical point. Negative free cash for a company that is losing market share, has declining revenue growth, and is unprofitable is a clear investment risk.

However, that is not the story of the hyperscalers. The revenue that justifies all this spending is accelerating, not fading. As noted, Google Cloud grew 82%, Azure is running near 40%, and AWS reaccelerated to 28%. The committed backlogs behind them are enormous, at $514 billion for Google, north of $600 billion for Microsoft, and more than $360 billion for Amazon. Those are not the numbers of a dying business. They are the numbers of businesses that cannot build capacity fast enough to meet demand.

This is where Howard Marks and his second-level thinking earn their keep. The easy call is to sell what just went down. The harder and usually more profitable call is to buy durable franchises when the crowd has decided the story is over. The hyperscalers are not dead. They are expensive, early in the payback, and briefly out of favor, which is a very different thing. We'd use this weakness to build positions in the names where cloud growth and backlog clearly justify the spend. And we'd do it in pieces rather than all at once.

What Should Investors Do Now

None of this argues for abandoning the AI trade. It argues for pricing it honestly. The businesses are real, the revenue is growing, and the best operators have earned some benefit of the doubt. But valuations already assume the capex converts cleanly, and next week, four companies have to show their work. Here is how we are approaching it.

A number that looks frightening in isolation can be rational once you see the asset it bought and the revenue it is producing. The bill for the AI buildout is coming due. Next week, we will start to find out who can pay for it.

Trade accordingly.

🖊️ From Lance’s Desk

This week's #MacroView blog is the prequel to today's newsletter, which discusses the AI Capex risk to record earnings when the future depreciation begins to eat into bottom-line earnings per share.

Also Posted This Week:

Can SpaceX Fire On All Cylind e rs? - RIA - by Michael Lebowitz

Why Retail Traders Consistently Underperform Over Time - RIA - by Lance Roberts

📹 Watch & Listen

Climbing Oil prices continue on a momentum buy signal as crude approaches key resistance near the 100-day moving average. A stronger U.S. dollar is rising alongside oil, while gold remains under pressure as global demand for dollars increases. Despite geopolitical tensions and higher energy prices, market volatility remains surprisingly subdued.

https://www.youtube.com/watch?v=nBKqoSD_uCI

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📊 Market Statistics & Analysis

Weekly technical overview across key sectors, risk indicators, and market internals

💸 Market & Sector X-Ray: Market Gains Ground

The market slid this past week, falling below the 50-DMA. However, it was the function of primarily the decline in Discretionary, Technoloogy and Communications. With those sectors oversold, and Energy, Industrials, Real Estate and Utilities overbought, a rotation between those sectors seems increasingly likely.

📐 Technical Composite: 77.09 - Still Bullish But Easing

The technical condition eased last week as semiconductors and momentum names came under pressure. With the selloff last week, the techical conditions fell 12 points. While the market is no longer overbought, it is also not oversold either.

🤑 Fear/Greed Index: 69.05 – A Reversion From Extreme Greed

The pick up in volatility and sell off into the end of last week has finally started weighing on investor positioning which fell 10-points from last week's reading. We are not washed out yet, and with the market below the 50--DMA there is more downside risk near term.

🔁 Relative Factor Performance

We noted two weeks ago that "compression of factors has been evident...that clustering will shake itself out sooner than later, and the opportunity will be in which factors start to take the lead." With the Megacaps on deck to report this week, and given their more deeply oversold condition, the bar has been lowered significantly. A rotation from Low Beta and Value to growth is becoming more likely over the next couple of months.

📊 MFBR Index (Money Flow/Breadth Ratio Indicator)

NEW! MFBR Index: The Money Flow Breadth Ratio (MFBR) model is a rules-based equity allocation framework that uses weekly S&P 500 money flow data to generate buy, sell, and neutral signals. The MFBR systematically adjusts portfolio equity exposure in response to the direction and persistence of institutional capital flows. It aims to reduce drawdowns while capturing the majority of market upside.

"As of July 24, 2026, with the S&P 500 at 7,411.98, the Money Flow Breadth Ratio (MFBR) stands at 65% and rising. This places the indicator in BUY territory (60-70%), triggering a BUY signal. The prior week reading was 65%, representing a 5% decline over the trailing four weeks.

The model currently recommends HOLDING exposure at 92%, a level that has remained since July 10, 2026 (2 weeks). This reflects a FLOW-OVERLAY OVERRIDE: the trailing 4-week net dollar flow has swung sharply positive (>$300B) after a deeply negative prior 4 weeks, a historically strong contrarian buy signal."

📊 Sector Model & Risk Ranges

The market consolidation over the last month has slowly started reducing the more extreme deviations in some sectors and markets, specifically Energy, Financials and Small Caps. Take profits in these areas and rebalance to target weights. Conversely, Technology, Discretionary, Emerging Markets, and Bonds are all trading well below normal ranges and may catch rotationary flows.

Have a great week.

Lance Roberts, CIO, RIA Advisors

The post The AI Capex Bill Comes Due appeared first on RIA.

AI Capex Depreciation Risk Is The Catch To Record Earnings

Lance Roberts — Fri, 24 Jul 2026 09:28:15 +0000

The second-quarter earnings season is in full swing. So far, the results are landing in line or better than the upwardly revised Wall Street estimates. That's the opposite of how this usually works. Analysts normally trim their forecasts as a year wears on. In 2026, they've done the opposite. The S&P 500 is on track to grow earnings north of 20% for a second straight quarter. The earnings are real. However, a meaningful slice of them is also an accident of accounting timing. That timing, the AI capex depreciation risk, hasn't hit the income statement yet. But it is about to turn from a tailwind into a headwind.

Alphabet handed investors a live example last week. The headline read earnings up 294%. Peel back a $99 billion paper gain on its stakes in Anthropic and SpaceX, and per-share earnings came in around $2.85 against a $2.88 estimate, with the core business growing a solid but ordinary 30%.⁶ That gain is one kind of distortion, and it can reverse the moment those private valuations move. The distortion this piece is about is quieter and larger, the depreciation bill on the AI buildout that today's reported earnings have barely begun to absorb.

The Golden Window

Currently, the entire earnings growth story is concentrated in the semiconductor and AI-infrastructure names. The accounting underneath it is where the catch hides.² Here is what I mean. When Nvidia sells a chip, it books the revenue and the profit almost immediately. The hyperscaler buying that chip does the opposite. It records the purchase as a capital asset and spreads the cost across years through depreciation. So the seller's earnings jump now, while the buyer's costs arrive later, in slow motion.

Here's what makes this run unusual. Analysts normally walk their forecasts down as the year unfolds. Over the past five years, consensus has trimmed full-year estimates by about 2% on average at this point on the calendar.⁴ In 2026, they've gone the other way. The full-year S&P 500 earnings growth estimate has climbed from roughly 14% in February to north of 23% now, a swing of nearly nine percentage points in the wrong direction for anyone expecting the usual fade. With Q2 results landing through late July, that bar keeps moving higher.

That upward march is the golden window in motion. Every beat this quarter lifts the bar for the next one, and the more confidently the Street marks earnings higher, the more those forward numbers lean on costs that haven't shown up yet. Make no mistake: this is the same setup I flagged in "Earnings Estimate Revisions Are Very Optimistic." The AI capex depreciation missing from today's numbers is exactly what those rising estimates are quietly assuming away.

Todd Castagno at Morgan Stanley calls this "a golden window where everybody looks good."² He's right. Revenues and margins look strong among chipmakers and the companies buying the chips at the same time, which is exactly the kind of broad, simultaneous strength that convinces investors a cycle is durable rather than borrowed from the future. Make no mistake, there's nothing improper here. This is how companies book capital assets. What's different this cycle is the sheer scale of the spending, and the eventual AI capex depreciation is being overlooked.

Where The Bill Actually Lands

Here's the problem with the everything-is-fine read. The spending is enormous, and it shows up in cash long before it shows up in earnings. The five biggest hyperscalers, Alphabet, Amazon, Meta, Microsoft, and Oracle, spent about $412 billion on capex in 2025.² For 2026, the estimates run to roughly $760 billion.^2,3 Yet the AI capex depreciation and amortization that those companies expect to recognize against all that spending in 2026 is only about $211 billion.

Read those two numbers again. They're spending $760 billion and expensing $211 billion. The other $549 billion sits on the balance sheet, waiting. It becomes an earnings cost later, once the equipment goes into service and the AI capital depreciation clock starts. A good chunk of it isn't even running yet, because the data centers housing it are still under construction.

The cleanest way to see the gap is the cash. For 2026, combined free cash flow at those five companies is projected to fall 91% to about $16 billion, while net income is projected to rise 25% to roughly $506 billion.² A business can report half a trillion dollars of profit and throw off almost no cash in the same year. That's not fraud. That's depreciation timing. You don't have to wait for the full-year math to see it. In the second quarter alone, Alphabet spent $44.9 billion on capital projects, more than double a year earlier, and its free cash flow swung to negative $5.9 billion even as it booked $40.8 billion of operating income.⁶ The cash is already walking out the door. The reported profit hasn't flinched.

The Number Nobody Can Model

However, here is where it gets interesting. If depreciation is the future cost of today's earnings, you'd want analysts to have a tight handle on it. They don't. Look at the consensus estimates for Meta in 2028. The standard deviation of the revenue forecasts is just 4% of the average. The standard deviation on the depreciation-and-amortization forecasts blows out to 24%, six times wider.² Translation: analysts broadly agree on what Meta will sell. They have almost no agreement on what it will cost to run the machines that produce it.

Why so uncertain? A few reasons. Most of these firms only shifted from asset-light to capital-heavy models in the past few years, so there's little history to model against. Companies also have wide latitude to lengthen or shorten the useful lives they assign to equipment, and that single assumption swings the annual depreciation number significantly. On top of that, a growing share of the buildout is financed off-balance-sheet. As David Zion of Zion Research Group puts it, consensus depreciation estimates "could be systematically understated."²

You can already hear the pressure building in the guidance. On last week's call, Alphabet's finance chief told analysts the infrastructure ramp will keep weighing on the income statement through higher depreciation expense.⁶ Management knows the bill is coming. What nobody can pin down is how large it gets.

That table is the entire bull case in five rows. The market isn't paying for the $16 billion. It's paying for the snapback to $387 billion. And the snapback is an assumption, not a result.

"You're paying 22 times earnings today for profits whose single biggest future expense the analysts modeling them can't agree on within a quarter of a trillion dollars. That's the catch."

"But The Revenue Will Come"

Let me steel-man the optimists, because they aren't wrong about everything. The consensus view holds that capex growth tapers after 2026 while revenue keeps climbing, so free cash flow rebounds in a clean "V." The same forecasts that show $16 billion in free cash flow this year also show it recovering to $185 billion in 2028 and $387 billion in 2029, with earnings compounding at around 20% a year through the end of the decade.² If that plays out, today's multiple looks reasonable in hindsight, and the depreciation wave gets buried under a bigger revenue wave.

Put real numbers on the bet. Consensus has the five hyperscalers' capex climbing from $412 billion in 2025 to roughly $760 billion this year, then to about $820 billion in 2027 and $930 billion in 2028.^2,5 Watch the growth rate, not the level. Spending jumps 84% into 2026, then the annual increase collapses to single digits. That deceleration is the entire argument. If capex growth stalls while net income keeps compounding near 20% a year, free cash flow snaps back on its own, because the cash stops rushing out the door faster than it comes in. The chart below is the bull case drawn to scale.

It's a coherent story. It also leans on a capex taper the same companies have run straight through at nearly every guide. Each time the Street pencils in a slowdown, the next quarter's guidance lands higher. The 2026 consensus alone climbed from about $600 billion last November to $760 billion by February.³ So the model that gets you back to $387 billion of free cash flow assumes spending discipline from an industry that hasn't shown any. Last week made the point again. Alphabet lifted its 2026 capital budget to as much as $205 billion, up from $190 billion just a quarter earlier, and told investors to expect spending to rise significantly again in 2027.⁶ That is the opposite of a taper.

Maybe. But notice everything that case requires. It needs capex to slow on schedule, revenue to accelerate on schedule, and depreciation that everyone admits they can't model to behave itself along the way. Bob Farrell's Rule #9 has aged well for a reason. When all the experts and forecasts agree, something else usually happens. The V-shaped recovery isn't a forecast. It's an assumption wearing a forecast's clothes.

The issue is NOT whether AI is real. It is. The issue is whether the price already paid assumes a clean landing that the people closest to the numbers can't promise.

What This Means For Your Portfolio

So what do you do with it? Start with the multiple. The S&P 500 trades around 22 times forward earnings, above its historical average, and that's before the depreciation wave ramps.¹ If the forward earnings inside that ratio are flattered by deferred costs, then the real multiple on fully loaded earnings is higher than the sticker says. You're paying more than it looks.

I made a related point last month in Earnings Estimate Revisions Are Very Optimistic. Strip AI infrastructure out of the index, and the other 470-odd companies have seen their 2026 earnings estimates revised lower over the prior 17 months. This is the same warning from a different angle. The index's earnings engine is concentrated in a handful of names. Notably, a chunk of those names' reported profits carries a deferred bill that the consensus is probably underpricing. Concentration risk and earnings-quality risk are now stacking on top of each other. I walked through the valuation side of this in Parabolic Semiconductor Rally Is Pricing In 2028 Already as well.

While we continue to hold AI infrastructure positions. But we also continue to manage that risk. We will trim the names that have done the most work, hedge the largest exposures while protection is still cheap, and you keep dry powder for the first real disappointment. Howard Marks has spent a career making the same point. The riskiest moment is usually the one that feels the safest.

The AI capex depreciation wave is coming. That part isn't in dispute. The only open questions are how big it is, when exactly it lands, and whether the revenue arrives in time to absorb it. Right now, the market is answering all three with optimism and pricing the answer as though it were already known. When the first hyperscaler guides depreciation higher than the Street modeled, the golden window closes fast. Better to position for that before the tape forces the issue.

Sources & Notes

S&P 500 forward 12-month P/E approximately 22x per FactSet Earnings Insight and the WSJ, mid-2026, above its 5- and 10-year averages. Spot index levels are intentionally omitted given the July 24 publication date; refresh the live index level, P/E, and Q2 actuals at publication.

Jonathan Weil, "Turbocharged Earnings Are Pushing Stocks Higher. There's a Catch," The Wall Street Journal, June 18, 2026. Capex and free-cash-flow estimates per Visible Alpha; 2025 S&P 500 capex per S&P Global Market Intelligence; Castagno and Zion quotations as reported by the WSJ.

2026 hyperscaler capex range cross-checked: CreditSights (~$750B), Epoch AI (~$770B), Futurum/Introl ($660–690B); the 2026 consensus rose from ~$600B (Nov. 2025) to ~$750–760B (Feb. 2026) per CreditSights. Free-cash-flow compression corroborated by CNBC (Meta FCF down ~90%; Amazon turning negative), Feb. 6, 2026.

S&P 500 quarterly and annual earnings-growth estimates per FactSet Earnings Insight, 2026: Q1 2026 actual 27.7%; Q2–Q4 2026 estimated 22.0% / 25.6% / 23.1%; CY 2027 estimated ~16.3%. Q4 2025 blended 13.2%. Full-year 2026 growth estimate revised up over the year: ~14.4% (Feb), ~17.6% (Apr), ~21.3% (May), ~23.3% (Jun); the five-year norm is a ~2% downward drift by midyear.

Multi-year hyperscaler capex consensus: 2027 ~$820B (Moody's Ratings, March 2026); 2028 ~$930B (Wall Street consensus per Penn Capital). Net income for 2025 and 2027–2028 derived from the WSJ-stated 2026 figure ($506B) and the ~20% annual compounding the WSJ cites through 2029; shown as estimates.

Alphabet Q2 2026 results, reported July 22, 2026 (company 8-K/earnings release and earnings call): revenue $119.8B (+24%), operating income $40.8B (+30%), net income $112.1B (+298%), diluted EPS $9.11 (+294%). Other income included a ~$99.0B net gain on equity securities that lifted net income by ~$77.1B and EPS by ~$6.26; excluding it, EPS was roughly $2.85 versus ~$2.88 consensus. Q2 capex $44.9B (about double year over year); Q2 free cash flow -$5.9B. Full-year 2026 capex guidance raised to $195B–$205B from $180B–$190B, with management guiding 2027 capex to rise significantly. The CFO cited higher depreciation expense ahead.

The post AI Capex Depreciation Risk Is The Catch To Record Earnings appeared first on RIA.

Are Oil Prices Driving The Iran Conflict?

