Welcome to MktContext. We cut through noise with thoughtful macroeconomic commentary and tactical market research. Written weekly for wealth managers and active investors to navigate today’s stock markets.

Current market timer: Bearish

In last week’s letter, titled “AI Bubble Bursting,” we identified a topping pattern in the S&P 500 and Nasdaq. This week, the indexes fell sharply, along with AI favorites like semiconductors and data center stocks.

We are witnessing a dramatic reversal as crowded tech positions are sold and the market braces for recession. The Nasdaq is down 8% from the peak. Semiconductors are down 27%.

But while tech giants struggle, the weakness has not spread to the rest of the market. Energy, Utilities, Consumer Staples, Consumer Discretionary, Healthcare, Financials, and Real Estate are all rebounding. The crosscurrents have never been stronger.

This week’s selloff was triggered by concerns over Meta’s capital spending, which turned free cash flow negative. Next week’s Amazon, Google, and Microsoft earnings could bring more bad news.

Is the selloff over? Or is there more to come? We discuss in today’s letter…

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Welcome to MktContext. We cut through noise with thoughtful macroeconomic commentary and tactical market research. Written weekly for wealth managers and active investors to navigate today’s stock markets.

Current market timer: PAUSE

Our worst fears have been confirmed.

The market failed to sustain its break above all-time highs. The broader index is “catching down” to weak breadth as the last remaining leaders fall.

The Nasdaq is unwinding from overcrowded positioning, and spiking volatility is triggering a cascade of selling. In times like these, portfolio protection is essential.

The bond market is also signaling a regime change: 10-year yields fell to a three-week low of 5%. Yet, instead of rallying like they should, stock indexes fell sharply. Nasdaq lost almost 6% on the week.

In this report, we examine whether the AI bubble is about to burst…

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Welcome to MktContext. We cut through noise with thoughtful macroeconomic commentary and tactical market research. Written weekly for wealth managers and active investors to navigate today’s stock markets.

Current stock market timer: BULLISH

The Utilities (RSP, XLU) and Retailers (XRT, ANF) trades given last week are in the money. These are rate-sensitive stocks that were leading the rebound, ahead of interest rates cooling.

Utilities were helped by timely news announcements from Vistra and Constellation, that saw their stocks jump as much as 12% in one day. We’ve previously written about the need for data centers to bring their own power. Nuclear power is the future; we’re just along for the ride.

New all-time highs

The SPX briefly touched a new record high for the first time since August 13 before quickly pulling back. There were similar failed breakouts in the Nasdaq and Mag 7.

Beneath the calm surface, the median stock is already down 17% from its highs in a silent bear market.

The macro tide is turning. For the past week, we’ve called for a peak in interest rates, arguing that global bond markets were oversold and ripe for a relief rally. Markets finally validated that view, with the 10-year rate retreating after hitting a 24-year high.

Meanwhile, oil prices cooled despite simmering Middle East tensions, aided by export flows returning to pre-war levels and renewed diplomacy.

While the broader market catches its breath, this shift in macro is triggering a massive rotation under the hood.

OpenAI revenue miss

On Thursday, OpenAI reportedly told investors its revenues would hit $50B rather than $70B — a $20B shortfall that shocked the AI complex and triggered a sharp selloff in chips and data center stocks.

Where did the $20B go? It comes down to accounting methodology. Comparing OpenAI’s financials directly to Anthropic's yielded the inflated $70 billion consensus.

Let’s get into the weeds of the accounting:

• Customer pays $100 to a cloud provider to use ChatGPT. The cloud provider collects $30 as their cut and the rest goes to OpenAI.

• Per accounting rules, OpenAI has two choices: Report $100 in revenues and $30 in expenses, netting $70 in gross profits.

• Or, simply report $70 in net revenues and no expenses.

• Both methods result in $70 of gross profit, but the former makes revenues look a bit larger.

Apparently, Anthropic chose the first method, while OpenAI chose the second. That’s why comparing the two companies’ revenues is apples-to-oranges. Financial outlets framed the $20B as a “revenue shortfall” or missed target.

Does it change the business? No. OpenAI’s net revenues still grew over 70% in recent months. AI demand is still healthier than ever.

Nonetheless, it shows investors are already jittery; with token costs falling rapidly, Anthropic “pacing the frontier”, and both OpenAI and Anthropic delaying IPOs. There is tangible fear that the AI bubble is about to burst. However, today is not that day.

