Motion Sickness is Setting In…
Executive Summary:
Macro Crosscurrents and Market Dispersion: Daily market volatility is masking historical underlying dispersion, with the average S&P 500 stock moving in the opposite direction of the headline index on 52 of the first 135 trading days this year. The broader S&P 500 remains trapped in a 7,400–7,600 range as interest rates climb, highlighted by the 10-year Treasury yield closing last week at 4.70% and the 2-year yield reaching 4.31%. This interest rate pressure is already impacting borrowing-sensitive sectors like autos and homebuilders, while driving an 80% market-implied probability of a Federal Reserve rate hike by mid-September.
AI Capex Scrutiny and Earnings Accounting: Second-quarter earnings are delivering a strong fundamental beat with a blended growth rate of +25.9%, yet the S&P 500 has traded sideways since mid-May as investors shift their focus from headline EPS beats toward forward guidance and capital allocation. Heavy AI-related capital spending—such as Alphabet raising its 2026 capex guidance to $200 billion—is facing rising scrutiny due to an accounting timing mismatch between immediate supplier revenue recognition and deferred buyer depreciation. This pushback is simultaneously emerging in corporate credit markets, where bond buyers are rejecting new hyperscaler debt issuance and demanding substantially higher yields to fund AI infrastructure.
Positioning Reset and Bullish Tactical Outlook: Investor positioning and sentiment have experienced a measurable reset during the recent consolidation, leaving the Mag 7 trading at its cheapest forward P/E multiple since the 2022 rate-hiking cycle. While systematic CTA positioning is not yet washed out—still holding roughly $120 billion in long global equity exposure—critical medium-term sell triggers sit just 2.9% below Friday's close for the S&P 500 and 2.0% for the Nasdaq 100. Despite structural risks around tightening global liquidity and emerging semiconductor competition, the overall tactical outlook remains bullish across gold, bonds, and equities as internal market rotation cleanses excess and reallocates capital to overlooked opportunities.
Full Commentary:
Bombing on / bombing off. Strait open / Strait closed. Hyperscaler capex expanding / buy the S&P 493; capex contracting / retreat to the Mag 7. Fed rate hikes back on the table / Fed on hold. Inflation re-accelerating / inflation cooling. Markets are violently gyrating on a daily basis, behaving as though they are governed by a binary toggle switch that flips with whatever narrative dominates the morning headlines. Frankly, it’s exhausting and nauseating all at once – and in my conversations with money managers across the industry, that sentiment is near-universal.
What is driving this feeling of whiplash? Beneath the macro headlines, the real issue is extreme dispersion. At the individual stock level, the underlying market is completely detached from the headline index. According to data highlighted by Barron’s, the average stock in the S&P 500 moved in the opposite direction of the index on 52 of the first 135 trading days so far this year—meaning we regularly see net decliners on index-up days and net advancers on index-down days.
To put that internal churn into perspective: through the first 135 trading days of 2025, that divergence occurred just 24 times. Throughout the entire decade of the 2010s, that number never once exceeded 15. We are navigating a market where a seemingly placid surface index masks violent, uncorrelated crosscurrents underneath.
The big news over the weekend, which prompted a renewed risk-on atmosphere as futures rolled into Monday morning’s open, is the cessation of tensions in this on-again/off-again war – President Trump again doing an about-face in shifting from “massive attack” to allowing “some space” for diplomacy. Brent crude has responded in kind by slumping -7% to $90 per barrel. The decline in oil prices has momentarily arrested the rise in interest rates, which moved up to the highs of the year to close out last week (4.70% on the 10-year T-note). While it’s a welcome relief to see oil prices reacting to the latest headline, the reality is that this war lacks any amicable off-ramps for either side. As such, we have chokepoints becoming a visible supply constraint for crude yet again – this time with even weaker global inventory and storage levels. Shipping traffic in the Strait of Hormuz has receded to a two-month low. The Iranian-backed Houthi militia group has threatened to blockade Saudi ships taking an alternate route in the Red Sea through the Bab al-Mandeb Strait, forcing shippers to now journey to Asia via the Suez Canal, which means a tanker will spend three more weeks in transit because they must sail around Africa.