RIA Team — Fri, 24 Jul 2026 09:25:00 +0000

In physics, kinetic equilibrium describes a system in which forces are balanced, and motion continues at a steady, unchanging rate. Felix Vezina-Poirier of BCA Research argues that we can apply kinetic equilibrium to the Iran conflict. Unlike most analysts, he believes that oil prices are not the result of the ebbs and flows in the conflict. Instead, he thinks oil prices are steering the conflict. When oil prices are at the lower end of the recent range, both sides appear more comfortable bad-mouthing each other and escalating their actions. Conversely, when oil prices climb, the political pressure forces more constructive communications.

BCA Research's latest missive extends the logic. Iran's negotiating team is under growing pressure, he says, "while the approaching midterms are increasing pressure on the US administration." His conclusion is not surprising: "as prices approach the upper end, escalation gives way to de-escalation."

Crude oil prices, as shown below, have climbed roughly 20% over the past month, touching a six-week high near $90 as the US military has carried out numerous strikes and Iran has responded with missile attacks on neighboring countries. Their kinetic equilibrium theory regarding military conflict in Iran is about to be tested. Will higher prices force both sides toward talks?

We have written about how a durable decline in oil prices would flow through to CPI, take rate hikes off the table and possibly reopen the door to Fed rate cuts. BCA’s kinetic equilibrium theory offers the geopolitical trigger that might produce that decline. If the conflict continues to be swayed by oil prices, the next several weeks should bring renewed diplomatic movement rather than further escalation. However, if the kinetic equilibrium fails with prices continuing higher and escalating military actions, the markets may become less complacent about the conflict.

What To Watch Today

Earnings

Economy

Market Trading Update

In yesterday’s report, we looked at Polymarket and why a real-money bet on the next open can sharpen our read on crowd sentiment. Today, I want to point to the one gauge that is NOT flashing any concern at all, even with a mega-cap earnings gauntlet and next week’s FOMC directly in front of us. That gauge is the VIX.

The volatility index sits in the high teens this morning, near the low end of its 12-month range, and it barely flinched while Alphabet dropped 5% and Tesla fell 7% on their prints. Think about that. Two of the largest companies in the index had violent single-day moves, and the market’s fear gauge shrugged. Volatility is being sold into event risk, not bought ahead of it.

There is a mechanical reason. Goldman’s volatility desk has flagged one-month S&P implied correlation near its lowest level in twenty years. When correlation is this low, index volatility stays cheap because single names zig and zag against each other and wash out at the index level. That is how the VIX can sit near 19 while individual mega-caps swing 5% to 7%. The catch is that the cushion disappears fast the moment those names start moving together.

Here is the part that matters for timing. As the seasonality chart below shows, August through October is historically the highest-volatility stretch of the calendar year. We are walking straight into that window with protection priced near the lows. Man Group said it plainly this week: the VIX isn’t worried, but maybe it should be.

Positioning says the same thing. Nomura notes that asset managers’ VIX futures positioning sits near record lows, and historically that setup has preceded some of the strongest forward gains in VIX futures. This is not a crash call. It is an asymmetry. Howard Marks reminds us that risk is highest precisely when it feels lowest, and right now it feels very low.

So here is what we are doing. We are NOT selling volatility to reach for a little extra yield, which is exactly what this tape is tempting managers to do. In client portfolios, we keep our hedges on, and where mandates allow, we reposition as needed. We hold quality, we keep dry powder, and we let the seasonally weak window come to us. When protection is this cheap and the calendar is this heavy, you buy the umbrella before it rains. Manage risk accordingly.

Tesla And Alphabet Flop On Earnings

Alphabet and Tesla both beat revenue expectations, yet both fell sharply. Alphabet dropped over 5%, and Tesla declined by over 10%. Both companies are good examples of how investors are increasingly looking beyond traditional revenue and EPS data for guidance.

Alphabet's headline results were strong. Google Cloud revenue surged 82% to nearly $25 billion, with the segment's operating margin jumping to 35.6% from 20.7% a year earlier. Janus Henderson's Alison Porter called it "one of the strongest revenue growth quarters that Alphabet has had in five years." The problem, however, seems to be its free cash flow, which swung to negative $5.9 billion from nearly $25 billion a year ago. Furthermore, the company raised its 2026 capex guidance by about $15 billion. Alphabet's CFO Anat Ashkenazi told analysts the increase reflects "an acceleration in the delivery of capacity to meet growing demand."

Tesla's story was not as good. While the automotive business grew revenue by 23%, operating expenses climbed even faster, and free cash flow turned negative for the first time in over two years. Elon Musk defended the spending toward robotaxis, Optimus, and semiconductor production, calling it "probably the fastest industrial scale-up since World War II in America."

The market's message across both names is consistent: Investors are currently more concerned about the amount of AI-related capex than the potential benefits down the road.

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The post Are Oil Prices Driving The Iran Conflict? appeared first on RIA.

Prediction Markets: A New Sentiment Gauge For Traders

RIA Team — Thu, 23 Jul 2026 09:34:00 +0000

Prediction markets leader Polymarket has a daily contract that bets on whether the S&P 500 opens higher the next trading day. Yesterday's contract, as shown below, implied just a 30% probability of an up open, despite the index gaining nearly 1% the day before. The prediction market proved correct with the market opening lower. That lack of follow-through between sentiment and prior day gain provides some clues about the mindset of some investors.

Prediction markets differ from most traditional sentiment tools in one important way: they reflect real money committing to an outcome. A consumer confidence survey merely captures opinions, which are often subject to heavy biases. Options skew, which does have real money behind it, can reflect positioning that is stale for days. A Polymarket contract resolving the next morning's market direction reflects what traders believe now and, furthermore, it's updated in real time as headlines break.

While prediction markets can provide clues, Benzinga notes that the trading volume on these daily up/down contracts has been fading. For instance, they note that only $20,156 changed hands on the July 21 bet. Per Benzinga, that was "one of the quietest prediction markets in weeks," suggesting participation has cooled and reducing its value as a sentiment gauge.

Prediction markets are still new enough that their long-run reliability remains unproven. That said, the more sentiment tools in our toolbox, the better we can understand the collective market's mindset.

What To Watch Today

Earnings

Economy

Market Trading Update

In yesterday's report, we walked through why oil and inflation move together, and what that link is doing to bond yields right now, linked here. Today, I want to push it one step further and ask the portfolio question. If the market believes oil heads lower over the next 18 months, is this the setup to start buying bonds?

Start with where we are. WTI trades near $86 a barrel this morning, Brent near $92, both up a fourth straight session as strikes on Iran and renewed Houthi threats to shipping keep a supply premium bid. Crude is up roughly 18% on the month. That move has not stayed in the pits. The 10-year yield sits at 4.60%, the 30-year at 5.11%, both firming right alongside oil.

The reason is in the chart below. Through 2026, the correlation between crude and the 10-year yield runs 0.70 and 0.75 since the mid-February conflict escalation. This is NOT a coincidence. The recent backup in the long end is, in large part, an oil-driven inflation premium, not a growth story and not a fresh fiscal scare. Strip out the oil premium, and the underlying disinflation is intact. One-year market inflation expectations have fallen from 3.5% in May to 2.4% this month. Put plainly, the bond market is paying up for a barrel of oil right now, not for a hotter economy.

Here's where it gets actionable. The forward curve and Goldman's own scenarios tilt oil lower from here. As the chart below shows, Goldman's base case drifts crude into the low $70s by 2028, and the downside case, higher production and softer demand, takes it toward $55. Only the upside case, a prolonged Hormuz disruption, pushes Brent back to $125 in 2027. Two of three paths point down. We flagged this same oil-leads-yields mechanic back in 2024 in "Why bond yields track the oil market.

So is this the spot to buy bonds? If oil follows the base or downside path, the inflation premium bleeds out of the long end, yields fall, and duration bought at 4.60% pays off in both coupon and price. That is a real setup. BUT the upside oil tail is live, and a Hormuz shock would take yields higher before they roll over.

Until we know with some certainty, we are maintaining our shorter-duration positioning for now. If the Iran issue is resolved, we can then start laddering exposure to longer-duration holding rather than backing up the truck. If you have no bond exposure, you can buy the first tranche here, hold dry powder for a higher-yield entry if oil spikes, and let the base case play out. Trade accordingly.

AMD And Anthropic Ink A Deal With A Circular Financing Wrinkle

Anthropic will buy as much as 2 gigawatts of AMD's latest-generation Instinct MI450 chips beginning in the first half of 2027. This deal gives AMD an important customer in its battle to compete against Nvidia. AMD CEO Lisa Su told the Wall Street Journal,

We have very much wanted to be a major part of their infrastructure

The quote above is telling. AMD didn't just win over a new client with a new product. Anthropic will not only receive the new chips starting in 2027, but AMD will also invest as much as $5 billion in Anthropic, with contingencies. Simply, that means AMD's capital helps fund Anthropic's purchase of AMD's hardware. This is a circular arrangement where AMD's investment underwrites the demand it books as revenue.

This is not a new pattern in the AI infrastructure buildout. Nvidia has structured similar vendor financing arrangements with its own customers. Circular financing raises an important question for investors: how much of the reported "demand" for AI chips reflects organic demand versus capital that chipmakers themselves are supplying to generate the orders. Circular financing arrangements, like the one between AMD and Anthropic, do not make the deal illegitimate; Anthropic needs the compute. But it does mean the revenue AMD books from this arrangement is not entirely arm's length, and that distinction matters when evaluating the financial statements of involved companies.

Can SpaceX Fire On All Cylinders?

SpaceX's June IPO was the largest in history, briefly pushing its market cap to $2.5 trillion before cooling to a still-staggering $1.84 trillion. But investors chasing the next Amazon need to ask a harder question: what growth rate does that price actually require? Using Amazon's real trajectory as a benchmark, from its $438 million IPO valuation to today's e-commerce and cloud dominance, we work backward from SpaceX's current market cap to find the revenue growth needed to deliver a reasonable 20% annual return.

The answer is sobering. Depending on what multiple the market eventually assigns, SpaceX needs somewhere between 41% and 67% annualized revenue growth for the next ten straight years, a pace only a handful of companies have ever sustained, and one Amazon itself never matched at this scale. We also stack up Elon Musk's own $1 trillion revenue forecast for 2030 against Wall Street's far more conservative models from Morgan Stanley and Goldman Sachs.

SpaceX may well be an extraordinary company. Whether it's an extraordinary investment at today's price is a different question entirely; read the full breakdown to see the math for yourself.

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Can SpaceX Fire On All Cylinders?

Michael Lebowitz — Wed, 22 Jul 2026 11:01:48 +0000

SpaceX's June IPO raised $75 billion, resulting in an initial valuation of $1.77 trillion, making it the largest IPO in history. SpaceX, encompassing its launch business, Starlink, and the recently merged xAI, peaked at a $2.5 trillion market cap in its first week of trading, briefly tying it with Amazon as the fifth-largest publicly traded company. After only a month, the enthusiasm is rapidly fading.

Perhaps most amazing of all, the fanfare is occurring despite SpaceX producing a net loss of nearly $5 billion in 2025. Based on its $1.84 trillion market cap, investors are clearly not worried about the present. They are excitedly pricing in astronomical growth for SpaceX.

To evaluate SpaceX from a fundamental perspective, investors need to quantify the implied growth in its valuation and compare it with their own and market forecasts. In this article, we attempt to help them by providing context for their growth expectations, using Amazon’s history as a proxy.

Amazon, like SpaceX, was priced at expensive valuations and ultimately delivered on those expectations. Initial Amazon investors who held through the dot-com crash and years of zero earnings have been rewarded roughly 3,300-fold, amounting to about 32% annualized for nearly three decades.

So, the question we pose: what does the Amazon playbook require of SpaceX?

Amazon

Amazon went public in May 1997 at $18 per share, valuing the online bookseller at $438 million. Revenue that year was $148 million. The market was pricing its shares at a price-to-sales (P/S) multiple of roughly 3x. At the time, the ratio was generous for a money-losing start-up, but defensible given that Amazon was doubling revenue every year. Importantly, those who envisioned that Amazon was much more than an online bookstore and appreciated its growth potential must have thought its price-to-sales ratio was dirt cheap.

What followed was one of the greatest periods of sustained revenue expansion in corporate history. Amazon crossed $19 billion in annual revenue in 2008, only eleven years after going public with $148 million in revenue. In 2025, Amazon generated $716 billion in revenue, putting it on par with Walmart as the highest-revenue company in the US. From its IPO to today, revenue has grown nearly 5,000-fold.

That trajectory is nearly unprecedented. Can SpaceX also fire on all cylinders?

SpaceX Today vs. Amazon Then

As the graph above shows, Amazon generated approximately $19.2 billion in revenue in 2008, nearly identical to SpaceX's $18.7 billion in 2025. In 2008, Amazon's market cap was slightly under $40 billion, implying a P/S multiple slightly above 2x. SpaceX, with a $1.84 trillion market cap and $18.7 billion in sales, trades at a P/S nearing 100x. The market is pricing SpaceX at approximately 50 times the multiple it gave Amazon at the same revenue level.

While the ratio difference sounds extreme, there are reasons to argue SpaceX deserves a premium:

Its rapidly growing Starlink business generates $4.4 billion in operating income, with revenue compounding at a 50% growth rate. However, as we share in the first graphic below, its revenue growth is slowing, and average revenue per customer is declining.

The reusable launch business accounts for over 50% of orbital rocket launches, as we share in the second graphic. That said, competition is increasing rapidly, especially from the well-funded Blue Origin, Jeff Bezos' rocket venture.

There is promise in its AI infrastructure business through the xAI merger, but Anthropic, OpenAI, Gemini, and new open-source models like Kimi-K3 appear to hold a meaningful advantage.

The way to rationalize a near triple-digit P/S multiple is through extraordinary, historically unprecedented growth. So, let's quantify "extraordinary."

SpaceX's Implied Growth Rate

Let's work backward from SpaceX's $1.84 trillion market cap to gauge the growth needed to satisfy the market's implied forecast. To do so, we assume that investors demand a 20% annual return. While lofty, it is roughly a third below the 32% Amazon has delivered since its IPO.

If SpaceX shares compound at 20% per year for the next ten years, its market cap will reach $11.4 trillion by mid-2036, implying a share price near $860, assuming no new equity issuance.

With that proxy $11.4 trillion market cap in hand, the only remaining variable is the P/S multiple investors will pay for a mature SpaceX. That multiple determines the revenue it must produce. Consider two scenarios:

Scenario one: SpaceX matures like Amazon. Amazon today, after 29 years of dominance across e-commerce and cloud computing, trades at roughly 3.7 times trailing sales. If SpaceX has the same multiple in 2036, it will generate about $3.1 trillion in annual revenue. For context, that approximates the entire GDP of France and roughly a tenth of US GDP. The implied revenue growth rate that clears this hurdle is 67% per year, compounded over ten consecutive years.

Scenario two: SpaceX retains a higher premium multiple. A more generous P/S assumption eases the required revenue growth, but the implications are still daunting. At a P/S ratio of 20x in ten years, the required 2036 revenue falls to about $570 billion, roughly three-quarters of what Amazon generates today, and a level Amazon needed 27 years to attain. The implied growth rate is substantial at 41% per year for a decade.

To appreciate what a P/S of 20 means, we share the ratio of the 20 largest US stocks below. Broadcom at 29.2 and Nvidia at 24.9 are the only two above 20, and both are growing rapidly with enormous profits.

Amazon's single best ten-year revenue stretch, from 1997 to 2007, produced a 59% compound annual growth rate. But Amazon started with $148 million in sales and was just beginning to expand beyond books. SpaceX began at $18.7 billion, 126 times Amazon's starting point. Growth rates achievable from a small base are significantly easier than from a large one, which is precisely why only a handful of companies have ever sustained 40%+ growth for a full decade.

Time Out: What A P/S Of 20 Implies

It's worth pausing to stress what a P/S ratio of 20 implies. The best way to do so is to share the advice Scott McNealy from Sun Microsystems gave his shareholders in 2002.

‘At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?’— Scott McNealy, Business Week, 2002

Elon Musk's Growth Forecast

Elon Musk's forward guidance warrants caution, as it is very aggressive. Days after the IPO, Musk posted the comment below on X. Growing from $18.7 billion in 2025 to $1 trillion in 2030 is a 53-fold increase in five years, a compound growth rate of roughly 122% per year, more than double Amazon's best-ever pace and from a base thousands of times larger.