French bonds?

After surging from 4% to 5%, the French 10-year interest rate is stabilizing. Populist party leader Marine Le Pen vowed to cut France’s budget deficit, reassuring creditors on the country’s fiscal position.

Why care about French bonds? Because international yields are linked. The relief pulled down US rates and sparked a rally in global risk assets. For the past few weeks, the market has been stuck in a cross-border bond liquidation event that bled into equity markets (or at least, the rate-sensitive sectors).

We can’t say for sure Europe’s issues are over. But we do know that markets immediately jumped to worst-case conclusions, e.g. a Euro area contagion (Italian government default swaps shown below). That reads to us as a bit of an overreaction.

Bringing it back to the US, there are signs that yields are topping. The 10-year is struggling to hold above the 5.3% level, while the 2-year is cooling off dramatically. Odds of an October rate hike have pared back from nosebleed levels.

This should bode well for our rate-sensitive trades like Small caps, Utilities, and Consumers. After forming bottoming patterns last week, they are following through this week. That’s exactly what we want to see to confirm that a major trend change is underway.

Tech sector crowded

Technology was the only positive sector in September. Without it, the index would have fallen 6%. Yet as the SPX and QQQ hit record highs, the median stock is down 17% from the highs.

That’s what narrow breadth looks like: extremely few individual stocks participating in the index move. And yet the index keeps rising, driven by only a handful of heavily weighted, mega-cap stocks.

What caused this? As we explained here, interest rates rose sharply as the market adjusted its outlook for more Fed hikes. Investors fled to the stocks that historically were resilient to interest rates, which happened to be mostly tech: Mag 7, AI, and chip stocks.

As a result, these stocks are heavily crowded:

If rising rates drove capital out of rate-sensitives and into tech, then logically, falling rates should reverse the rotation. The OpenAI “revenue miss” provided the catalyst to unwind some of this crowded positioning:

To reiterate, lower yields could mean Nasdaq, chips, and Mag 7 decline while breadth rebounds from extremely oversold conditions. Conversely, the equal-weight SPX and Russell 2000 small caps (representing non-tech stocks) are bouncing off their 200-day moving averages and forming reversal patterns.

Repairing bad breadth

We established that market breadth is weak — despite index highs, the vast majority of stocks have not participated in the rally. In fact, over half the index is in a technical bear market.

There are two ways bad breadth can resolve:

1. Interest rates and oil prices fall. The rally “broadens out” to other sectors, with the laggards catching up to the index.

2. Macro pressure becomes unbearable. Tech stocks stall out and catch down to the rest of the market.

We lean more toward the first camp: given easing interest rates, the strong economy, and strong earnings, the non-tech stocks should be able to recover back to highs.

A few of our oversold indicators are starting to fire as well. Historically, these were levels where rebounds often start:

While narrow breadth is typically a signal of underlying weakness, that ceases to be true when SPX stays near highs. Here is a study of such prior instances. Contrary to what one might believe, the broader market kept rallying.

Technical analysis

Consistent with the “partial” bear market, investor positioning is at moderate levels. A reading of 86.8 means there’s still room for people to get long and bid up the market. That’s potentially bullish.

The Skew index is climbing again, reflecting nervousness among investors. Skew measures the cost of downside Put Option protection. Readings above 150 typically signal a stalling market or looming pullback.

Our primary concern is whether Nasdaq and SPX can stay above the new highs after having broken out. The next few weeks will be an important test. It is already somewhat concerning that SPX instantly fell back below the breakout level.

In recent years, when the indexes have failed to sustain an all-time high breakout, it has resulted in a longer-lasting bear market. Some examples:

Stocks to watch

Continuing from last week’s theme of the resilient consumer, we look to the travel and entertainment sector for oversold stocks. Hotel & lodging stocks have been stagnant for several months due to concerns about consumer sentiment and willingness to travel.

For several years, Airbnb (ABNB) battled slowing growth and market saturation. Rather than cut costs, management reinvested capital into international expansion, platform enhancements, and new guest experiences. These initiatives were slow to pay off, which led to a multi-year consolidative Cup & Handle pattern:

The catalyst: On August 6, the company reported robust Q2 earnings results, proving their reinvestment initiatives are paying off. They are also working together with hotels now (previously it only listed private homes). The company’s vision is to be the go-to hub for travel planning.

The stock gapped up 18% on earnings day, well above the $150 level that was resistance for several years. It recently bounced off the level and is continuing the uptrend.