As I type, equity markets have faded the entirety of the ‘peace deal’ rally, with the S&P 500 giving back 70 points from its opening print at 7,464 to sit at 7,395 (we’ll see where it closes and what happens the rest of the week). As for last week, the stock market retreated as oil prices and Treasury yields remained on their upward trajectory. The Nasdaq tumbled to below the June 9th low and is now at risk of a breakdown. Alphabet (parent company of Google, -7.8% last week) and Tesla (-17.8%) weighed heavily on the tape as both confirmed they are burning through cash as they spend heavily on AI supremacy, while AI hardware stocks also sold off. The S&P 500 has slipped below its 50-day trendline, but the ongoing rotation within the broad equity market has staved off any notable technical damage. It’s the Tech sector that looks most vulnerable, which is worrisome in that this is the group that has led this market both up and down, and the Nasdaq 100 might be breaking to the downside. One relationship I continue to focus on is the short-term divergence between Mag 7 capex and the performance of the SOX Index. The gap has become unusually wide, which suggests that either semiconductor equities have become too pessimistic, or expectations for future AI spending remain too optimistic.
Nevertheless, those investors focused on the broad market can look at an S&P 500 trapped in a relatively tight 7,400–7,600 range (currently sitting at the lower end). Aside from a few brief overshoots and undershoots, price has largely respected these levels. I’m not getting too excited one way or the other until we see a decisive breakout in either direction.
Aside from tape bombs on the Iran war front, investor attention will be focused on two things this week: the Fed meeting that concludes on Wednesday, and corporate earnings with roughly 20% of the S&P 500 reporting this week. I’ll share some thoughts on each, starting with the former.
The odds of the Fed raising its short-term rate target on Wednesday have crept up to around 36% from 13% a week earlier, according to the CME FedWatch site. But a quarter-point increase by the Fed’s mid-September confab now has about an 80% chance, given that inflation remains above the Fed’s +2.0% target and there has been a renewed surge in oil prices. The futures market has two hikes priced in overall, but the 2-year Treasury yield at 4.31% (roughly 70 bps above the midpoint of the Fed Funds range of 3.50–3.75%) suggests the Fed will reverse last year’s 3 rate cuts.
What is clear is that the market has already done a lot of the heavy lifting for the new Fed Chair that seems adamant about defending the Fed’s inflation credibility. Without the Fed having yet to lift a finger, the spike in market interest rates is already unleashing its damage in the corners of the stock market most sensitive to shifts in Treasury yields and the attendant consequences on borrowing costs: from the nearby springtime highs, autos are down -27%, the homebuilders have peeled back -16%, retailing stocks have slid -12%, and now consumer finance stocks have fallen -7% just in the past ten days. So far, investors don’t seem to be bothered by what this could be signaling since it’s all about Tech, but the equity market action is pointing in the direction of escalating consumer strains. To be fair, the U.S. consumer only has 14% representation in the S&P 500, but as for the economy, well, it retains its dominance with a 68% share of GDP.
As for earnings, we have four bellwether earnings reports on deck this week: Apple, Microsoft, Meta, and Amazon, where we shall see whether we remain in this new regime where investors give little reaction to the headline bottom line and top line numbers and more towards guidance and any further capex buildup, which is no longer being rewarded positively given all the concerns now surrounding how the investment binge is posing a risk to future ROI estimates. Beyond these four companies we’ll get results from 170 other companies this week, many of which are included in the earnings calendar graphic below.