Suppose Musk delivers. The shareholder outcome still hinges entirely on the multiple. If the market awards a $1 trillion revenue base Amazon's current 3.7x P/S valuation, SpaceX's 2030 market cap would be roughly $3.7 trillion, about a 17% annualized return from today's price. At 20x, the same revenue produces a $20 trillion valuation and returns near 70% annually.

A 17% to 70% range on identical fundamentals illustrates the difficulty in our analysis: both variables, sales and the multiple, are unknowable, and the multiple alone can swing the outcome from ordinary to absurd.

Wall Street's Wide View

To be clear, SpaceX is unique. Starlink's subscriber economics provide a sustainable revenue base; the launch business has pricing power that thus far has not been challenged, and an xAI integration could, in the most optimistic scenario, open multiple trillion-dollar markets quickly. That said, analysts must carefully discount even the most tremendous forecasts.

To wit, the models from the SpaceX IPO underwriters sit far below those of Elon Musk. Morgan Stanley projects roughly $330 billion in 2030 revenue, and Goldman Sachs sees about $470 billion, both fractions of Musk's $1 trillion.

New Street Research, which initiated coverage with a $165 target, acknowledged the bullish thesis could work but noted investors need a "20 to 25-year time frame" for the math to resolve favorably.

Morningstar, by contrast, set the fair value for SpaceX at $63. As we share below, the $63 to $401 range of analyst price targets reflects the uncertainty surrounding the company’s potential.

Summary

Amazon rewarded patient investors immensely, but it did so from a mere $438 million IPO valuation. Compounding from $1.84 trillion, as SpaceX tries, is harder by orders of magnitude. SpaceX can be a great company and still prove disappointing to its shareholders. To justify today's price, its growth must be historically unprecedented, at a scale no company has ever operated, for longer than any growth cycle has ever lasted.

While that may sound bearish, this analysis doesn’t make SpaceX uninvestable. The stock will cycle through bullish and bearish periods as momentum ebbs and flows along a likely volatile path. Accordingly, traders will find plenty of opportunities on both sides. For those looking to buy and hold, however, the odds seem lofty. But, transcending financial forecasting, Musk has a proven track record of success, so it's too early to count SpaceX out.

Can SpaceX do what only a very small handful of companies have ever done, or is the market once again pricing in a future that gravity will eventually catch up with?

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Alphabet And Intel: Q2 AI Earnings Kick Off

RIA Team — Wed, 22 Jul 2026 09:18:00 +0000

Alphabet reports earnings after today's close, and Intel follows tomorrow. Together, they provide a first clue as to whether AI-related spending and investment continue at the brisk pace of the prior quarters.

Alphabet represents the demand side for AI models. Google's Cloud backlog nearly doubled sequentially last quarter to a record $462 billion, growing 63% year over year, the fastest pace among major cloud providers. That backlog is one important reason Alphabet and the other hyperscalers continue to allocate hundreds of billions of dollars to build out data centers. The problem, however, with their massive spending is declining free cash flow. Alphabet raised 2026 capex guidance to $180 to $190 billion and told investors 2027 spending will "significantly increase," despite free cash flow declining 47% year over year in the first quarter to just $10.1 billion (shown below). Watch whether Google Cloud's margin expansion continues and for any changes to capex guidance.

Intel represents the supply side of AI investment. Data center and AI revenue grew 22% last quarter as demand for its products increases and chip efficiency improves. Watch revenue and forward guidance for signs on whether AI investments from the largest companies continue to expand rapidly or if declining free cash flow is slowing capex investments.

What To Watch Today

Earnings

Economy

Fed Speakers

None scheduled. The FOMC is in its pre-meeting blackout ahead of the July 28 to 29 meeting, so there are no Fed voices to move the tape this week.

Market Trading Update

In our recent commentary, we walked through the momentum meltdown ripping through the chips and the high-beta names. Today, that story finally has a name. Spencer Jakab of the Wall Street Journal calls it bad breadth, and the label fits.

His metaphor is a duck. On the surface, the market glides along, calm and unbothered. Underneath, investors are paddling furiously. The VIX sits at 17.5, below its long-term average, so the index looks placid. The S&P 500 itself trades near 7,485, a stone's throw from its record, which is exactly the point. The headline masks the wreckage underneath. Look at single-stock volatility and the picture flips. The VIXEQ measure sits above 50, and the gap between the two just hit a record, according to Citadel Securities strategist Scott Rubner. Traders aren't bracing for a crash. They're worried about specific names, mostly the AI momentum crowd.

The simpler tell is cleaner still. BTIG's Jonathan Krinsky counts 52 sessions this year in which the S&P 500 closed one way while most of its members went the other way. That already ties the tumultuous 2000 for the third-highest count this century, and July isn't over. 2026 will almost certainly break the record. You can see the full history in the chart below.

This is Bob Farrell's Rule #7 in real time.

"Markets are strongest when broad and weakest when they narrow to a handful of leaders."

Divergence can mark a healthy leadership handoff. It can also preview trouble. BTIG's own read is the uncomfortable one. When these relationships normalize, it is likely to come from everything catching DOWN to the recent pullback in AI names, not from AI names catching back up to everything else.

The tape underneath supports the worry. Software turned toxic earlier this year. Chips flipped from a market engine to a bear trend inside a few days. The Magnificent Seven are lagging, and Oracle closed at a multiyear low on Monday, down roughly 50% from its early-June high. Tuesday's bounce, with the semis up more than 3%, doesn't erase any of that. Sharp reflexive rallies are a feature of downtrends, not proof of a bottom.

Tonight raises the stakes. With the Fed in blackout into next week's meeting and no marquee data on the tape, the multiple is on its own. Alphabet and Tesla both report after the close, and the estimates below frame the bar. Those two prints will tell us whether the mega-cap bid holds or joins the catch-down.

So we are treating this as a market to rebalance, NOT to chase. In the equity models, we have trimmed the most extended AI and semiconductor winners back toward target weight, lifted quality, and kept dry powder for better entries. Manage risk at the line, and let the breadth confirm the next leg before you commit fresh capital to it.

Nike

Nike has lost roughly 65% of its value since its November 2021 peak. With the stock trading near a decade low, and full-year revenues of $46.4 billion essentially flat on a reported basis, the question is whether Nike stock is an opportunity or a trap. To help answer the question, we provide a SWOT analysis below.

Strengths
Nike remains the world's most recognizable athletic brand with unmatched global distribution. Its dividend has grown an average of 11% annually over the past decade and remains well covered by earnings and cash flow. Nike's new CEO Elliott Hill is trying to execute a turnaround. This includes returning to wholesale and sport-focused marketing. Wholesale revenues grew 4% in Q4, an early signal his efforts may be working.

Weaknesses
Nike Direct revenues fell 7% in Q4 and 9% on a currency-neutral basis. Its gross margin compressed 1.3% to 40.2% in Q3 as discounting to clear excess inventory continues to pressure profitability. Revenue from China remains a persistent drag.

Opportunities
EPS is forecast to grow 60% over the next three years as the turnaround takes effect. The 2026 FIFA World Cup gave Nike a rare global marketing moment with 12 national team sponsorships. The average analyst price target of $59.58 implies nearly 40% upside.

Threats
Newcomers like On Holding and Hoka are taking market share in the premium performance footwear sector. Tariff uncertainty creates ongoing margin risk. Furthermore, there is speculation that Nike could be removed from the Dow Jones Industrial Average, a symbolic blow that would trigger passive fund selling.

At $41, Nike is priced for continued failure. The question is whether Hill's turnaround is fast enough to outrun the competition, which is gaining ground every quarter.

The graph below is from our "soon-to-be-released" SimpleVisor AI.

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Moonshot AI Raises Red Flags In The AI Industry

RIA Team — Tue, 21 Jul 2026 09:06:00 +0000

Moonshot AI, a Chinese company, just released AI model Kimi K3. Kimi K3 is a 2.8 trillion-parameter open-source AI model that the company claims is the largest ever built. With Kimi K3, Moonshot AI believes it can compete with Claude Opus 4.8 and GPT-5.5 across several benchmarks, trailing the leading systems only marginally. The news is not about Kimi-3's capabilities but what open-source models may do to pricing power for the AI industry.

Open source refers to AI models whose underlying weights, architecture, or training code are made publicly available. Thus, users can download, run, modify, or build on them without paying licensing fees to the developer. This contrasts with closed or proprietary models like ChatGPT or Claude, which are only accessible through a paid API or app, with the underlying weights and training methods kept private.

Research from SemiAnalysis warns that "the rising share" of open-source capability "would fundamentally erode" any moat if the gap continues to close. While pricing may be a concern to the AI model industry, MoonShot AI security issues may be a problem for users. For instance, OpenAI disclosed that a supply chain attack linked to North Korea compromised a developer tool used by MoonShot AI. The Atlantic Council has warned that self-hosted open-weight models "can't be fully tested or inspected," leaving enterprises exposed.

This is precisely why OpenAI's $10 billion custom chip partnership with Broadcom is important. Purpose-built, dedicated hardware lets an AI lab control the full stack, model, silicon, and data pipeline, rather than exposing its customers to whatever an open-weight file contains. For chipmakers and data centers, who wins the model war has little impact, as training the MoonShot AI model consumes enormous compute power.

The graphic below is courtesy of Arena.AI via ZeroHedge.

What To Watch Today

Earnings

Economy

Fed Speakers: None scheduled. The FOMC is in its pre-meeting blackout ahead of the July 28–29 meeting (decision July 29).

Market Trading Update

In yesterday’s report, Michael Lebowitz showed how the cost of borrowing, not the spending itself, has become the real driver of the deficit. Today I want to take that same lens to the corporate side, because borrowing costs are where the AI trade’s biggest risk is now hiding.

Here’s the argument the credit bears are making, and it deserves a fair hearing. Goldman’s derivatives desk, in a widely circulated note from Brian Garrett, argues that the real threat to AI stocks was never in the stock market. It is in the bond market. Hyperscaler spreads have been widening, single-name CDS have been blowing out, and deal concessions are expanding, all while hyperscaler capex has become the single largest source of the global credit impulse. When the market doubts the return on that capex, credit is where it shows up first, and it has led equity drawdowns by two to four weeks in past stress. The strain is already visible in the tape, where implied correlation near 20-year lows tells you the S&P has become a poor proxy for the average stock.

Now here’s the other side, and it matters just as much. The broad credit market is not confirming the warning. The ICE BofA high-yield OAS sits near 270 basis points, within a hair of its multi-decade tights and nowhere near the 3.5% that flags late-cycle stress, let alone the 8% that signals recession. Investment-grade and BBB spreads are near 25-year tight spreads of around 1%. Monday’s tape agreed. The washed-out semiconductors and momentum names caught a bid, the equal-weight index gave a little back, and high-yield credit barely moved. That is NOT what systemic stress looks like.

The positioning data points in the same direction. Goldman’s prime desk shows hedge funds have net sold US technology in six of the past eight weeks, the heaviest stretch in over a decade of their records, cutting tech net exposure to the 2nd percentile of the past year.

The high-beta momentum pair is down 32% from its highs, matching prior washouts. In plain terms, the crowd has already done much of the selling. The stress is idiosyncratic, concentrated in the handful of mega-cap issuers that drive the credit impulse, not systemic. That concentration is the risk. As Howard Marks often noted, the credit cycle turns before the equity cycle, and it turns without asking permission.

For our models, this draws a clean line. In the ETF Sector Rotation and Equity Conservative Growth models, we stay up in quality and hold dry powder, watching two tells into Wednesday night’s Alphabet and Tesla capex referendum: the broad high-yield index and the S&P’s near-term CTA trigger around 7,446. If high-yield breaks above 3.5% and price loses 7,446 on volume, we will start to de-risk. Until then, this is a rotation to manage, not a crisis to flee. Watch credit markets, not the headline. Trade accordingly.

Momentum Mash

The key momentum ETF (MTUM) has underperformed the S&P 500 by 7% over the last 20 days. Other than gold miners, which have given up over 18% to the market, MTUM is the worst short-term performer. The second graphic shows the top ten holdings of the MTUM ETF. As shown, chip companies such as Micron, AMD, Intel, and Broadcom are the most oversold. However, their scores are not very oversold, indicating that they have more room to fall. The spectacular gains these stocks experienced help explain why the scores remain tame despite the sector's rout. It's worth noting that the high-beta ETF (SPHB) holds some of the same stocks as MTUM; thus, it is underperforming, as is MTUM.

Overall market breadth is good, with most sectors clustered within ±25 points of fair value. As the first graphic shows, the rotation is not necessarily value vs growth, as we have typically seen over the last few years; instead, prior underperformers seem to be taking charge.

It's worth noting that emerging markets are underperforming for the same reason as momentum: chip stocks. SK Hynx and Samsung account for nearly 14% of the ETF. It also helps explain why the sector outperformed during the first half of the year.

Why Retail Traders Constantly Underperform Over Time

Decades of data across global markets reach the same verdict: the more frequently retail traders trade, the worse they perform. The infrastructure has never been more inviting. The losses have never been more documented. Here are some key statistics we will dive into further.

Retail traders have never had it so easy. Zero commission platforms, options on your phone, social media feeds full of “10 bagger” tips, and a Reddit thread for every stock in the S&P 500. The infrastructure for frequent trading has never been more frictionless, more democratized, or more psychologically seductive.

And the evidence is overwhelming that it is destroying investor wealth at scale.

The data is not subtle. It is not marginal underperformance that can be dismissed as noise. Across decades of academic research, multiple global markets, and every asset class retail traders favor, from stocks to complex options, the conclusion is remarkably consistent: the more frequently retail traders trade, the worse they perform. Not slightly worse. Dramatically, often catastrophically, worse.

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The Deficit Spending Problem With A Non-Political Fix

RIA Team — Mon, 20 Jul 2026 09:45:34 +0000

The national deficit debate usually focuses on entitlement and defense spending. While they have merit, they miss the single largest driver of America's deteriorating fiscal picture. After the pandemic-related deficits, the cost of borrowing itself, not spending, has been the biggest deficit buster.

As shown in the first graph, in 2021, the government paid $482 billion in interest on $28.4 trillion of debt, at an average effective rate of 1.70%. Since then, interest rates have risen appreciably, with the interest on the federal debt for the current fiscal year expected to reach $1.35 trillion, at an average effective rate of approximately 3.44%. Today's average interest rate is more than double the 2021 rate and, importantly, is applied to a rapidly growing stock of debt due to new issuance and the rolling of maturing debt.

The second graph shows the deficit that would have resulted if interest rates hadn’t increased. In that hypothetical scenario, interest expense today would be around $650 billion, roughly half the current figure. The extra $684 billion in annual interest costs is not the result of deficit spending programs or legislative choices. It is purely due to higher interest rates. The compounding effect on total debt is also significant. Lower interest costs would have produced smaller annual deficits, which means less borrowing accumulating interest of its own. In our scenario, the total federal debt under the 2021 low-rate scenario would be approximately $36.0 trillion, rather than $39.2 trillion, and debt-to-GDP would be 109.4%, rather than 119.2%. For reference, the debt-to-GDP ratio was 107% before the pandemic-related deficit spending.

The fiscal situation is problematic, and we must urge our politicians to manage spending more effectively. But often forgotten in the debate, the rate environment has made it dramatically more urgent than it would otherwise be.

What To Watch Today

Earnings

Economy

Market Trading Update

This is where the quiet-index story gets interesting for traders. The S&P 500 closed the week at 7,457.69, and that put it right on top of its 50-day moving average near 7,464. Call it dead flat against the line. The index still sits about 6.8% above its rising 200-day average near 6,985, so the primary uptrend remains fully intact, and it is roughly 2% below the June 2 record high of 7,620.

Momentum on the index itself is neutral, not broken. The 14-day RSI reads 48.8, smack in the middle of its range and nowhere near oversold. The MACD is the wrinkle. It just rolled below its signal line for the first time since the April low, and the histogram flipped negative. That is a fresh bearish crossover. One crossover is not a sell signal, but it is exactly the kind of longer-term warning we watch for as a correction builds.

The contrast between the index and the factor is the whole point. The Momentum ETF, MTUM, fell about 6% on the week and printed a 14-day RSI of 41, far weaker than the broad market. The average stock barely flinched. The equal-weight S&P lost less than half a percent and actually tagged a fresh record high midweek, and the Russell 2000 held up better than the Nasdaq. When the cap-weighted index falls, but the median stock does not, the damage is narrow by definition.

So how do you trade it? The 50-day is the line in the sand. Therefore, a decisive hold keeps the burden of proof on the bears, and the first real test on a break sits at the mid-July range low near 7,300. I would not chase the semiconductor and high-beta names lower into a knife that is still falling, and I would not short a market whose average stock is making new highs. This is a spot to rebalance risk, not to place a directional bet. Hold 7,464, and the rotation stays healthy. Lose it on volume, and the correction earns a wider berth.