We would buy on the next pullback, targeting a price of at least $220, its post-IPO high watermark. Our stop-loss goes under the $150 breakout level. This should provide a very attractive reward-to-risk ratio of about 4x.

Our portfolio

Given the crowding in tech stocks, and the potential rebound in market breadth, we are switching 30% of QQQ to IWM. Our final portfolio will be 50% SPX, 30% IWM, 20% QQQ.

As a reminder, we first switched from IWM to QQQ in early September, when tech stocks were oversold and small caps were vulnerable to interest rate hikes. This proved timely; in just one month, QQQ has outperformed IWM by 11%.

The rotation has gone too far, too fast, which is why we’re switching some back to IWM. We are betting that the rotation will reverse itself once investors become more comfortable with the current macro environment.

Meanwhile, we’re keeping our position in SPX as the interest-sensitive parts of the index should benefit from the rate normalization.

That’s all for this week!

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Disclaimer: This publication is for educational purposes only. The authors are not investment advisors and nothing here is investment advice. Always do your own due diligence.

Welcome to MktContext. We cut through noise with thoughtful macroeconomic commentary and tactical market research. Written weekly for wealth managers and active investors to navigate today’s stock markets.

Current stock market timer: BULLISH

Stocks started the week on a cautious note after Trump rebuffed a proposed peace deal with Iran, raising geopolitical tensions.

But the real news came on Friday when the September jobs report came in softer than expected, which is viewed positively for stocks because it reduces Fed rate hikes. Stocks lifted and the Nasdaq reached a new all-time high.

Semiconductor and AI-related stocks continued to lead the rally, while non-AI stocks struggled under high rates and weak breadth. But there are burgeoning signs that other sectors are starting to rebound…

Why are yields rising?

Interest rates ended the month significantly higher. The primary driver is a repricing of Fed policy. Not long ago, the market was expecting two rate cuts for 2026; now it is expecting three hikes.

The Fed has clear reasons to hike: a solid economy risks overheating, while a tight labor market threatens to spark wage-price spirals. Therefore, the Fed is hiking to cool activity before this self-reinforcing cycle becomes entrenched.

The Fed is also scarred by 2022 when they reacted too late and allowed inflation to reach 9%. Policymakers are determined not to repeat the mistake (a.k.a. “fighting the last war”). This time, they are moving aggressively to stamp out inflation before it takes root.

Exacerbating the issue, global interest rates move in tandem as nations compete for capital (investors choosing higher-yielding US bonds over German bonds, for example). Unfortunately, an oil price shock is reverberating around the world at the moment. Unlike the US, most economies struggle to absorb higher energy prices, forcing foreign central banks to raise rates in a vicious loop:

Where do rates go from here? How will it affect stocks? We discuss below…

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• Market overreaction to interest rates

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Welcome to MktContext. We cut through noise with thoughtful macroeconomic commentary and tactical market research. Written weekly for wealth managers and active investors to navigate today’s markets.

Current stock market timer: BULLISH

Our Nasdaq, semiconductor, and Mag 7 dip-buy calls were well-timed as tech stocks exploded off the lows. As we predicted, QQQ broke out of its 4-month consolidation, SOXX cleared a major downtrend line, and MAGS extended its uptrend.

But there’s a problem brewing under the surface. Outside of tech, few stocks are participating in the rally, much less achieving new highs. The 10-year interest rate continues to push above 5%, putting strain on overall stock market valuations.

Can the bull market persist under these circumstances? We answer that question inside…

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Welcome back to MktContext where we study the US economy and time the stock market.

Current stock market timer: BULLISH

Last week, we said buy the dip as interest-rate panic subsides and the SPX and Nasdaq prepare to break out of consolidation. This week offered two dip opportunities to buy: Anthropic’s pause (more below) and the Fed’s rate hike.

For months, the SPX and Nasdaq consolidated in a choppy range, weighed down by high rates and oil price fears. This week brought a capitulation and technical reversal:

Investors mistook the Fed’s rate hike as bearish. Hikes shouldn’t be feared in a growing economy, though they do confirm an underlying rotation toward high-quality companies.

As interest rates ease and September seasonality ends, the market is well-positioned to reach new highs. A new bull market has begun.

FOMC rate hike

In a unanimous decision, the Fed hiked short-term interest rates by 0.25%. With the economy and labor market resilient, they are choosing to focus on inflation which stays stubbornly above 2% (though not accelerating).