So far, with 27% of S&P 500 companies reporting, the second-quarter earnings season has been an undeniable fundamental success. Companies are beating estimates by an average of +12.6% (even after stripping out Alphabet’s $98 billion one-time GAAP windfall from its holdings in SpaceX and Anthropic). Blended Q2 earnings growth sits at an extraordinary +25.9% on +13.2% revenue growth, according to FactSet—both figures dismantling their respective 5- and 10-year historical averages (+15.2% / +11.2% and +8.8% / +6.6%). Yet, the S&P 500 has remained flat since mid-May.
This sideways price action occurs against an unprecedented backdrop of upward revisions. Consensus Q2 growth expectations have surged from +14% at the start of the year, to +22% in June, to +26% today. This upward drift completely subverts the traditional Wall Street playbook, where analysts typically set inflated placeholder estimates only to slash them as reporting dates approach to manufacture an easy beat. Here, the estimates are rising into the print. Extrapolating the magnitude of current beats, Evercore ISI projects the S&P 500 could close the quarter with nearly 28% earnings growth – a pace roughly four times the post-WWII average. Despite this historical fundamental backdrop, the index has gained just ~8% year-to-date.
While a valuation drop from 22x forward earnings at the start of the year down to 20x today is a welcomed change for those investors with a valuation bias, it raises a critical institutional question: Is the market beginning to discount overall earnings quality?
Alphabet’s recent post-earnings price action serves as Exhibit A. Despite delivering exceptional top- and bottom-line growth driven by accelerating cloud momentum, the stock dropped -7%. There were a couple of blemishes analysts latched onto in this report, such as operating margins declining from 41.7% to 32.6% (although this can be explained away by an intended inventory for its custom-designed AI chips) and free cash flow tipping into negative territory. But I’d argue the main culprit was capital allocation: management raised 2026 capex guidance by $15 billion to a midpoint of $200 billion, and warned that spending will scale "significantly" higher next year.
What we are seeing evolve in real-time is the generative AI arms race effectively transforming how we value the world's largest tech conglomerates. Today, Alphabet operates as a hybrid entity: equal parts cash-flow juggernaut and venture-stage AI startup. Valuing the mature search and advertising business is straightforward; valuing an R&D-heavy AI venture with uncertain terminal margins is exceptionally difficult. When the cash flows of the legacy juggernaut are systematically redirected to fund an open-ended capital expenditure cycle, valuation multiples compress and stock price volatility increases – even when market participants trust management's long-term stewardship.
Beneath this dynamic lies a critical accounting distortion that is currently inflating aggregate S&P 500 earnings: the timing mismatch between capital expenditure and depreciation. When an infrastructure supplier like Nvidia books a multi-billion-dollar chip sale, the revenue and profit flow immediately to its income statement. However, when the buyers – hyperscalers like Alphabet, Amazon, Microsoft, Meta, and Oracle – deploy that capital, the expense does not hit their P&L immediately. Those purchases are capitalized on the balance sheet and depreciated over an assumed useful life. Crucially, for hardware purchased but not yet "plugged in" and placed into service, that depreciation expense is entirely deferred.
The net result is that aggregate index earnings – the "E" in the P/E ratio – are currently being flattered by corporate accounting protocols, creating a structural echo of the late-1990s Tech buildout. The cash is leaving the system today, but the income statement recognition is pushed years into the future.
As market participants recognize that they are underwriting long-lived, high-depreciation assets, skepticism is building around the true earnings power of the index. This shift in sentiment explains why beating quarterly consensus estimates has lost its protective power. As demonstrated by recent price action in Alphabet, Intel, and American Express, forward guidance and capital expenditure discipline now dictate market performance. Intel provided a stark reminder: a strong headline print sent shares higher by 12% in after-hours trading, but once the market digested a $2 billion increase in capex plans (to $20 billion) alongside soft forward guidance, the stock reversed course to finish down -7.9% by the closing bell. The market is no longer paying a premium for capital spending; it is demanding a clear path to return on investment.