The Week Ahead

Earnings announcements kick into high gear this week with Alphabet and Tesla both reporting Wednesday evening alongside Philip Morris, Texas Instruments, and IBM's formal Q2 call, a week after its preliminary capex-reprioritization warning rattled the stock. Thursday adds Intel and RTX, while American Express closes the week on Friday.

Economic data is comparatively light. Thursday's initial jobless claims will be watched closely for any confirmation of the labor softening we saw in June payrolls. Friday brings new home sales, a read on how the recent spurt higher in mortgage rates is negatively impacting the housing market.

With the next FOMC decision landing on July 29, the Fed enters its traditional pre-meeting quiet period this week, meaning no speeches to move markets.

Home Affordability: Better Than The Headlines Suggest

Here are the “facts” that the media tells you about home affordability.

Let’s start with a recent survey. Two out of three Americans now say it’s a bad time to buy a house, the most negative reading Gallup has ever recorded.¹ Another study showed that a record 25.2 million adults under 35 are living with their parents.² Scroll any feed, and you’ll hear that home affordability has priced an entire generation out for good. Those are the “facts” according to the media.

However, here’s the problem with that story. When you measure home affordability today against the metric that actually governs the check you write each month, the picture flips. By that measure, buying a home may be easier now than it was for the Boomers and Gen Xers who get blamed for everything.

Let me be clear about what’s real, because I won’t build an argument on a false floor. Since 2019, the median listing price has jumped about 34% to roughly $430,000.³ The payment on a median home went from near $1,700 in early 2020 to about $3,100 by late 2025.⁴ Rates tripled off the 2021 lows. That shock was real, and it landed in five short years.

So the frustration makes sense. What doesn’t hold up is taking a recent, regional price spike and turning it into a permanent law of physics that applies to every zip code and every buyer. The honest version of home affordability today is narrower, more local, and far more fixable than the headline suggests.

But let’s start with the narrative that the Boomer generation had it easy. As one individual posted on X:

“You boomers had it easy, you could buy a home for the price of bread and a gallon of milk.”

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Why Retail Traders Consistently Underperform Over Time

Lance Roberts — Mon, 20 Jul 2026 09:22:00 +0000

Retail traders have never had it so easy. Zero commission platforms, options on your phone, social media feeds full of "10 bagger" tips, and a Reddit thread for every stock in the S&P 500. The infrastructure for frequent trading has never been more frictionless, more democratized, or more psychologically seductive.

And the evidence is overwhelming that it is destroying investor wealth at scale.

The Behavioral Gap Is Growing

Every year, DALBAR publishes its Quantitative Analysis of Investor Behavior, the most comprehensive long-term study of how retail investors actually perform versus the benchmarks they chase. The 2025 report covering 2024 returns delivered yet another indictment.

The average equity investor earned 16.54% in 2024. The S&P 500 returned 25.02%. That 848-basis-point shortfall was the second-largest investor performance gap of the past decade. In one of the strongest bull markets in recent memory, retail traders left nearly a third of available returns on the table. And 2024 was not an anomaly. Retail traders have now underperformed the S&P 500 for 15 consecutive years.

DALBAR's "Guess Right Ratio," meaning how frequently investors correctly time their entries and exits, fell to just 25% in 2024, tying a record low. Retail traders got market direction right just once out of every four times. And yet, the urge to act, reposition, and trade around every headline only intensified.

The compounding consequences are brutal. A hypothetical buy and hold investor who started 2024 with $100,000 in the S&P 500 finished the year with $125,020. The "average" investor, mimicking the behavioral cash flows DALBAR tracks, ended with $112,774, over $12,000 less in a single calendar year, simply from repositioning at the wrong times. Extended over twenty years, that same $100,000 left untouched in the S&P would have grown to $717,503. The average behavioral investor ended up with $345,614, forfeiting more than half their potential wealth, not to the market, but to their own decisions.

The Hazardous Truth About Stock Trading Frequency

The academic literature on trading frequency and performance is unambiguous, and it dates back decades. The landmark 2000 study by Professors Brad Barber and Terrance Odean, "Trading is Hazardous to Your Wealth" (Journal of Finance), analyzed 66,465 household brokerage accounts from 1991 to 1996. Its central finding was stark: retail traders who traded most aggressively earned an annual return of just 11.4%, while the market returned 17.9%. That is a 6.5 percentage point annual performance drag attributable entirely to excessive trading.

Even the average household in the study, turning over 75% of its portfolio every year, still earned 1.5 percentage points less than a simple buy-and-hold strategy. The gross returns were nearly identical across groups. All the destruction happened after transaction costs and the accumulated impact of poorly timed decisions. Overconfidence was the root cause Barber and Odean identified. Retail traders consistently overestimated their informational edge, leading them to trade when sitting still would have served them far better.

Subsequent research confirmed the finding globally. A study of the Colombian Stock Exchange covering 5.38 million trades by over 42,000 individual investors from 2006 to 2016 found that retail investors generated negative abnormal returns of 4% to 4.4% per year, before transaction costs. The most active traders performed the worst, even on a gross basis. The problem is not just the cost of trading. It is the trading itself.

Day Trading: Where Retail Traders Go to Lose Everything

If frequent stock trading is hazardous, day trading is in a category of its own. FINRA data from 2020 showed that 72% of day traders ended the year with financial losses. Among proprietary traders, those treating it as a professional business, only 16% were profitable. A mere 3% earned more than $50,000 for the year.

The survival statistics are equally grim. 80% of day traders quit within the first two years. Nearly 40% abandon it within one month. After three years, only 13% remain active. Only 1% of day traders maintain consistent profitability over a five-year horizon.

The most comprehensive single market study, a 2020 examination of Brazilian equity index futures traders who persisted for more than 300 trading days, found that 97% lost money. Only 1.1% earned more than Brazil's minimum wage, and all of them experienced substantial volatility. No survivorship bias. Every trader who tried was measured over an extended period.

Retail traders, undeterred by the data, have gotten more aggressive since COVID. Post-pandemic research found that poor market timing, which cost investors roughly 0.53% per year before 2020, nearly doubled to 1.01% per year since. The explosion in retail participation, fueled by social media and zero-commission apps, has not produced better outcomes. It has produced worse ones.

Options: A Wealth Destruction Engine

If day trading is a casino, retail options trading is the casino where the house advantage is structural, invisible, and relentless. The research here is particularly damning.

A landmark study by de Silva, Smith, and So ("Losing is Optional," MIT Sloan and Stanford, 2022) found that retail traders lost approximately $3 billion in options trades over the period from January 2010 through February 2021. Market makers were the primary beneficiaries.

Bryzgalova, Pavlova, and Sikorskaya (Journal of Finance, 2023) calculated that the aggregate retail options portfolio lost $2.1 billion from November 2019 through June 2021 alone, with the bulk of those losses coming not from bad directional calls, but from the cost of trading itself. Retail traders in options incur average gross monthly losses of 1.81%, described by researchers as "economically large and statistically significant."

The mechanics of the losses fall into three repeating behavioral traps. First, retail traders systematically overpay for options relative to the realized volatility the underlying actually delivers, especially around earnings announcements. Second, they incur bid-ask spreads averaging roughly 8% of the option's value on a round trip, an immediate structural headwind equivalent to a 9 to 10% drag on invested capital before any directional bet pays off. Third, they hold losing positions well past the point where price decay accelerates after a catalyst passes, sitting on deteriorating contracts as volatility collapses around them.

Since the introduction of zero-commission complex options trading, retail volumes surged by more than 75%. More access did not produce better results. It produced more frequent losing trades.

The Common Thread: Overconfidence

Across every study, every market, and every asset class, the behavioral driver is the same: overconfidence. Retail traders overestimate their ability to predict short-term price movements. Unsurprisingly, they trade more after a strong recent performance, buy into momentum precisely when the easy money has already been made, and sell winners 50% faster than they sell losers. In other words, they confuse activity with skill.

Short-term trading is largely a zero-sum game. For every retail trader who profits, a more sophisticated, better capitalized, algorithmically equipped counterparty sits on the other side. The house advantage embedded in options markets alone, via bid-ask spreads and market maker flow, is the financial equivalent of playing blackjack at a table where the dealer wins on ties.

The antidote is not complicated, even if it is psychologically difficult. Discipline, lower turnover, longer time horizons, and a ruthless focus on what can actually be controlled, including cost, diversification, and behavior, remain the only reliable defenses against the retail trading trap.

Five Tactics to Navigate Risk Without Overreacting

None of the evidence above argues for passivity in the face of market risk. Risk is real, volatility is real, and periods of genuine portfolio danger require thoughtful responses. The problem is not that retail traders care about risk. The problem is that their responses to it, frequent repositioning, speculative options bets, and tactical timing, reliably make outcomes worse rather than better. The following five tactics are designed to keep investors engaged and protected without triggering the behavioral traps revealed by the data.

Write a Personal Investment Policy Statement. A written Investment Policy Statement (IPS) is the single most underused tool in retail investing. Furthermore, it forces the investor to commit, before any market stress arrives, to their asset allocation targets, acceptable drawdown thresholds, rebalancing triggers, and the conditions under which they will and will not make changes. When markets fall 15%, and every instinct screams to act, a pre-committed IPS replaces emotion with a predetermined framework. Writing an IPS does not eliminate risk. It eliminates the most dangerous variable in the portfolio, which is the investor's own unguided reaction to it.

Rebalance on a Schedule, Not a Sentiment. Rules-based rebalancing, triggered by calendar dates or percentage drift thresholds rather than market headlines, captures one of the few mechanical edges available to individual investors: it systematically forces buying of what is cheap and trimming of what is expensive. Research from Vanguard and Morningstar consistently shows that disciplined annual or threshold-based rebalancing adds 10 to 50 basis points of return per year over time while materially reducing drawdown severity.

Replace Speculative Options with Defined-Risk Structures. For investors who use options, the research is clear about where losses concentrate: in naked or leveraged directional bets, especially around earnings announcements, when bid-ask spreads widen and volatility collapses after the event destroys premium value. Instead, use defined-risk structures, including covered calls on existing long equity positions, protective puts sized to hedge a specific portfolio drawdown threshold, and vertical spreads that cap both gain and loss, to generate a fundamentally different statistical profile.

Require a Three-Day Waiting Period Before Any Non-Scheduled Trade. Before executing any trade that is not part of a pre-scheduled rebalance, the investor imposes a mandatory 72-hour waiting period and writes down, in plain language, why they are making the trade, what the exit criteria are, and what price action would tell them they are wrong. Most trades that feel urgent on Monday look considerably less urgent on Thursday. The behavioral literature consistently finds that the speed of a trading decision is inversely correlated with its quality. Slowing the process forces the investor to engage their deliberate reasoning rather than their reactive instincts.

Calculate Your Own Behavioral Return Gap Every Year. The exercise is straightforward: take the time-weighted return of each position as if it had been held without any transactions, then compare it to the account's actual dollar-weighted return, including every buy, sell, and repositioning decision made during the year. The difference is the personal behavioral gap, the exact cost in dollars of every trade made. For most active retail traders, this number is negative and larger than they expect. For some, it represents tens of thousands of dollars in self-imposed performance drag per year. Seeing that number concretely, attached to actual dollars rather than abstract percentages, is the most powerful behavioral intervention available.

The market will always be there tomorrow. The question is whether your capital will be, and whether the decisions you make today will compound in your favor or against you.

REFERENCES

Barber, B.M. & Odean, T. (2000). Trading is Hazardous to Your Wealth. Journal of Finance, 55(2), 773–806.

DALBAR (2025). Quantitative Analysis of Investor Behavior (QAIB). www.qaib.com.

De Silva, T., Smith, B. & So, E. (2022). Losing is Optional: Retail Investors in the Options Market. MIT Sloan / Stanford GSB.

Bryzgalova, S., Pavlova, A. & Sikorskaya, T. (2023). Retail Trading in Options and the Rise of the Big Three Wholesalers. Journal of Finance.

Naranjo, A., Nimalendran, M. & Wu, S. (2024). Complex Options Study. University of Florida.

Chague, F., De-Losso, R. & Giovannetti, B. (2020). Day Trading for a Living? SSRN Working Paper.

FINRA (2020). Day Trading: Your Dollars at Risk. Finra.org.

Morningstar (2023). Mind the Gap: A Report on Investor Returns in the U.S., Morningstar.com.

Bessembinder, H. (2018). Do Stocks Outperform Treasury Bills? Journal of Financial Economics, 129(3), 440–461.

The post Why Retail Traders Consistently Underperform Over Time appeared first on RIA.

Momentum Meltdown Catches Traders By Surprise

Lance Roberts — Sat, 18 Jul 2026 09:19:20 +0000

🔎 At a Glance

Momentum Meltdown Catches Traders By Surprise

Market Brief & Technical Review

From Lance's Desk: Home Affordability: Better Than Headlines Suggest - RIA

Market stats, screens, and risk indicators

🏛️ Market Brief - Momentum Breaks, Oil Spikes

The headline number this week was boring, but the action underneath was not, as the momentum meltdown was tearing through the market's most crowded trade. The S&P 500 slipped about 1.5% to close at 7,457.69, the Nasdaq 100 gave back roughly 4%, and the Dow held up with a fractional loss. Look only at the index, and you would think nothing much happened. That would be a mistake.

Underneath the calm surface, one of the most crowded trades on the planet came apart. Goldman Sachs' high-beta momentum basket fell about 24% month-to-date through the first half of July, its worst stretch since April 2009. Morgan Stanley's tech momentum index posted a 17-day rate of change of -35%, the worst reading in the 27 years that desk has tracked it. Back in early June, I asked in "Parabolic Semiconductor Rally: What Breaks The Trade," what would finally crack the parabolic semiconductor and momentum complex. This week, we got the answer.

The catalysts arrived together. China's Moonshot AI unveiled Kimi K3, a 2.8-trillion-parameter open-weight model that benchmarked close to leading US systems at a fraction of the cost, reigniting fears about the durability of the American AI premium. Chipmakers took the brunt. The Philadelphia Semiconductor Index dropped more than 10% this week and now sits near a 20% drawdown from its June high, the level that defines a bear market. Marvell fell 20%, Arm dropped 17%, and Micron lost 13%.

Then oil lit up. Renewed US and Iran strikes pushed WTI crude up roughly 14% on the week and Brent up more than 15%, handing Energy a 4.7% gain and the top spot on the sector board. Real estate, staples, and financials also finished green as yields fell on soft inflation readings. Overall, the damage was concentrated in one place. Technology lost 5.5% and stood alone at the bottom, while the average stock barely moved.

Cross-asset markets told the same rotation story. Gold slipped about 2%, silver dropped nearly 6%, and the dollar finished roughly flat. The ten-year Treasury yield held near 4.55% while the front end eased a touch. One bright spot for the consumer landed Friday, when the University of Michigan's preliminary July sentiment reading jumped to 54.4 from 49.5 as gasoline prices cooled earlier in the month.

The thread to follow into next week is simple. Money is not leaving the market. It is rotating hard, and the tape will not settle until the crowd finishes repositioning.

📈Technical Backdrop - Coiling Below The Record

Here is where the quiet-index story gets interesting for traders. The S&P 500 closed the week at 7,457.69, and that put it right on top of its 50-day moving average near 7,464. Call it dead flat against the line. The index still sits about 6.8% above its rising 200-day average near 6,985, so the primary uptrend remains fully intact, and it is roughly 2% below the June 2 record high of 7,620.

🔑 Key Catalysts Next Week

Next week, the Federal Reserve goes silent. The July 28–29 FOMC meeting puts the committee in its blackout window, so there are no Fed speakers to move the tape. That leaves two things in charge: the economic data and the start of mega-cap earnings, with the second being the main event.

Wednesday after the close is the night that matters. Alphabet, Tesla, and Texas Instruments all report at once, and Intel follows on Thursday evening. This is the first real referendum on the AI-capex story since the momentum trade cracked. Alphabet is the tell. The company has guided to roughly $175 billion of capital spending in 2026, and JPMorgan's desk pegs 2027 buyside expectations for Google alone near $325 to $350 billion, well above a Street consensus closer to $250 billion. If the hyperscalers signal any hesitation on that spend, the chips that depend on it have further to fall. If they reaffirm it, the washed-out names finally get their catalyst.

The setup is loaded. Alphabet's blowout first-quarter results were flattered by tens of billions in mark-to-market gains on its Anthropic and SpaceX stakes; stripping those out, the operating number would have missed by a hair. That is exactly the earnings-quality question we have been raising for months. The market will judge this print on margins and cloud growth, not on the headline number.