We think this is a policy mistake, as supply shocks in oil and diesel are driving current inflation. Hikes dampen economic growth rather than increase supply. But what if supply stays constrained? The Fed will keep hiking, causing real damage to the economy.

We were wrong to expect a Fed pause. Warsh noted that financial conditions remain accommodative, and they are removing “a dose” of that accommodation. Both projections and Warsh’s remarks signal further hikes ahead.

Lower- and middle-income families will face added pressure as they contend with higher gas prices, shrinking savings, and rising debt burdens.

On the bright side, the hike should help cool long-term interest rates, which had risen since June because the Fed held rates steady during the previous two meetings. In effect, the bond market did the tightening for them. This is why stocks had been languishing since June.

With the Fed actively hiking, the bond market can breathe a sigh of relief. The 10-year yield should, counterintuitively, fall. As yields fall, stocks should rebound, just as historical analogs showed:

Investors mistakenly assume Fed hikes are bearish for stocks. The important driver is economic growth and corporate earnings. Stocks can thrive alongside inflation if it boosts revenue. However, higher rates constrain valuations, requiring earnings growth to sustain the rally.

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• Rate-sensitive stocks turnaround?

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Welcome back to MktContext, where we study the US economy and time the stock market.

Current stock market timer: BULLISH

Stocks experienced another volatile week as long-term interest rates hit new highs, with the 10-year yield reaching 5% for the first time since October 2023.

Rising interest rates pressure stocks. The key question is whether rates have peaked for this cycle or will continue climbing. Today, we examine how stocks performed in similar historical setups.

Muse and Astra

The AI arms race continues with the announcements of Meta’s Muse and OpenAI’s GPT-6 Astra, both featuring notable advancements in agentic AI.

Muse is a full-fledged assistant integrated into WhatsApp, Instagram, and Facebook. Instead of just giving chatbot responses, it executes actions directly, like creating and placing shopping orders.

Astra, OpenAI’s next-gen flagship AI model, offers improved reasoning capabilities focused on multi-step execution, such as computer navigation and project management.

Earlier AI functioned like a librarian; ask and answer. Muse and Astra act as digital assistants. The shift requires significantly more compute, as agents run multi-step, iterative processes that plan, draft, self-correct, and refine before presenting results.

Higher compute usage is key to justifying ongoing AI capital expenditures. It is not enough to make smarter models. Industry growth relies on continuously increasing 1) the number of AI tasks, and 2) the complexity of tasks. This in turn incentivizes training even larger models.

The chart below shows that AI capability has increased exponentially for software programming tasks, which fuels continued AI development:

Stop advancing AI, and revenues stop growing. OpenAI becomes worthless as its spending outstrips future potential profits. So what happens when compute growth eventually hits a wall?

Eventually, the volume or complexity of AI tasks may hit diminishing returns. If a 10,000-IQ model can’t solve a problem, an 11,000-IQ model probably won’t either. Some tasks just can’t be reduced to AI.

While we remain far from this upper limit, current market valuations assume indefinite exponential growth. The AI bubble is not priced for this possibility, leaving the sector vulnerable if development slows.

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• Yields pressure stocks

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Welcome back to MktContext where we study the US economy and time the stock market.

Current stock market timer: BULLISH

A tug-of-war between equities and bonds drove sharp volatility this week.

On one side, a renewed war with Iran pushed oil prices higher, triggering a breakout in long-term interest rates. The 10-year rate surpassed 4.75% to highs not seen since 2023. High rates are a headwind for stocks.

On the other side, investors are attempting to anticipate the Fed’s next move amid limited forward guidance. While Fed officials signal dovishness, economic data contradict their messaging (more on this later).

“Recent data suggest we are finally seeing some signs of disinflation…”

“If this continues… I would be inclined to support holding the Federal Funds Rate at its current setting.”

-Fed Governor Chris Waller

Rising interest rates are a global phenomenon. Major developed nations are seeing multi-year highs (Japanese rates at 1996 highs; French rates at 2008 highs; German and Australian rates at 2011 highs). Because global interest rates move in tandem, international upward pressure is reinforcing higher US yields.

We maintain our view that the Fed will not hike in Sept nor the rest of 2026. That does not mean stocks rise in a straight line. If bond investors believe the Fed is too permissive on inflation, long-term yields will climb further, causing market volatility .