This is also starting to spill over into the credit markets, where seasoned traders and investors in the space are pushing back against the tsunami of financing hitting the markets while the appetite to own such debt has dried up. The below tweet from Bill Fleckenstein provides some very valuable color for a corporate debt market that is no longer willing to blindly provide credit to MegaCap Tech based on past pedigree:
Alright, enough with the mumbo jumbo word salad; some feedback from recent commentaries is that I’m missing the mark on clarity and simplicity. For that, I am sorry; this industry is great at throwing out an alphabet soup of acronyms, which even makes my head spin from time to time. Looks like I’ve fallen subject to using a lot of words without explaining a thing, thereby doing a disservice to my readers by not simplifying the complex into a digestible manner.
With that prologue out of the way, let's get into some closing thoughts and takeaways on markets. I’m taking my cues from the market at this juncture where it looks like most markets have repriced for the elevated uncertainty around a lot of important macro factors:
Central Bank Tightening is Priced In: Most asset classes—including gold, rates, the U.S. dollar, and equities—have already adjusted to a "higher-for-longer" tightening bias. A dovish pivot would trigger a powerful risk-on re-rating, provided inflation cools without breaking the labor market. Conversely, any rate hike that sacrifices growth to squash sticky inflation remains a primary risk-off catalyst.
Global Liquidity is Structurally Tightening: This risk is steadily climbing the priority list. Between the federal government running $2 trillion annual deficits and AI capex tracking toward $750 billion (increasingly funded via external capital rather than organic cash flow), the market faces a massive supply of new financing that will continuously absorb excess liquidity.
Geopolitical Risk is Contained: Markets have largely moved past the immediate disruptions of the Iran conflict. While unhindered shipping routes would provide welcomed supply-chain relief, regional workarounds and alternative sourcing have successfully capped the economic pain point for most global markets.
Fundamental Growth Remains Resilient: Corporate profits, economic growth, and the labor market remain remarkably resilient. While it's hard to envision a meaningful improvement in any of these variables (beyond some modest wiggles), I also don’t see them deteriorating meaningfully either. Sure, the rate of change on earnings growth is likely set to decelerate in the next quarter or two, but that shouldn’t come as a surprise to markets.
Lastly, Sentiment & Positioning: Both have gone through a reasonable reset over the past 2-months of chop. No, it's not the washout or capitulation panic that marks a V bottom, but for this market it’s measurable. Especially in the momentum factor and Technology sector where investors have cut exposure, positioning has normalized and stress levels remain elevated, leaving parts of the sector looking considerably cleaner than they did just a few weeks ago. But just as the tactical backdrop begins to improve, a new structural risk is emerging. China's rapidly advancing semiconductor ecosystem could become an increasingly important challenge for the AI supply chain. The following chart plots the deleveraging that has occurred in semiconductors and the Mag7.
Speaking of the Mag7, the group is trading at its cheapest forward P/E since the lows during the aggressive rate hiking cycle back in 2022.
One last point on positioning, where the systematic community has been quiet for months, but both the SPX and NDX have slipped below their short-term CTA trigger levels. CTAs still hold around $120bn of long global equity exposure (49th percentile), meaning positioning is far from washed out. The more important medium-term sell triggers lie 2.9% (SPX), 2.0% (NDX), and 5.4% (RTY) below Friday's close, levels that could unleash significantly larger systematic selling, according to Goldman Sachs derivatives desk.
Bottom line, I continue to lean in the bullish camp for most asset classes. I think gold at $4,050/oz has carved out a bottom and has been materially de-risked from its all-time spike high north of $5,500/oz at the end of January. I think bonds offer a favorable risk/reward at current interest rate levels, which are near the highs of the last three years. As for equities, I think the rotation within the equity market is healthy. Excesses are getting cleansed while capital reallocates to areas of the market that have been overlooked or are delivering results worthy of attracting new investment. In the meantime, the major averages are seeing a little air escape out of the balloon without it popping.
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