Ed Yardeni has framed the broader mood as a case of AI Fatigue, with investors starting to ask whether the trillion-dollar buildout will ever pay off. The Friday flash PMIs are the data highlight, since they are the first look at how business activity handled the July volatility and the oil spike. Everything else bends around Wednesday night. A clean capex message from Alphabet steadies the entire complex. Any wobble, and the momentum meltdown gets a second leg.

Need Help With Your Investing Strategy?

💰 Momentum Meltdown Sends A Warning

Every so often, the market hands you a week where the index and the internals tell opposite stories. This was one of them. The S&P 500 fell about 1.5%, a garden-variety pullback, while the momentum factor suffered its worst drawdown since the depths of the 2009 financial crisis. That gap is the entire story, and understanding it is the difference between panic-selling the wrong thing and using the rotation to your advantage. As I flagged two weeks ago in Mag 7 Stocks: Risk Or Opportunity In The Making?, this rotation was coming.

The scale of this move is genuinely historic, and the qualifier matters. As noted above, the Goldman Sachs high-beta momentum basket fell roughly 24% in the first two weeks of July, the worst such stretch since April 2009. Furthermore, the Morgan Stanley tech momentum index registered a 17-day rate of change of -35%, the worst in its 27-year history. Goldman's flagship momentum pair is now down about 33% from its highs and has broken below its own 200-day average, a drawdown that matches the late-2022 low. Those are numbers worth repeating for emphasis.

Here is the part that keeps this from being a catastrophe. That same high-beta momentum basket is STILL up about 16% for the year after peaking near +60%. This is a violent give-back of an enormous gain, not a wealth-destroying collapse. The single-stock casualties show where the crowd was hiding: in semiconductors.

It Is A Rotation, Not A Collapse

If money were fleeing the market, you would see it everywhere, but that is not the case. The equal-weight S&P 500 fell less than half a percent on the week and printed a new all-time high midweek, while defensive and cyclical value groups finished green. Energy led following the oil spike, and real estate, staples, and financials all gained. That is not what a market top looks like. That is capital rotating out of the most crowded corner and into everything else.

The leadership under the surface has quietly flipped. Look at what is working against what is breaking, and the rotation is obvious. Security-software names like Palo Alto and CrowdStrike, which benefit from AI adoption without the semiconductor bottleneck risk, are catching the bid alongside energy and the banks. The mega-cap AI generals held up far better than the speculative fringe, with Nvidia down under 4% and both Microsoft and Amazon actually positive on the week. The pain was surgical, not broad.

What Actually Broke The Trade

Four forces hit at once, which is why the move was so violent; the setup was a positioning problem. Momentum had been the undisputed king of 2026, and nearly everyone owned it, leaving no marginal buyer when selling started. The trigger came from leverage. In Asia, single-stock leveraged ETFs on names like SK Hynix had ballooned, and when the underlying prices dipped, those funds were forced to sell to maintain their 2x exposure, which fed a self-reinforcing unwind. Korea moved to halt new listings of these products midweek.

On top of that, China's Kimi K3 release cracked the assumption that US AI leadership was unassailable, and the oil spike from renewed Iran tensions revived a macro risk the momentum crowd had stopped pricing. The June index-rebalancing that had provided a price-insensitive buyer for winners like SpaceX and Marvell was gone. Take away the buyer, add forced sellers, and you get a washout.

The lesson of every crowded-trade unwind is the same. The factor that leads on the way up leads on the way down, and the exit door is always narrower than the entrance.

Goldman's own desk offers a hopeful footnote. Once the momentum factor drops more than 20% in a month, forward returns have tended to be positive, with a median gain near 4% over the following week and close to 6% over the following month. The path is rarely smooth, and next week's reports are the swing factor. Notably, a violent factor unwind is often closer to an opportunity than to the start of a bear market. Yes, that is an optimistic case, but it is a real one to consider given the rash of negative headlines this past week.

The Earnings-Quality Problem Underneath The Rally

There is a deeper issue that the momentum crowd has been willing to ignore, and it goes to the quality of the earnings that are holding up the AI trade. Take Alphabet's blockbuster first quarter. The headline was a record, but tens of billions of it came from mark-to-market gains on private stakes in Anthropic and SpaceX, not from the operating business. Stripping the paper gain would have caused the estimate to be missed. That is not a one-off quirk. Across the hyperscalers, a wave of AI capital spending is being depreciated over long schedules that assume these chips and data centers will earn their keep for years, thereby inflating near-term margins and quietly deferring the true cost.

We walked through that dynamic in Capex Spending On AI Is Masking Economic Weakness, and it is the reason next week's reports carry so much weight. The moment the market decides to pay for cash flow and earnings quality rather than capex headlines, the most crowded and most expensive names carry the most risk. Momentum had been priced for perfection. Perfection is an expensive thing to own the moment the story starts to wobble.

Why There Could Be More To Go

It helps to separate two ideas. The momentum meltdown is the event, and the violent two-week repricing we just lived through. The momentum shift is the bigger thing, a change in market leadership away from the narrow band of high-beta and semiconductor names that carried 2026 and toward the broad market underneath. The first can end in a week. The second is a process, and history says leadership changes take months to resolve, not days. That distinction applies to patience here, and it is why I think more air can still come out before this is finished.

The math tells you why the shift may not be over. As discussed above, following the worst two weeks since 2009, the high-beta momentum basket is still up about 16% on the year. That is the give-back of a parabola, not a full reset. Positioning has been reduced, but it has not capitulated, and not a single US semiconductor is even oversold yet on a 14-day RSI basis. Washouts of this scale rarely resolve in one clean flush. They tend to arrive in waves, with sharp relief rallies that pull money back in right before the next leg lower.

The healthy read is that the average stock is doing fine while the crowd unwinds. The cautious read is that the unwind still has fuel in the tank. This is because the crowd is sitting on a full year of gains it may yet decide to protect. Both can be true at once. That tension is exactly why the tape has felt so violent under a calm surface.

The Macro Has Turned Against The Trade

Here is where this week's other headline matters. In Inflation Wil l Be A Thing Of The Past, we covered Kevin Warsh's first testimony to Congress. The message was not what a momentum trader wants to hear. Warsh told lawmakers the Fed has "no tolerance for persistently elevated inflation." He also pointedly refused to offer forward guidance, arguing that published projections only breed confirmation bias. June CPI actually showed prices falling 0.4% on the month, and yet the committee is still split on the odds of a rate hike in September, not a cut.

Now read that against this week's tape. Oil just jumped roughly 14% on renewed Iran tensions, which threatens to undo the very disinflation that gave Warsh room to sound patient. A hawkish Fed with no rate cut on the horizon and no forward guidance to lean on is the opposite of the backdrop that inflated the momentum trade in the first place. The most expensive, longest-duration growth names need falling rates and easy liquidity to justify their multiples. Right now, they are getting neither, and policy uncertainty alone widens the risk premium the market demands to hold them.

None of this is a forecast of a bear market. It is a reminder that a leadership shift, once it begins, usually runs longer and further than the first move suggests. Here are both sides of the ledger, laid out honestly.

Weigh the calendar, too. We noted previously that the risk of a larger market correction (5-10%) is highest in August through October. That is particularly true given the upcoming mid-term elections. Those three months are historically the weakest stretch of the year anyway. However, the election uncertainty adds to that risk, and this unwind is landing right as we walk into it. That does not mean you sell everything and hide. It means you respect the shift. Therefore, keep tight risk controls on the crowded names, and let the earnings and the tape confirm the next move.

What Should Investors Do Now

This is a moment for discipline, not heroics. The rotation is healthy but not finished. Next week's reports will determine whether the momentum names have found a floor. As we laid out last week in The Dollar Narrative Has Turned, the play into late July is to lean toward the washed-out mega-cap leaders rather than the extended names, and to define the exit at the earnings dates themselves. If Alphabet and the others confirm the capex and cash-flow worries when they report, you sell and move on. If estimates hold, the oversold snapback has room to run.

Keep capital preservation first. An index sitting on its 50-day with a neutral RSI is neither a screaming buy nor a screaming sell. It is a market telling you to rebalance, tighten your stops on the crowded names, and let the earnings do the talking. The momentum meltdown was a warning shot about what happens when everyone owns the same thing at the same time. The momentum shift it kicked off is the story that matters now, and it likely has further to run.

Trade accordingly.

🖊️ From Lance’s Desk

This week's #MacroView blog examines the doom feed claiming home affordability has locked a generation out. The math on the payment you actually write says something the headlines won’t.

Also Posted This Week:

Headwinds And Tailwinds: Minding The Market Weather - RIA - by Michael Lebowitz

Spotting Market Bubbles: Why History Says It’s Nearly Impossible - by Lance Roberts

📹 Watch & Listen

The bigger story is happening beneath the surface. Leadership rotated sharply as investors sold semiconductor stocks despite ASML's earnings. With the semiconductor sector breaking below key technical support, investors should watch closely to see whether this is simply a healthy consolidation or the beginning of a larger topping pattern.

https://www.youtube.com/watch?v=9PJPUe3i390

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📊 Market Statistics & Analysis

Weekly technical overview across key sectors, risk indicators, and market internals

💸 Market & Sector X-Ray: Market Gains Ground

Semiconductor stocks continued to be under pressure this past week as money rotated to other areas of the market with Energy, Financials, Real Estate and Staples caught the flows with International, Technology, Industrials and Discretionary more oversold.

📐 Technical Composite: 77.09 - Still Bullish But Easing

The technical condition eased last week as semiconductors and momentum names came under pressure. While not at more extreme levels, the market is overbought enough to continue limiting upside modestly over the next few weeks.

🤑 Fear/Greed Index: 79.65 – Greed Remains Elevated

Despite a bit of volatility last week, and pressure in the high beta and momentum names, overall allocations and sentiment remain elevated particularly as professional investor sentiment pushed sharply higher.

🔁 Relative Factor Performance

Last week we noted that the "compression of factors has been evident...that clustering will shake itself out sooner than later, and the opportunity will be in which factors start to take the lead." That occurred last week as the factors stretched back out with Low Volatility, Value, and Quality gaining flows while Emerging Markets (via Semiconductor exposure) and High Beta sold off.

📊 MFBR Index (Money Flow/Breadth Ratio Indicator): 60% = Buy Zone

"As of July 17, 2026, with the S&P 500 at 7,457.69, the Money Flow Breadth Ratio (MFBR) stands at 65% and rising. This places the indicator in BUY territory (60-70%), triggering a BUY signal. The prior week reading was 65%, representing a 5% decline over the trailing four weeks.

The model currently recommends increasing equity exposure aggressively, with a target equity weight of 92%. This reflects a FLOW-OVERLAY OVERRIDE: the trailing 4-week net dollar flow has swung sharply positive (>$300B) after a deeply negative prior 4 weeks, a historically strong contrarian buy signal."

📊 Sector Model & Risk Ranges

The market consolidation over the last month has slowly started reducing the more extreme deviations in some sectors and markets. Over the past week, Energy, Financials and Staples traded above their historical monthly ranges while Technology corrected along with Emerging Markets and Gold Miners. The market is going through a correction via rotation.

Have a great week.

Lance Roberts, CIO, RIA Advisors

The post Momentum Meltdown Catches Traders By Surprise appeared first on RIA.

Inflation Will Be A Thing Of The Past- Kevin Warsh

RIA Team — Fri, 17 Jul 2026 09:49:00 +0000

Kevin Warsh delivered his first semiannual testimony to Congress earlier this week. In it, he used every opportunity to stress the urgency of returning inflation to the Fed’s 2% target. To wit, he stated, “Inflation will be a thing of the past.” He also said the Fed “has no tolerance for persistently elevated inflation.”

The June CPI inflation report, showing a 0.4% decline in prices, was released 90 minutes before his House testimony on Tuesday. It gave Warsh room to sound determined without the need to promise immediate action via a rate hike. He made it clear that while the inflation data was great news, “It’s one data point.... I don’t want to overread or cherry-pick data.”

Kevin Warsh's aversion to forward guidance was another key theme. His argument, in essence: "We're human." Importantly, Warsh seems to understand that behavioral flaws can negatively impact policy. Publish a projection,” he said, and the committee inevitably starts "taking information that's consistent with our priors and rejecting information that's inconsistent." When a person or group anchors to a forecast, they tend to favor it and may be less likely to consider opposing data. In Warsh's view, when members are not saddled with the perception of prior forecasts, they can be "more circumspect," which is a better way to set policy.

Warsh did receive a few questions about the Fed’s independence. To wit, Rep. Nydia Velázquez asked whether Warsh "works for" the administration. Warsh replied, "We're an independent central bank." When pressed further, he committed only to "follow the law and follow the data."

The graphic below shows the Fed is currently split on the odds of a September rate hike.

What To Watch Today

Earnings

Economy

Fed Speakers

None scheduled. The pre-FOMC blackout begins Saturday, July 18, ahead of the July 28–29 meeting, so Friday is the last open day on the calendar. Chair Kevin Warsh’s semiannual monetary policy testimony wrapped on Wednesday before the Senate Banking Committee.

Market Trading Update

In yesterday’s report, we walked through semiconductors stretched to a historic extreme and made the case for trimming the parabola before it trims you, as we covered here. Today, I want to discuss what happens when that trade finally cracks, because the underlying tape is telling a very different story from the headline index.

On the surface, the markets look dull, well, actually just boring. The S&P 500 remains barely lower than its record high, but that calm is a cap-weighting illusion. The Nasdaq 100 slipped below its 50-day moving average for the first time in months, while the VanEck Semiconductor ETF (SMH) dropped roughly 3% as the chip bid unwound. The generals took the damage.

Now look at what the troops did. The equal-weight S&P 500 (RSP) rose, and its RSI is a healthy 60. Small caps (IWM) also lifted, with the Dow also gaining ground. On a day when Semiconductors and Technology retreated, the average stock advanced. As the chart below shows, RSP now sits 2.8% above its 50-day line, while the cap-weighted Nasdaq has fallen below its own 50-day line.

With the market broadening, there remains a bullish backdrop for investors for now. While the rally from the March lows has been impressive, it has relied primarily on a handful of stocks. With the relative strength of the equal-weight versus cap-weight index bottoming six weeks ago and climbing since, it is clear that money isn’t leaving the market. It’s changing seats.

Here’s the catch. Yes, the market's broadening is healthy, but the trigger matters. This rotation is being FORCED by tech rolling over, not pulled by fresh optimism about growth. Small caps still have to prove they can lead with a hawkish Warsh Fed and yields backing up on higher oil. IWM remains shy of its high with an RSI of just 54. A rotation that is really only tech deleveraging can reverse in a single session.

So, what does this mean to you? That is THE question, and there are no guarantees. Therefore, you manage the risk and let the markets dictate your next course of action. We are not chasing small caps up here, and we would rather add on a pullback toward the S&P’s 50-day near 7,456 than pay up into resistance at the old high. Keep quality high, keep a little dry powder, and most notably, continue to manage risk at the line. Broad is good. Forced-broad still has to prove itself.

One Company- Two Prices: Examining SK Hynix's Reverse Kimchi Premium

South Korea has long had what is called a "Kimchi discount." This is the tendency for Korean companies to trade at lower valuations than their global peers due to weak governance and limited shareholder returns. South Korean memory chip maker SK Hynix just demonstrated the discount in its new US ADR listing.

SK Hynix's Nasdaq-traded ADR (SKHY) began trading on Tuesday, closing at $193.92, up over 25%. Each ADR represents one-tenth of an ordinary Korean share. That same day, the Seoul-listed shares closed at $1,280. The ADR should have been $128. US investors are paying an approximately 50% premium for identical ownership, underlying business, dividends, and earnings. The only difference is which exchange processes the trade.

Why doesn't arbitrage close the gap immediately? Part of the gap reflects the structure of the listing itself. SK Hynix's ADRs can be converted freely into Seoul-listed shares, but conversions in the other direction require regulatory approval. This one-way conversion model mirrors TSMC's approach. Its US-listed shares have maintained persistent premiums of 13% to 20% for years as the arbitrage mechanism is hobbled by the same conversion limitations.

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The post Inflation Will Be A Thing Of The Past- Kevin Warsh appeared first on RIA.

Home Affordability: Better Than Headlines Suggest

Lance Roberts — Fri, 17 Jul 2026 09:19:00 +0000

The doom feed says home affordability locked a generation out. The math on the payment you actually write says something the headlines won't.

Here are the "facts" that the media tells you about home affordability.