The market indecision/confusion is clearly reflected in the “spinning top” candlestick on the weekly SPX chart:

Here’s what it means for stocks…

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• No end to Iran war

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Welcome back to MktContext where we study the US economy and time the stock market.

Current stock market timer: BULLISH

This week brought strong earnings results from software leaders like Salesforce (CRM) and CrowdStrike (CRWD). The sector soared to new highs, one of the few recent bright spots in tech.

If we rewind the clock, chip stocks had been outperforming software stocks since the April 2025 “Liberation Day” lows. As the AI revolution grew, there were fears it would displace software programming (a.k.a. SaaS-pocalypse). Over a one-year period, chip stocks outperformed software by a whopping 260%:

But market narratives have a way of getting over-extrapolated. The outperformance peaked this past June, around the same time we noticed chip stocks were crashing and we Sold Marvell. As shown above, the market retraced more than half of that move as chips fell and software rose.

Recent earnings proved the “SaaS-pocalypse” fears were overblown. Revenues are growing and margins are expanding. Software companies are implementing AI (the very tech thought to obviate them) and gaining traction doing so.

So now we have come full circle. Software leaders like Microsoft, Palantir, CrowdStrike, and Palo Alto Networks have rallied sharply off their lows and now appear overbought. The retracement against chips looks overdone and could consolidate from here.

Expect software outperformance to become selective rather than broad-based, as only specific stocks break out from long consolidations. Below are three software stock picks breaking out from long consolidations and deeply oversold levels. These setups offer potential short-term trade opportunities…

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• Nvidia earnings

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Welcome back to MktContext where we study the US economy and time the stock market.

Current stock market timer: BULLISH

Stocks are retracing the early-August short squeeze. A lot of crosswinds here as the US Treasury suppresses interest rates while oil prices trudge higher. Today's post will feature a deep discussion on both.

Meanwhile, stocks remain extremely bifurcated. Chip stocks continue to struggle in post-bubble fashion. Speculative stocks like biotech and ARKK are breaking out. The rotation continues.

Many of the healthcare stock picks we gave several weeks ago are working nicely as the entire sector is lifted by a positive cancer-vaccine announcement this week. Our best pick was THC which rallied 55% on the back of strong earnings:

Iran war update

The war remains at a low simmer. The 60-day ceasefire expired with neither side attempting to extend it or resume discussions…

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Welcome back to MktContext where we study the US economy and time the stock market.

Current stock market timer: BULLISH

The Bank of Nvidia

Nvidia partnered with 6 major Wall Street banks to provide private financing for AI infrastructure. Instead of requiring tech companies to pay cash upfront to buy chips, this allows them to borrow money to buy Nvidia’s chips and build out data centers.

Banks love to finance physical assets like real estate or energy infrastructure because these assets generate income and hold collateral value. They can’t do so with chips because chips become obsolete as soon as a next generation launches.

Enter Nvidia. They are offering to cover the banks’ loan losses if the chips unexpectedly lose value, effectively guaranteeing their residual value. Nvidia’s data show that its chips not only retain usefulness longer than expected, but their rental prices are actually rising. In other words, the chips are appreciating in value, not depreciating.

Part of this stems from the ongoing shortage as AI demand outstrips supply. But in general, older chips can transitioned to inference and other workloads, where they continue to generate value for years. Nvidia is betting that older GPUs won’t suddenly become worthless when faster models are released.

As evidence, CoreWeave just announced a deal for Nvidia A100 chips. That is, a design that was introduced in 2020 will retain economic value nearly a decade later.

NVDA stock fell -2% on the news as investors feared circular financing (where suppliers lend to customers to buy their products). It invokes memories of the dot-com bust and Enron. This is the wrong way to look at it.

Cloud providers and AI labs will benefit greatly from increased access to capital. With debt, they can expand capacity faster without draining corporate reserves, thereby accelerating AI development.

For Nvidia, this unlocks new demand by helping customers secure needed funding. Previously, Nvidia would’ve had to provide loans or buy equity in the customer. Now, willing banks are stepping in, reducing strain on Nvidia’s balance sheet. It’s a win-win-win situation.

It’s not without risks, of course. If these chips fail to generate an ROI, loans will default, leaving Nvidia on the hook. It accelerates the bubble’s implosion, whenever that day comes. Things usually go wrong when leverage is involved, and a scenario of waning demand is easy to envision.

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• Iran war at an impasse

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Welcome back to MktContext where we study the US economy and time the stock market.

Current stock market timer: BULLISH

The restaurant trades we recommended just a few weeks ago are breaking out, confirming our consumer spending thesis. Bloomin’ Brands (BLMN) broke out of consolidation on strong earnings. It is up nearly +40% from our entry point.

Our second restaurant-related pick, Toast (TOST), also reported good earnings and rose 20% from our $30 breakout level:

The leader of the pack, Cheesecake Factory (CAKE), also reported good earnings and pushed to new highs:

From the earnings reports, it is evident that restaurant foot traffic and consumer spending is returning in a major way. We were able to catch the inflection before it happened.

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• Market rebound and lock-out rally

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Welcome back to MktContext where we study the US economy and time the stock market.

Current market timer: HOLD

We’ve just witnessed one of the biggest momentum unwinds in a generation, yet major indexes mask it. SPX is down just -1.5% from the highs and remains positive year-to-date.

Underneath the surface, things change dramatically. Many of the AI stocks that led the bull rally have fallen from grace. Nasdaq and chip stocks are in a substantial drawdown that wiped out tremendous wealth for institutional and retail investors alike.

Our switch to RSP (equal-weighted SPX) in early July was well timed. RSP has continued to make new highs even as QQQ, SPX, and now IWM rolled over. It speaks to the rotation progression and change of leadership. But if the SPX and QQQ regain leadership, we will not hesitate to switch back into those major indexes.

For now, we are watching for a potential rebound in the indexes. Next week holds the secret to the market’s future direction. We use our market-timing signals to determine whether the next phase of the rally is officially starting.

Mag 7 earnings

Several of the Mag 7 reported earnings this week, giving us insight into the AI investment cycle. Let’s start with the good news first.

Microsoft (MSFT) delivered excellent cloud growth, the fastest growth since 2022. This is expected to accelerate as demand outstrips supply; a great read-through for the rest of the AI complex. Despite higher capital investment, they expect to remain cash-flow positive — meaning they don’t need debt or equity to finance projects. Music to investors’ ears.

Investors were also delighted to hear that users of Copilot (Microsoft’s AI model) are willing to pay for it. There was previously doubts that enterprise clients would expand or renew licenses after initial trial pilots. Microsoft is even adding usage-based billing for heavy agentic tasks. What this means is that AI providers are capturing more of the economics from customers deploying highly productive AI.

MSFT stock was up nearly 20% on the week. This just goes to show that the hyperscalers have a pathway to higher stock prices if they can demonstrate good return on investment (ROI) to validate the massive infrastructure spend.

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• AMZN, META earnings

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Welcome back to MktContext where we study the US economy and time the stock market.

Current market timer: Bearish

We’ve said many times that this is a stock-picker’s market. Most stocks and the index are falling, which means it requires precision and market timing to pick the right stocks to buy.

Many of the stocks recommended in our healthcare picks continue to rally. One particular stock that stands out is Tenet Healthcare (THC). At the time, we wrote that “a retest to the 50-day moving average should be buyable.” The stock did exactly that and gapped up massively on strong earnings results. It is up over 30% in under two weeks.

Amid the broader market pullback, healthcare stocks have held up well, along with financials and real estate. These are the sectors you want to own right now as beneficiaries of the ongoing market rotation.

Tech earnings

For years, a simple rule governed Wall Street: buy tech giants, mention “AI,” and watch stock prices rise. The Mag 7 lifted the entire stock market on nothing more than a promise that AI would usher in a new era of productivity.

The latest earnings from Google and Tesla tell us we’ve officially entered a new, trickier phase of the cycle. We are moving away from pure excitement around AI’s potential, and into the harsh reality of what it actually costs to build.

On the surface, Google’s earnings results beat all expectations. Sales were strong and profit numbers eye-popping, but look under the hood: debt has doubled in six months, and spending exceeded generated cash flow.

For the first time, Google’s AI capital expenditure reached over $200B/year. And yet they’re still losing to Anthropic and OpenAI (that’s Claude and ChatGPT). On the conference call, CEO Sundar Pichai sheepishly admitted that staying at the frontier is not easy. That was not the message investors wanted to hear; the stock sold off -7% on the day.

Tesla presented a similar theme. Sales rose a lot, but they also spent more money than they raked in. For months, Elon Musk has been hyping up self-driving Robotaxis and Optimus humanoid robots. But these ambiguous moonshots are still in development rather than generating real cash. Building tomorrow’s autonomous tech and robotics requires massive spending today.