Let's start with a recent survey. Two out of three Americans now say it's a bad time to buy a house, the most negative reading Gallup has ever recorded.¹ Another study showed that a record 25.2 million adults under 35 are living with their parents.² Scroll any feed, and you'll hear that home affordability has priced an entire generation out for good. Those are the "facts" according to the media.

However, here's the problem with that story. When you measure home affordability today against the metric that actually governs the check you write each month, the picture flips. By that measure, buying a home may be easier now than it was for the Boomers and Gen Xers who get blamed for everything.

Let me be clear about what's real, because I won't build an argument on a false floor. Since 2019, the median listing price has jumped about 34% to roughly $430,000.³ The payment on a median home went from near $1,700 in early 2020 to about $3,100 by late 2025.⁴ Rates tripled off the 2021 lows. That shock was real, and it landed in five short years.

So the frustration makes sense. What doesn't hold up is taking a recent, regional price spike and turning it into a permanent law of physics that applies to every zip code and every buyer. The honest version of home affordability today is narrower, more local, and far more fixable than the headline suggests.

But let's start with the narrative that the Boomer generation had it easy. As one individual posted on X:

"You boomers had it easy, you could buy a home for the price of bread and a gallon of milk."

Boomers Did Not Have It Easy

Here's the part the narrative skips. The Boomer who bought in 1980 financed at a 30-year fixed rate of 13.74%, watched it climb past 18% by October 1981, and had no way to know rates would ever come back down, which made every payment feel like a life sentence.⁵ Think about that. For a median home price of $64,600 with 20% down, that household sent roughly 39% of its income to the mortgage before property taxes.⁶ Add the taxes, and the typical 1980 family spent close to 47% of their income on housing.

Today's buyer, financing about $417,000 near 6.5%, spends closer to 32% on the mortgage and about 43% all in.6,14 Two independent analyses ran this exact math and landed in the same place. On the payment that matters, 1980 was as hard as, or harder than, 2026. So home affordability today is mostly a payment story, and the payment math favors the present. Notice what the work did. It isn't the price of the home, it's the rate.

The Crisis Is Regional, Not National

Now look at where the "home affordability" pain actually sits. A typical home in Iowa costs about 3.7 years of household income, near where the national buyer stood in 2000.⁷ Ohio, Indiana, Illinois, and Kansas still sell near or below $300,000. Among large metros, Chicago, Houston, Dallas, Atlanta, and Philadelphia rank among the most affordable in the country.⁷ Home affordability today is a function of your zip code first, your generation second.

The expensive markets are real, but they're specific. And here's the twist most coverage misses. The old escape hatch of moving somewhere cheap is closing, because Montana now costs 8.7 years of income, worse than California or New York.⁷ The same regional pattern shows up in who's living at home. In New Jersey it's 44% of young adults. In South Dakota, 18%.⁸ The map of "kids who can't move out" is mostly a map of expensive states.

That "one in three" figure above also deserves a second look. It counts everyone ages 18 to 34, which includes college kids, 22-year-olds in their first job, and people who've always lived at home for a stretch. If you narrow that gap to a more realistic home ownership range, ages 25 to 34, the share drops to about 18%.⁹ And roughly 70% of those 25-to-34-year-olds at home are employed.² So this "home affordability" story isn't about a lazy generation or a broken job market. It's a story about down payments, rent, and a marriage age that has drifted six years later since 1980.

Where The Skeptics Are Right

I won't pretend that nothing has changed. Two things genuinely got harder, and waving them away would insult the reader. First, the down payment. In 1980, 20% down ran about two-thirds of a year's income. Today it runs a full year or more, which is why the median first-time buyer now puts down just 9% to get in the door, and why the first-time buyer's median age has climbed from 29 to roughly 40.¹⁰ That capital wall is a real barrier.

Second, insurance. Premiums jumped 24% from 2021 to 2024 to an average of $3,303, twice the rate of inflation, rising in 95% of zip codes.¹¹ In Utah, insurance premiums rose 59%. That cost isn't your fault, and it won't be fixed by skipping lattes, but notice what both problems have in common. They're specific and addressable, not a sentence handed down to an entire generation. The home affordability debate today has two honest exceptions, and naming them is what separates analysis from a comment-section rant.

Where They Aren't

Here's the irony buried in the down payment story. The 1980 buyer didn't just face a 20% norm; they put down even more, averaging about 28%.¹⁰ To skip mortgage insurance on a conventional loan, you needed the full 20% in cash, no exceptions. There were no mainstream 3% conventional programs, no piggyback structures in wide use, no stack of state assistance grants to pull from. You saved the lump sum, or you stayed a renter.

Today, the menu is wide open. A first-time buyer can go conventional with as little as 3% down, FHA with 3.5% down, or zero down with a VA or USDA loan if eligible, and can cover even that with gift funds, a 401 (k) withdrawal, or a state assistance grant.¹⁵ The 20% rule is dead. The median first-time buyer actually put down 10% last year, not 20^.16 Less down means PMI and a bigger payment, of course. But the belief that you need 20% in cash just to walk in the door is the single most expensive myth keeping renters stuck, and it hasn't been true for decades.

The Playbook: Home Affordability Today Is on You

So what's the move? Stop reading a national headline as a verdict on your situation. The buyer who treats "homeownership is dead" as gospel, while sitting in a market where a solid house costs three or four times income, talks himself out of a purchase he could actually make. Bob Farrell's ninth rule fits here. When every expert and forecast agrees, something else usually happens.¹² Sentiment just hit a record low. That's historically when the patient buyer gets paid.

But mindset only gets you to the starting line. Here's the part nobody wants to hear.

Working isn't enough. Roughly 70% of the young adults living at home already have jobs, so a paycheck alone clearly doesn't get you out of the basement.² What gets you out is a set of decisions most people dodge because they sting. So let's say them plainly.

Run the number, then automate it. A 3.5% down payment on a $250,000 home is $8,750, about $730 a month for a year. If you can't find $730, that's a spending problem or an income problem, and both are yours. But here's the part the pushback misses. The inability to save that money isn't just a down payment problem. It's a signal you can't afford to own yet. The mortgage is only the floor. Property taxes, insurance that now averages $3,303 a year, the roughly 1% of a home's value it consumes in annual upkeep, and HOA dues, if you have them, all add up to the monthly payment.¹¹ Can't bank $730 a month as a renter? You'll drown in those carrying costs as an owner. The savings test isn't the barrier. It's the readiness check.

Cut the big rocks, not the pebbles. The daily coffee isn't what's keeping you in your childhood bedroom, but the $650 truck payment, the $1,900 rent in a city you picked for the nightlife, and the lifestyle you finance to look successful on a phone screen absolutely are. Sell the financed truck. Get a roommate. Buy smaller, because the median new home is 38% larger than it was in 1980, making a 1,500-square-foot starter a choice rather than a hardship.¹³ Live below your means on purpose. Nobody is coming to subsidize your standard of living.

Then move to the money. The good jobs and the cheap houses rarely sit in the same expensive zip code you grew up in. They sit in Columbus, Des Moines, Indianapolis, and Greenville, where a median income still buys a median home.⁷ Remote work made that move easier than it has ever been. If you won't relocate for opportunity, fine, but then you've made unaffordability a choice, not a fate.

Raise your income and your credit score at the same time. A side income of $1,000 a month is a full down payment in under a year. A credit jump from 580 to 620 can move you off a 3.5% FHA loan and onto a 3% conventional, saving you thousands up front and more over the life of the loan.¹⁵ And every year you stall has a price tag. The National Association of Realtors estimates that delaying a purchase from age 30 to 40 costs the typical buyer around $150,000 in lost equity.¹⁷

The market isn't fair. It was never fair. The only question that matters is what you're going to do about it.

The bottom line is this. Housing isn't unaffordable everywhere, for everyone, forever. It's expensive in specific places, for specific reasons, and most of all since 2020. The rest is geography, a savings problem, and a story people keep repeating until they believe it. After three decades of watching cycles, I've learned the worst financial decisions get made when people accept a narrative instead of running the numbers. Home affordability today is better than the Fed admits. Run your own numbers and see.

Sources

Gallup Economy and Personal Finance Poll, April 2026. 67% of U.S. adults say it is a bad time to buy a home.

Realtor.com analysis (Hannah Jones), 2025, via The Hill and TNND. A record 25.2 million adults under 35 living with parents; roughly 70% of those 25 to 34 are employed.

Realtor.com, 2025 median list price near $430,000, up about 34% since 2019.

Fox Business / Realtor.com, Q4 2025. Median home payment is near $3,100.That is up from about $1,700 in early 2020. Income needed climbed from roughly $66,000 to more than $120,000.

Freddie Mac via Bankrate and Rocket Mortgage: 1980 30-year fixed averaged 13.74%, peaking above 18% in October 1981.

Meredith Wealth and Landmark Wealth Management analyses of Census and FRED data. Mortgage as a share of income roughly 39% (1980) vs 32% (today); about 47% vs 43.5% all-in with property taxes.

Best Interest Financial and Visual Capitalist. Using Realtor.com, Census ACS, and NAR data, 2025-26: Iowa 3.7x, U.S. national 5.08x, Montana 8.7x; metro affordability rankings.

FinanceBuzz and Visual Capitalist, Census ACS 2024-25: New Jersey 44%, Connecticut 41%, South Dakota 18%.

Pew Research Center, 2023: 18% of adults ages 25 to 34 live in a parent's home.

Landmark Wealth Management. 1980 average down payment ~28% vs ~9% median for first-time buyers today; first-time buyer median age 29 to about 40.

Consumer Federation of America. "Overburdened," April 2025: premiums up 24% (2021-2024) to an average of $3,303. Twice inflation, in 95% of zip codes; Utah +59%, Illinois +50%, Arizona +48%, Pennsylvania +44%.

Bob Farrell's 10 Rules, Rule #9: "When all the experts and forecasts agree, something else is going to happen."

U.S. Census Bureau / NAHB: median new single-family home 1,595 sq ft (1980) vs 2,205 sq ft (2024), a 38% increase.

Freddie Mac Primary Mortgage Market Survey: 30-year fixed averaged about 6.49% for the week ending June 25, 2026.

2026 minimum down payments: conventional 3% (Fannie Mae HomeReady / Freddie Mac Home Possible, 620+ credit), FHA 3.5% (580+ credit; 10% for 500-579), VA, and USDA 0% for eligible buyers. PMI applies to conventional loans with less than 20% down (roughly $30 to $70 per month per $100,000 borrowed) and is canceled at 20% equity; an 80/10/10 piggyback avoids it. Sources: Bankrate, Rocket Mortgage, lender data, 2026.

National Association of Realtors, 2025 Profile of Home Buyers and Sellers. Median first-time-buyer down payment of about 10%, the highest in nearly 40 years.

The National Association of Realtors estimates. Delaying a home purchase from age 30 to 40 costs a typical buyer roughly $150,000 in lost equity.

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Why Are BDCs Ignoring Junk Bonds?

RIA Team — Thu, 16 Jul 2026 09:08:00 +0000

A reader recently asked us: "Why are BDCs diverging from corporate junk bonds?" To his point, the graph below shows the ICE BOA index of BB and B yield spreads to Treasuries are at or near 30-year lows. At the same time, BDCs, which hold lower-rated credit loans to small and mid-sized companies, are trading in many cases at near-historical discounts to their NAVs. The answer is that "junk" is not a single market, and the ICE BOA indexes reflect a divide that partially helps explain the disconnect.

The top graph also shows that CCC junk bond spreads have diverged from their BB- and B-rated peers. The lower graph shows that this divergence is the largest in 30 years. BB spreads, the highest-quality junk, trade at 1.58%, just 22 basis points above their all-time low set in 1997 and in the 1st percentile of history. Single-B spreads, at 2.87%, sit in the 4th percentile. But CCC and lower spreads trade at 9.72%, the 52nd percentile, a full 558 basis points above their record low. Simply, investors have never paid this much for "quality" junk relative to distressed junk.

BDCs, publicly traded securities that hold private credit loans, trade at roughly 10-15% discounts to net asset value. The sector is generally down about 20-25% over the past year. Our reader notes the contradiction between BB- and B-rated bonds and BDCs. S&P's credit estimates place most BDC borrowers at B- or lower, with a tail in CCC territory. Part two, in a lower section, examines the relationship and why it broke.

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we dug into IBM’s guidance miss and how quickly one mega-cap warning can sour the whole tape, as we covered here. Today I want to widen the lens to the group that has actually carried this rally, and the one with the most air underneath it: semiconductors.

Start with the trend. At the time of this writing, the VanEck Semiconductor ETF (SMH) is trading near $604. That’s only about 1.7% above its 50-day moving average of $594. But it sits 38.6% above the rising 200-day near $436, and a remarkable 147% above its 50-month moving average of $244. That 50-month line has tracked the sector cleanly through every cycle since the fund’s inception. Price has rarely, if ever, been this far above it. Put it in trade terms. A garden-variety pullback to the 50-day is less than 2% away. A full reversion to the 200-day would be a 28% decline from here.

Here’s what matters. The move is already cooling. SMH is roughly 10% off its June closing high of $668.91. The 14-day RSI has slipped back into the high 40s from deeply overbought territory, the weekly RSI has eased into the mid-60s after printing above 80 at the peak, and the MACD has rolled below its signal line. Nvidia, the group’s bellwether, is trading near $211 has traded weakly, so leadership is narrowing rather than broadening. Momentum has cooled, not collapsed. The tape simply isn’t confirming new highs anymore.

Parabolic moves run further than anyone expects, and then they don’t correct sideways; they correct hard. What breaks this trade isn’t the fundamentals, at least not yet. ASML made the bull case louder on Wednesday. It beat on the quarter and raised full-year revenue guidance to 43 to 45 billion euros, lifted its gross margin outlook toward 56%, and said it will expand low-NA EUV capacity by roughly 30% in 2027.

SK Hynix ADRs jumped 27% on Tuesday. Demand is clearly intact. That’s exactly the risk. When the news is this good and everyone already owns the trade, the price reflects it, and there’s little room left to surprise on the upside. TSMC reports before the bell this morning with a very high bar to clear, and, behind the scenes, the hyperscaler bond market is flashing signs of funding stress. Crowded positioning and valuation gravity do the rest.

This is NOT a call that the AI buildout is over. It’s risk management at a point where the asymmetry no longer favors holders. Trimming a parabolic winner isn’t a market call. The reward for riding the last leg of a move like this is small, and round-tripping the prior run is permanent damage. Keep semis at target weight, tighten the stops, and manage risk at the line, not after it breaks.

More On BDCs and High-Yield Bonds

In our lede, we showed the record bifurcation between higher- and lower-rated junk bonds. We believe that the divide partially explains why BDCs trade at steep NAV discounts despite tight credit spreads for some junk bonds.

Over the last five years, BDCs (BIZD) and high-yield (HYG) show a correlation of 0.56, with no lead-lag relationship at any horizon. The correlation is somewhat regime-dependent. It's 0.70 on large high-yield moves but just 0.24 on quiet days. Essentially, BDCs and junk are more correlated in volatile markets and less so in calmer ones.

There are four primary drivers to explain today's divergence.

S&P credit estimates rate most BDC borrowers at B- or lower, so BDCs tend to price off the CCC leg of the market.

Tight spreads on the BDCs' underlying loans are an earnings headwind for BDCs. It reduces net interest income, which pressures dividends.

BDC NAV calculations are quarterly, so rising non-accruals and PIK income are prompting some investors to sell and front-run writedowns.

Retail-driven BDC flows, irrational forecasts, and poor sentiment can dislocate spreads for periods.

Warning: if BB and B spreads finally widen from record tights, statistics say BDCs will recouple at high correlation on the way down. That said, BDCs have already priced in a much weaker credit market than higher-rated junk, so the convergence may not be as damaging as it would be if the divergence hadn't existed.

Headwinds And Tailwinds: Minding The Market Weather

Market forecasting has more in common with hurricane forecasting than most investors appreciate. The goal when managing an investment portfolio is not to predict a single outcome but to understand the environment well enough to establish a range of possible outcomes.

When a hurricane is brewing, meteorologists don’t draw a single storm track forecast on the map; they draw a “cone of uncertainty” that contains dozens of possible paths. Over time, as more information is gathered, the cone tightens.

Some storms cause immense damage, while others prove much weaker than expected. Other once-threatening storms never reach land and peter away in the ocean. Which path materializes depends on many variables layered on top of each other. Like markets, it’s a dynamic process that is impossible to predict with certainty.