TSLA shares are trading down -17% for the week.

Intel on Friday fared no better. Earnings beat expectations. Capital expenditures for 2026 bumped up from $18B to $20B. 2027 expected to be “significantly higher”. The stock sold off heavily on the day.

In any major technological revolution, the hype phase is followed by heavy construction. That’s where we are now. This phase is the toughest for stock prices because excitement meets cost reality. Tech giants are spending astronomical amounts on infrastructure out of fear of being left behind. Cash flow gets squeezed because the spending is immediate, but monetization is later.

So Wall Street’s favorite “AI Trade” and “Mag 7 Trade” are no longer a simple rising tide that lifts all boats. Investors are starting to ask the tough question: When will all this spending turn into real, lasting profit? In our view, not anytime soon.

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Welcome back to MktContext where we study the US economy and time the stock market.

Current market timer: HOLD

We called the dead-cat bounce last week. So far, we’ve been right to be bearish chip stocks. The rotation out of chip stocks (SOXX) accelerated to the downside, violently breaking below the 50-day average on its way to the 100-day.

The AI trade is imploding. Hope is not a good investment strategy. To be a good investor, one must understand the market context and decipher price action. If you’re still holding Nasdaq (QQQ) or semiconductors/AI stocks, you need to revisit your portfolio!

Non-tech stocks working

While the tech complex implodes, consumer and finance stocks have been rebounding sharply. Here are some of the picks we recommended over the last few weeks:

DAVE, a tiny digital banking company, continues to rally past our $400 target. This stock is up 50% since we recommended it, and a whopping 967% over the past two years. We still have “runners” left in the trade.

Travelers (TRV) and Chubb (CB) insurance companies were given as breakout ideas in our Jun 28 post. Financial stocks have been doing excellently lately and are a destination for capital fleeing the semiconductor trade.

Bloomin (BLMN) and Toast (TOST), two restaurant related ideas, not only withstood the tech selloff of the past few weeks. They are actually pressing up against the highs and poised to break out. Consumers remain resilient and spending is about to recover strongly:

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Welcome back to MktContext where we study the US economy and time the stock market.

Current stock market timer: BULLISH

Insurance stocks have broken out strongly since we recommended them in our Jun 28 letter. Many of these stocks are up 8% to 10% in just two weeks, beneficiaries of the ongoing rotation out of chip and tech stocks.

The market rotation continues with downside in chip stocks and a surprising rebound in Mag 7 stocks. The SK Hynix ADR issuance increases the supply of overhyped chip stocks in the marketplace.

This is a stock picker’s market. Being able to pick winning stocks carries outsized rewards because not all stocks are going up simultaneously.

Chip rotation

The chip rotation continues in full force. Chip stocks and AI infrastructure providers have declined precipitously and are now bouncing slightly. For example, Sandisk (a major memory chip maker) fell -37% from highs.

So where is all that speculative money flowing to instead? A variety of sectors, but most notably Biotech, Pharmaceuticals, Insurance, and Software. Even Bitcoin and Chinese stocks are getting a lift as investors seek out diversification in risky or uncorrelated asset classes.

We were able to capture some of these breakouts in our weekly stock picks.

The question everyone wants to know is: Do chips have further to fall? Possibly. As the daily chart below shows, SOXX bounced off the 50-day moving average. It is currently in a dead-cat bounce, driven by excitement for the SK Hynix ADR issuance.

Technically, due to the nature of leverage and investor psychology, it’s highly unlikely SOXX retests the all-time high anytime soon. Fundamentally, investors are wary of companies increasing AI infrastructure spending, which dampens the demand for chips.

Last week we talked about the possibility of SOXX dropping to the 100-day or 200-day moving average after a historic over-extension. It’s also possible that it consolidates sideways for a period of time. Either way, we won’t be buying SOXX until we see some better digestion.

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Welcome back to MktContext where we study the US economy and time the stock market.

Current stock market timer: BULLISH

Our trades from the past few weeks are working well: Insurance stocks continue their breakout, while consumer stocks (airlines, restaurants, and retail segments) are all blasting off to higher highs.

DAVE, the fintech company we picked in our June 14 letter, has reached its price target of $400. From our entry price of $293, this is a 37% move in two weeks. Reward-to-risk ratio of 3:1. We had taken partial profits along the way, and are now selling most of the stake, leaving a tiny portion for further upside (“runners”).