Investors face the same task as meteorologists. We must gauge the many forces acting on markets simultaneously and consider a slew of others that may or may not pressure markets in the future. Doing so efficiently provides us with a range of outcomes rather than relying on a single forecast.

With many headwinds arising, the job for investors right now is to closely track the environment and be ready to trim their sails if needed.

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IBM Stunned Investors: Reveals Industry Capex Reprioritization

RIA Team — Wed, 15 Jul 2026 09:24:00 +0000

Coming in on Tuesday morning, investors were expecting to sift through earnings from the largest banks and the CPI data. Instead, IBM stunned investors by pre-releasing its earnings 8 days in advance. Its earnings were much weaker than expected, with revenue well below expectations and EPS declining 2% year over year. As shown below, IBM fell by nearly 25% in pre-market trading.

Its CEO, Arvind Krishna, was blunt in his assessment of the quarter, stating, "This quarter we faltered."

Beyond IBM's earnings-specific details, they had an industry-wide message with potentially far-reaching implications for other companies. Specifically, IBM said clients shifted:

their quarterly capex spend toward servers, storage, and memory purchases to secure supply-constrained infrastructure ahead of expected price increases, adding it did not anticipate the magnitude of the capex reprioritization.

Per IBM, enterprises are now hoarding inventory to front-run the surge in memory prices and some hardware devices. Such behavior is typical shortage psychology, and it is self-reinforcing: panic buying tightens supply further, which raises prices further, which triggers more panic buying.

The implications of these actions benefit some companies to the detriment of others. Memory and hardware suppliers like Micron and SanDisk are seeing a surge in demand from the industry. However, a pull-forward today often becomes an air pocket tomorrow. Thus, earnings over the next few years may remain unaffected in aggregate, but the timing may be significantly altered. Meanwhile, IT budgets at large enterprises are largely fixed, so every dollar diverted toward memory and scarce hardware is a dollar taken from software and consulting, precisely IBM's core business.

What To Watch Today

Earnings

Economy

Fed Speakers

Chair Kevin Warsh delivers day two of the semiannual monetary policy testimony, before the Senate Banking Committee at 10:00 a.m. ET, following Tuesday's House appearance. The Fed is not yet in its pre-FOMC blackout, so his tone on the cooler June CPI and sticky PPI is the read to watch.

Market Trading Update

Yesterday, Michael walked through the KOSPI bubble and the concentration risk hiding inside a country index. Today I want to read the other tape that mattered: big bank earnings kicked off the season, and as I argued in this past weekend's Bull Bear Report, the number that forecasts the economy isn't the headline beat. It's the credit book.

So did the four tells I told you to watch actually trip? Not yet. Wells Fargo posted the cleanest read of the group. Net charge-offs fell to $876 million, just 0.34% of average loans, down from 0.44% a year ago, as consumer losses dropped to 74 basis points due to lower auto and card write-offs. Deposits grew 10%. New card accounts jumped 46%. That is not a household balance sheet cracking.

JPMorgan told the same story. Its Card Services charge-off rate printed 3.34%, right on management's roughly 3.4% guide, and the consumer bank's reserves were flat. The $149 million reserve build Jamie Dimon's team did take landed in the WHOLESALE book, not the consumer. Firmwide charge-offs actually fell $44 million from a year ago. Citi's card delinquencies sit near 2.3%, the low end of the peer group. Read the footnotes, and the consumer passed this test.

Here's the catch, which is worth paying close attention to. These beats didn't come from Main Street. They came from the trading floor. JPMorgan's equity-markets revenue exploded 86%, Citi's equities desk rose 45%, and investment-banking fees ran 30% higher across the group. The bank bulls, Mike Mayo among them, will tell you the franchises have never been better capitalized. Fine. The consumer held, but he didn't drive the quarter. The deal desk did.

The tape sniffed that out. Goldman ripped 7.9% on its capital-markets haul, JPMorgan added 2.8%, and financials (XLF) led the day. But Wells Fargo, the purest lender in the bunch, slipped 0.7% on a clean beat. That's a sell-the-news fade on the one name most tied to the household, and it tells you how much good news is already priced into a group our own work flags as overbought.

The consumer earned the soft-landing benefit of the doubt for now. But the one thing nobody could verify this week is the private-credit and nonbank-lending exposure buried in these balance sheets, and that's the reserve line I'll read first next quarter. Bank the strength in the market, but don't chase it.

CPI Surprises

June's CPI report delivered the biggest downside surprise in years as the oil disinflation trade hit the data. Headline CPI fell 0.4% in June, versus forecasts of 0.0%. As a result, the annual rate fell sharply from 4.2% to 3.5%. The monthly decline was the largest since April 2020. Core CPI, excluding food and energy, was flat on the month against expectations for a 0.2% rise, pulling the annual core rate down to 2.6% from 2.9%. Core goods declined for the second straight month, down 0.09%; housing was up just 0.12%; and core services ex-housing was -0.2%, the lowest in four years. The graph below shows that the share of CPI components rising above the Fed's 2% goal is 59.2%, the lowest since inflation started rising in 2021.

Energy prices fell 5.7% after rising 3.9% in May, with gasoline prices down 9.7% and fuel oil down 9.2%. The data confirms that the BLS's three-week measurement lag finally caught up with the oil decline from $110 to the high $60s.

The Fed's newly hawkish tilt is likely to remain intact despite today's soft headline. A July hike is probably off the table, but September will likely keep rate-hike odds alive.

JPMorgan and Bank of America: Trading Profits Take Earnings Higher

JPMorgan (JPM) delivered a strong earnings report Tuesday morning. Revenue of $58.02 billion easily beat estimates by 13%, and its GAAP EPS of $7.70 crushed the $5.85 consensus. There are caveats, however. Its earnings jumped 41% to $21.2 billion, but excluding $5.6 billion in non-recurring one-time gains, growth was a more modest 13%. The standout line item was its trading departments. Equities revenue surged 86% to $6 billion, $2.11 billion above expectations. This is a payoff from the volatility markets experienced throughout the quarter, increased speculative retail trading behaviors, and the SpaceX IPO. JPM's net interest income slightly missed estimates of $25.65 billion, though it still grew 9.9% year over year.

Bank of America's (BAC) earnings were not as strong, but it, too, had impressive trading revenue. Net interest income came in at $16.2 billion, up 9%, driven by global markets activity and higher loan and deposit balances. It matched Wall Street's consensus.

The macro takeaway for investors is that second-quarter profits were bolstered by trading activity. Trading revenues and earnings are highly volatile and less dependable than the core banking services. To wit, net interest income, a bank's core earnings metric, suggests that the two banks' lending business is stable rather than rapidly accelerating. That helps explain the lackluster price activity, as we share below.

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Headwinds And Tailwinds: Minding The Market Weather

Michael Lebowitz — Wed, 15 Jul 2026 09:22:00 +0000

A sailor who fixates on the barometer will rarely leave port. A sailor who never checks it will eventually get caught in a storm. It's easy for most investors to fall into one of those two modes, either warning that headwinds are approaching and taking cover, or waving off every warning because AI spending is carrying the market higher.

This article walks through several market headwinds that warrant attention, as well as a tailwind that may be large enough to keep the boat moving forward. Appreciating the headwinds and tailwinds in more detail will help you better monitor the market barometer, allowing you to assess and adjust risk levels with more awareness going forward.

Storm Forecasting

When a hurricane is brewing, meteorologists don't draw a single storm track forecast on the map; they draw a “cone of uncertainty” that contains dozens of possible paths. Over time, as more information is gathered, the cone tightens.

With many headwinds arising, the job for investors right now is to closely track the environment and be ready to trim their sails if needed.

The Headwinds Worth Watching

Global Liquidity

Liquidity is the lifeline of markets. To wit, Stanley Druckenmiller once stated:

"It's liquidity that moves markets"

With the recent surge in the use of derivatives, options, margin debt, and other forms of leverage, changes in liquidity conditions are even more important than ever in shaping market expectations.

Michael Howell's Global Liquidity Index (GLI) uses factors such as central bank balance sheets, cross-border bank lending, shadow banking, repo markets, and collateral availability to assess how liquidity is likely to change. In a recent Commentary, in which we elaborate on his work and his current view, we stated:

The cycle is now pointing down into 2027. Howell projects $40 trillion in global debt rollovers by 2027, a $4 trillion increase from the previous year. That borrowing demand comes as liquidity contracts, creating a mismatch between refinancing demand and tightening financial conditions.

The graph below charts Howell’s GLI alongside a 65-month sine wave that has been a good predictor of liquidity peaks and troughs. Howell’s index and the sine wave show the liquidity cycle peaked in mid-2025 and has been declining since, with the next trough not expected until 2027. Historically, the declining phase of this cycle has favored cash, long-duration government bonds, and gold over risk assets, precisely because a shrinking pool of global liquidity makes markets more dependent on cash flow and less prone to speculative excess.

Treasury Issuance

In a similar vein, the federal deficit continues to demand liquidity to fund the rapidly growing issuance of Treasury debt. That supply of debt has to be absorbed by someone. Heavier net debt issuance competes with demand for all other investments. On the demand side, with no QE and domestic banks constrained by regulation, there is less ability to absorb the new supply than in years past.

Bear in mind, however, that if there is a stimulus package or even increased government spending to boost support for Republicans in the midterm elections, this headwind can also be a tailwind.

Restrictive Fed Policy

Even with the last cycle of rate cuts, real policy rates, as shown below, remain above levels most economists would consider neutral. Such a restrictive policy works with a lag, and the economy has so far absorbed it well. That does not mean the lagged effects are gone.

Furthermore, the Fed’s hawkish tone and the potential for rate increases could make financial conditions even more restrictive.

The Yield Curve And Volatile Equity Rotations

We recently wrote, Are Flattening Yield Curves and Style Rotations Deceptive Omens, to help readers differentiate between monitoring financial conditions and timing market tops.

The article explains why a bear flattening of the yield curve and instability in leadership between growth and value stocks, as we are witnessing now, are both symptoms of the repricing of growth expectations and the discount rate. The lesson from that piece is that these signals describe a changing environment but do not tell you when or whether a market or economic downturn might occur.

The last two sentences of the article sum up this headwind well:

The signals suggest the regime may be changing, and we should be prepared for that possibility. However, until that becomes more evident, we must take advantage of what the market has to offer.

Low VIX – High Implied Correlation

Our daily Commentary from July 9, 2026, points out a wide and unusual divergence between the low S&P 500 volatility index (VIX) and the lack of correlation among the index's individual stocks.

As we share below, the condition represents a potential headwind, but for now, just something to be mindful of.

The low VIX (first graph) implies smooth sailing ahead, while a record-low implied correlation (second graph) suggests the market could be at risk. Goldman is hedging the risk of a correction, i.e., an implied correlation spike. Often, when implied correlation rises sharply from extreme lows, as it did in August 2024 during the yen carry trade unwind, the divergences that kept the index calm disappear. Stocks start moving together again, and most of the time they move down. This condition is not a warning to expect a market downdraft, but it does suggest that risk awareness is critical.

Midterm Elections

Markets tend to dislike uncertainty. Accordingly, the months leading up to the midterm elections often bring volatility. This year, the potential for the Democrats to regain the House and, less likely, to take the Senate as well poses greater risks than if the Republicans were expected to maintain control of both houses.

We suspect that toward later summer and early fall, market trepidation will increase over the unknown election outcomes and what they may mean for policies and ultimately markets. Accordingly, this is likely a stock market headwind that will intensify as the year progresses.

Consumer Struggles

After two strong months of outsized growth, consumer credit, mainly credit cards, contracted for the first time in almost two years. The personal savings rate sits at 3.0%, near its lowest level since 1960. Both sets of data indicate that consumers' wage growth is no longer keeping pace with inflation, forcing them to reduce borrowing and/or draw down savings and run tighter budgets.

This is a genuine headwind, and it isn't going away soon. But it's not the whole consumer story either. Unemployment remains low, and the struggle appears concentrated among lower-income individuals and parts of the middle class. Many indications of spending among upper-income households point to continued strength, and that cohort accounts for an outsized share of total consumption. Per Yahoo Finance:

A new report from Moody's Analytics shows the top 10% of earners now account for nearly half of all U.S. consumer spending, a historic high that shows how dependent economic growth has become on wealthy households.

A squeezed lower class matters for retailers and lenders exposed to that segment, but less for the broader market, where spending is increasingly a story about who still has room to spend.

This is a headwind worth watching more closely if the unemployment rate starts to rise and financial struggles spread to higher-income earners.

Tailwinds That Could Become Headwinds

Margin Debt

Record levels of margin debt have boosted demand for stocks, providing a strong tailwind for the market. As we wrote in Margin Debt Risk;

Margin debt just set another record. In May 2026, investors owed their brokers a combined $1.42 trillion, the highest in history and a 53.7% jump from the prior year.

While record and growing margin debt is a powerful tailwind, it’s a wind that can reverse direction suddenly. Per the article:

Leverage peaks near tops. Then it mean-reverts violently because the unwind forces the selling.

In addition to watching margin debt, pay attention to the most favored stocks. Today, semiconductor stocks are bolstered by a disproportionate share of the margin. If they start faltering while the broader markets hold up, this may be a sign that margin usage is about to reverse. Further, any indication of liquidity trouble in the money markets could also result in a decline in margin debt.

The Yen Carry Trade

The yen carry trade is a source of leverage pushing the market higher. As we wrote in a recent Commentary:

The carry trade thrives with a weak yen, as we have today. Despite higher Japanese borrowing costs, the yen has depreciated significantly against the dollar, more than offsetting the higher interest costs for carry trades. A weakening yen means the trade remains profitable, and the leverage the carry trade provides to markets continues to build.

The risk today to US investors is that higher Japanese yields and a stronger yen could force a rapid, disorderly reversal of the carry trade. Bear in mind that the more the yen falls, the more the trade grows, and the larger the unwind will be whenever the BOJ finally acts.

The Tailwind: AI Capital Spending

Working against every headwind we discussed, and others, is a single counterweight of extraordinary size: the capital spending boom tied to artificial intelligence infrastructure.

The four largest hyperscalers (Amazon, Microsoft, Alphabet, and Meta) are on pace to spend roughly $725 billion combined on capital expenditures in 2026, up about 75% from last year. Goldman Sachs has raised its cumulative capex estimate for these four companies from 2025 through 2030 to $5.3 trillion, up from $4.5 trillion prior to first-quarter earnings.

That spending shows up directly in corporate earnings, employment in construction and semiconductors, and demand for everything from GPUs to transformers to turbines. The spending is also self-reinforcing in the near term. For instance, cloud backlogs at companies are growing, giving management the revenue predictability needed to justify increased spending. Although there is considerable skepticism about the durability of this spending cycle, it has thus far yielded results that suggest otherwise.

This is the tailwind doing the heavy lifting in the economy and market. It has been large enough and persistent enough to absorb concern about the headwinds. The question worth asking is not whether the tailwind is real but how much further it can carry markets before the headwinds start to matter more than the continued spending.

Summary: Take Advantage Or Trim Your Sails?

In meteorological speak, the Cone of Uncertainty is wide. However, just because the headwinds are numerous and the range of potential outcomes is vast, investors don't need to trim their sails and batten down the hatches.

The more productive approach is to keep using the favorable winds while they are blowing, and to pay close attention to market barometers and remain prepared for a shift in the winds. That means participating in the areas of the market most directly tied to the AI capital spending cycle while it remains intact, while also paying attention to balance sheet quality, maintaining valuation discipline, closely monitoring technical conditions, and remaining diversified in other sectors less impacted by the AI spending boom.

The post Headwinds And Tailwinds: Minding The Market Weather appeared first on RIA.

The KOSPI Bubble

RIA Team — Tue, 14 Jul 2026 09:49:00 +0000

Semiconductor chip companies have been benefiting from strong momentum and a powerful narrative. For instance, memory chip producers like Micron, AMD, and Intel have risen by 192%, 138%, and 166%, respectively, year to date. While they provided a nice boost to the Nasdaq and an impressive, albeit lesser, tailwind to the S&P 500, the impact of Korean chipmakers on the Korean Composite Stock Price Index (KOSPI) has been stunning.

Consider the graph below, showing that the KOSPI has grossly outperformed the Nasdaq over the last three years. Incredibly, most of the KOSPI gains have occurred over the last year. Since the beginning of 2026 alone, the index has surged more than 88%. The KOSPI is now up over 200% in the last two years.

The reason for its parabolic ascent is two stocks. As of June 30, 2026, Samsung Electronics and SK Hynix together account for nearly 60% of the KOSPI, up from roughly 40% just two years ago. For context, Nvidia and Apple combined account for only about 20% of the Nasdaq.

The concentration carries serious risks. One such risk is regulatory. Goldman Sachs warns that if the combined KOSPI weight rises by just one more percentage point, foreign institutional investors subject to US Investment Company Act diversification rules will be forced to sell.

The KOSPI is no longer a gauge of South Korea or its financial markets. It is a bet on the global AI infrastructure buildout, packaged as a country index.

What To Watch Today

Earnings

Economy

Fed Speakers

Chair Kevin Warsh delivers the semiannual monetary policy testimony before the House Financial Services Committee at 10:00 a.m. ET, roughly 90 minutes after the CPI print. His debut testimony as Chair, with the Senate Banking hearing to follow on July 15. The Fed is not yet in its pre-FOMC blackout.

Market Trading Update

Yesterday, I discussed the technical backdrop coming into this trading week and published a piece on why spotting market bubbles is nearly impossible in real time. If you didn't read it, I want to recap on it today, as it is important given some of the prognostications running through the media, and there is one image that keeps landing in my inbox. It’s the AI bubble analog: today’s Nasdaq laid on top of the 1998 to 2001 Nasdaq, scaled so the two curves march up the page together. The caption always reads some version of “deja vu.” Look at it for three seconds, and the conclusion writes itself.

Here’s the problem with that chart. It’s a magic trick built from two y-axes. The left axis runs the modern Nasdaq from 10,000 to 26,000. The right axis runs the old one from 1,000 to 5,000. Stretch and squeeze the scales until the curves kiss, and any two rising markets will look like twins. Shape is not substance.

The differences from 1999 are real, and they matter. In March 2000, dozens of marquee Nasdaq names had no earnings, no cash flow, and a business model built on burning venture money to buy eyeballs. Pets.com had about nine months of cash in the tank when it went public. Cisco, the most valuable company in the world at the peak, traded north of 100 times trailing earnings. That was a market priced on stories.

Today’s leaders are a different animal. Nvidia, Microsoft, Alphabet, and Meta generate enormous free cash flow. Nvidia alone booked tens of billions in operating profit last quarter. The technology is REAL, and so are the profits underneath the biggest names. A bubble built on hope pops one way. A bubble built on real but over-extrapolated earnings pops another. That distinction is the whole ballgame for how much damage a reset actually does.

Read that scorecard the right way. It’s not a green light, and it’s not 1999 wearing a costume. It’s a stretched market with one dominant story and severe concentration, sitting atop profitability, policy, and retail behavior that are all in better shape than they were at the last comparable top. The piece that worries me more than the headline multiple is that concentration. When a handful of names drive most of the index return, you don’t own a diversified portfolio anymore.

Bubbles, real or imagined, create a behavioral problem more than a portfolio problem. Investors flip from all-in to all-out on the week’s headlines, and both extremes are usually wrong. Stocks aren’t a light switch. The decision is rarely between fully invested and fully in cash, so stop framing it that way.

Four rules have carried through every prior cycle.

Stay invested in a diversified mix you can defend in any tape.

Trim what’s run, add to what hasn’t.

Hold meaningful positions in assets that behave differently from the popular trade, including bonds, value stocks, and, most importantly, cash, which gives you an opportunity.

Above all, define in advance what would force you to reduce risk, and write it down.

I’ve argued for a while that bonds remain the best stabilizer for most investors, because in a true unwind, when growth and inflation expectations fall together, that negative correlation with stocks tends to reassert itself.

You don’t need to know when the music stops. You need to know what your book looks like when it does. That’s the question to answer this week, well before it turns urgent.

Breadth Improves Post Quarter End

The Heat Map below, courtesy of FinViz, shows that last week was very mixed, with much divergence within sectors. For instance, in the communications sector, Meta was up double digits while Google fell by 2.5%. Similarly, NVDA and AVGO led the semiconductor sector higher by over 5%, while many of the recent chip outperformers, such as MU and INTC, performed poorly. As a result, the market's breadth improved, with recent outperformers now underperforming and vice versa.

The second graphic from our soon-to-be-released new version of SimpleVisor shows that the sectors are clustered around fair value. Our new dispersion index, which measures breadth, is relatively low, signaling a healthy market. However, while the sectors show lower dispersion relative to each other, there is still considerable dispersion within some sectors.

The third graphic shows that the factors are even more clustered, again signaling that market breadth has improved significantly. Of the 23 factors, 20 have relative scores within ±0.20 of fair value.

Spotting Market Bubbles: Why History Says Its Nearly Impossible

If you knew you were standing inside a stock market bubble, you wouldn’t be standing in it for long. You’d sell. So would I, and so would everyone reading this. And if spotting market bubbles was something everyone could do in real time, the bubble couldn’t form in the first place. That paradox is why spotting market bubbles is one of the hardest jobs in finance, and why bubbles look painfully obvious only after the fact.

Market bubbles are not a modern invention. They’ve been a recurring feature of financial life for almost 400 years, ever since the first organized stock exchange opened in Amsterdam in the early 1600s.

The Dutch Tulip Mania of 1636 to 1637 is the textbook case. Tulip bulb prices in the Netherlands soared roughly twentyfold in a few months, then collapsed by about 99% in May 1637. Less than a century later, the South Sea Bubble of 1720 took shares of the South Sea Company from £128 in January to £1,050 in June before collapsing back to near the starting price by year-end. Isaac Newton, often cited as the smartest man of his era, lost a fortune in that one. He’s reputed to have said: “I can calculate the motion of the heavenly bodies, but not the madness of crowds.”

The 20th century gave us bigger versions of the same story. The Roaring Twenties ended with the 1929 crash and a peak-to-trough Dow drawdown of nearly 89% by 1932. Japan’s late-1980s asset bubble carried the Nikkei 225 to 38,915 on December 29, 1989, and triggered a collapse that eventually took the index down more than 80%, with the post-bubble low not arriving until October 2008, nearly 19 years after the peak. Then came the dot-com bubble. Between January 1995 and March 10, 2000, the Nasdaq Composite rose roughly 572% to a peak of 5,048.62. It then fell 78% by October 2002, and didn’t recover its 2000 high until April 2015.

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Spotting Market Bubbles: Why History Says It’s Nearly Impossible

Lance Roberts — Mon, 13 Jul 2026 09:48:00 +0000

If you knew you were standing inside a stock market bubble, you wouldn't be standing in it for long. You'd sell. So would I, and so would everyone reading this. And if spotting market bubbles was something everyone could do in real time, the bubble couldn't form in the first place. That paradox is why spotting market bubbles is one of the hardest jobs in finance, and why bubbles look painfully obvious only after the fact.

Market bubbles are not a modern invention. They've been a recurring feature of financial life for almost 400 years, ever since the first organized stock exchange opened in Amsterdam in the early 1600s.

The Dutch Tulip Mania of 1636 to 1637 is the textbook case. Tulip bulb prices in the Netherlands soared roughly twentyfold in a few months, then collapsed by about 99% in May 1637. Less than a century later, the South Sea Bubble of 1720 took shares of the South Sea Company from £128 in January to £1,050 in June before collapsing back to near the starting price by year-end. Isaac Newton, often cited as the smartest man of his era, lost a fortune in that one. He's reputed to have said: "I can calculate the motion of the heavenly bodies, but not the madness of crowds."

The 20th century gave us bigger versions of the same story. The Roaring Twenties ended with the 1929 crash and a peak-to-trough Dow drawdown of nearly 89% by 1932. Japan's late-1980s asset bubble carried the Nikkei 225 to 38,915 on December 29, 1989, and triggered a collapse that eventually took the index down more than 80%, with the post-bubble low not arriving until October 2008, nearly 19 years after the peak. Then came the dot-com bubble. Between January 1995 and March 10, 2000, the Nasdaq Composite rose roughly 572% to a peak of 5,048.62. It then fell 78% by October 2002, and didn't recover its 2000 high until April 2015.

The 2008 housing-and-credit bubble ended differently. Instead of a single speculative asset, the bubble formed in mortgage credit and spread across the entire global banking system. The S&P 500 lost 57% from its peak to its trough. None of these episodes looked the same on the way up. Yet all of them look identical on the way down. This is why spotting market bubbles is always a function of hindsight.

Notice in the chart above. The drawdowns from the four largest equity bubbles ranged from 57% to 99%. None of them recovered quickly. The Nasdaq took 15 years. The Nikkei took 34 years to finally reclaim its 1989 peak, hitting it in February 2024, before pushing on to fresh all-time highs since. The damage from a real bubble isn't measured in months. It's often measured in lost decades.

Why Spotting Market Bubbles Is Mostly Hindsight

As stated above, spotting market bubbles in advance is often futile. Just because assets sport high prices, valuations, or any other metric you choose, those alone do not necessarily define a bubble. A good example of the futility of spotting market bubbles in advance was in 1996 when Alan Greenspan warned of "irrational exuberance." Yes, prices were elevated, sentiment was extremely bullish, and the Nasdaq then tripled over the next three and a half years before peaking. Anyone who sold on that warning missed an enormous gain before the eventual crash. That's the trap.

Owen Lamont, a portfolio manager at Acadian Asset Management who has spent years studying market extremes, put it bluntly. He once joked that a bubble is just "when I think the stock market is overpriced and then it doubles." That's not really a joke. It captures the practical impossibility of timing a top in real time. Stanley Druckenmiller, working alongside George Soros, identified the Japanese bubble in 1988 and shorted it. The Nikkei kept ripping higher into late 1989, and Druckenmiller eventually said his lesson was simple." Valuation is not a catalyst."

Bubbles also sustain themselves through narrative, not arithmetic. In 1999, the story was that the internet had repealed the rules of economic gravity. Cisco Systems, the world's most valuable company at its peak, traded at a trailing P/E ratio above 100. In 1989, the story was that Japan Inc. was unstoppable. In 2007, the story was that housing prices would never fall nationally. Each story was wrong, but each story sounded reasonable at the time, especially because each story had real evidence supporting it. The internet did transform commerce. Japan was a manufacturing powerhouse. Housing prices had not, in fact, fallen nationally for decades. The bubble forms when investors take a real trend and extrapolate it past any reasonable mean reversion.

The Four Horsemen Investors Should Watch

So, with that said, if high prices or valuations alone don't make a bubble, what does? Several decades of academic and practitioner research point to a consistent checklist. Lamont calls them the four horsemen, and they are essentially what you would expect.

High prices, measured by valuation multiples that significantly exceed long-term averages.

High volatility. Bubbles don't drift higher quietly. They lurch up and down with bigger and bigger swings.

High trading volume, particularly among retail and speculative accounts that were previously inactive.

The spread of "bubble beliefs," the idea that this time is different and traditional valuation rules no longer apply.

However, for me, I would include a fifth indicator that's saved me more than once. It's defensiveness. When the cheerleaders of an asset stop selling its merits and start attacking the people who question it, the bubble has gone parabolic. We saw it in late-1999 internet stocks. We saw it again at the 2021 SPAC mania and the Bitcoin peak. And we saw it most recently in the 2025 precious metals run.

When I published my critique of the commodity supercycle and dollar-debasement thesis last year, the response from precious metals advocates wasn't a counterargument backed by data. It was dismissal and accusations of being on the wrong side of history. Silver then rallied roughly 135% on the year before suffering its biggest single-day drop since the 1980s in late January 2026. Gold knocked more than 10% off its peak in the same window. When debate stops, and tribal loyalty takes over, the top is usually close.

How the Current Setup Compares to 1999

Naturally, the question is whether we are currently "spotting a market bubble"? The honest answer is that some signals are flashing yellow. Others aren't.

The yellow signals are real. The S&P 500's cyclically adjusted P/E sits within striking distance of the all-time high set in December 1999. Concentration risk is severe. The top 10 stocks now make up a larger share of the S&P 500 than tech, media, and telecom did at the March 2000 peak. Performance for AI infrastructure leaders has gone parabolic. A normalization of multiples back toward the long-term average would, by itself, deliver a market drawdown of 30% or more even without a recession.

However, the differences from 1999 are real and matter. In March 2000, dozens of marquee Nasdaq names had no earnings, no cash flow, and business models built on burning venture capital to acquire eyeballs. Today's leaders, meaning Nvidia, Microsoft, Alphabet, and Meta, throw off enormous free cash flow. Pets.com had 9 months of cash left when it went public. Nvidia generated tens of billions in operating profit last quarter. That isn't a small distinction. A bubble built on hopes and venture capital pops differently than one built on real, but extrapolated, earnings power.

The table below puts the comparison on a single page. Some indicators are eerily similar. Some are actually worse today. And a few key fundamentals are meaningfully better.

Read the verdict column carefully. Out of 13 indicators, four flash similar or worse than 2000, six look genuinely better, and three sit on the watch list. That's not a green light. It's also not 1999 with a new ticker symbol. The honest read is that we have a stretched market with a single dominant narrative and severe concentration, but with profitability, monetary policy, and retail behavior in better shape than they were at the last comparable top.

The piece that worries me more than the headline P/E is concentration. When the S&P 500 owes most of its return to a handful of stocks, you don't actually own a diversified U.S. equity portfolio. You own a thematic AI bet dressed as an index fund. That's the exposure most readers should be measuring carefully right now.

How to Stay Invested Without Catching a Falling Knife

Bubbles, real or imagined, create a behavioral problem more than a portfolio problem. The behavioral problem is that investors flip from "all in" to "all out" based on the week's headlines. Both of those positions are usually wrong. Stocks aren't a light switch. The decision is rarely between fully invested and fully in cash.

What's actually worked through every prior bubble cycle is straightforward.

Stay invested in a diversified mix you can defend in any tape.

Trim what's run, add to what hasn't.

Hold meaningful positions in assets that behave differently from the popular trade, including bonds, value stocks, and, most importantly, cash, which gives you an opportunity.

Above all, define in advance what would force you to reduce risk, and write it down.

I've been arguing for some time now that bonds remain the best portfolio stabilizer for most investors, even after the 2022 drawdown. In a real equity unwind, bonds historically offset stock losses through the duration trade as the Fed cuts in response. That's the relationship that briefly broke down in 2022 because both stocks and bonds were repricing higher inflation at the same time. In a true bubble pop scenario, when growth and inflation expectations both collapse, the negative correlation tends to reassert itself.

The other rule is worth repeating. Rebalancing is not market timing. Selling some of your winners and buying some of your laggards forces you to do something contrarian on a calendar, not on a hunch. Investors who rebalanced annually from 2000 to 2002 still suffered, but suffered far less than those who rode the Nasdaq concentration into the abyss.

Free Resource: If you want the full framework we use to stress-test client portfolios for concentration risk, download our RIA Portfolio Risk Guide. It walks through the same checks our team runs every quarter.

The Signals That Mark the End

What actually triggers the unwind, in past bubbles, is rarely the thing analysts spend the most time worrying about. The Fed didn't pop the Nasdaq with the warnings of 1996. The Fed popped it with the 1999 and 2000 rate hikes. The Bank of Japan popped its bubble by raising the discount rate from 2.5% to 4.25% in late 1989. In 2007, a small wave of subprime mortgage delinquencies sparked the contagion. The catalyst is usually a tightening of liquidity, not a change in the narrative.

Several signs tend to cluster near the top:

First, a flood of new stock issuance. SPACs in 2021. Internet IPOs in 1999 and early 2000. When the supply of speculative paper finally meets demand, prices roll over. Lamont himself has flagged issuance as the single signal he's watching most closely right now. With multiple AI-era giants reportedly preparing to go public, that signal is worth tracking week to week.

Second, a shift from "buy the dip" to "buy the rip." Healthy bull markets see investors add on weakness. Late-stage bubbles see investors pile in on strength because they're afraid of being left behind. That FOMO behavior is the textbook performance-chasing pattern.

Third, mainstream financial coverage that stops debating valuation entirely. When the question "are we in a bubble" disappears from major publications and gets replaced by exclusive feature stories on the personal lives of momentum traders, the top is usually close. We aren't there yet, but we're closer than we were a year ago.

Fourth, a credit event. Bubbles don't usually pop from inside the asset. They pop because something in the financing chain breaks. In 2000, it was margin calls and burning cash balances. Then, in 2008, it was subprime credit. In 2021, it was the SPAC unwind that started taking down low-quality issuers.

The next pop, whenever it comes, will likely be triggered by stress somewhere in private credit, leveraged loans, or AI infrastructure financing rather than in the equity market itself.

The bottom line is that you don't need to know exactly when the music stops. You need to know what your portfolio looks like when it does. That's the question to ask yourself this week, well before the question becomes urgent.

The post Spotting Market Bubbles: Why History Says It’s Nearly Impossible appeared first on RIA.