As we’ve highlighted in the past few weeks, we are in the midst of a bull market rally and rotation into non-tech parts of the market. This is why cyclical stocks like DAVE are breaking out to new highs. We continue to find excellent trade opportunities to capitalize on this trend.

Another cloud competitor?

On Wednesday, Bloomberg ran an article that suggested Meta (parent company of Facebook and Instagram) is starting a cloud business to rent out its excess computing capacity. Investors read this announcement as a signal that they have too many data centers, so CEO Mark Zuckerberg is pausing capital spending. As we’ve written before, Meta has a spending addiction when it comes to AI infrastructure. That’s why META stock shot up 10% on the day the article was published.

Less spending is good for all Mag 7 since the market extrapolated the cuts to other cloud providers (as we expected they would). On the flip side, less spending means less revenue for data center providers and chip makers, in particular the memory chip makers (chart below). This sparked the selloff in tech stocks that started on Weds and continued into Thurs:

Let us first point out that the reaction may have been exaggerated. Meta is opportunistically taking advantage of current high compute prices. This does not mean they stop building data centers, as their long-term strategy is centered around growth in AI. It also does not mean they stop building their internal AI model, “Muse”.

We’ve been calling for Mag 7 to pull back on AI spending, but this is not it. Unfortunately, the spending addiction continues. If anything, it proves that demand for underlying compute is still red hot.

So what should we take away from this? Recall Encroachment Theory, which we started writing about in March 2025. Mag 7 used to have separate monopolies, but now they are all converging on the same turf. Competition is heating up as AI increasingly proves to be undifferentiated.

Worse yet, brand new competitors are entering the fray. Oracle is infamously transitioning into an AI cloud provider (look how their stock price is performing). Neoclouds like CoreWeave and Nebius came to market on the premise that demand for AI data centers would outstrip supply for years. SpaceX is building data centers in space. And now, Meta wants to compete for the same customers.

Every seller of excess capacity makes it harder for the next data center/cloud company to justify a premium price. What was supposedly scarce is being answered with new supply. That’s how supply and demand work. The dot-com bubble followed a similar arc: first excess demand for a new technology, met by new supply, and then oversupply.

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Welcome back to MktContext where we study the US economy and time the stock market.

Current stock market timer: BULLISH

In our Apr 5 post, we recommended Marvell (MRVL) as a trade. At the time, the stock was breaking out of a cup-and-handle pattern with a positive news catalyst. From our entry price of $107, the stock tripled to over $320.

With the AI theme faltering and an ongoing rotation out of tech (as explained in the Paid section), the weekly chart now shows a large bearish engulfing candle. We took partial profits along the way up, and will now be exiting the remainder of the position.

Picking stocks in hot thematic sectors, with a recognizable technical pattern and a positive risk/reward ratio, can produce explosive results. Not all our trades will look like this, of course. This also demonstrates the importance of using trailing stops to capture as much upside as possible.

Just to show we’re not cherry-picking: In the same Apr 5th post, we also recommended CSX (+15%) and TJX (stopped out). More recent recommendations on SHY (levered), VSXY (+12%), DAVE (+20%), and short Gold (+8%) are also performing well.

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Welcome back to MktContext where we study the US economy and time the stock market.

Current stock market timer: BULLISH

The two short-term trades we gave last week, VSXY and DAVE, are in the money. Even on days when the SPX was weak, these stocks held their breakout levels and made new highs. We would recommend selling small portions along the way as it approaches target price.

The market is very clearly signaling a rotation out of concentrated AI stocks and into cyclicals and consumer stocks. In today’s post, we explain this phenomenon as well as highlight a few stock ideas to capitalize on this broadening bull market.

Last week we correctly called the end of the SPX pullback and switched to bullish. All based on our fundamental outlook and technical analysis.

Fed chair Warsh

This week we had the first FOMC meeting chaired by Kevin Warsh. Interest rates were kept unchanged. Investors widely regarded the meeting to be hawkish (i.e., leaning toward rate hikes) causing markets to sell off. We think this was an overreaction.

In the Fed members’ projections, inflation forecasts were higher, as were rate hikes. What was previously a cut has now turned into a hike (image below). Sounds bad; however, let’s not forget that half of the members still forecast interest rates flat or lower. Warsh himself abstained from forecasting, but he certainly would’ve voted lower — forming a majority in favor of no hikes.

When you look more closely at the Fed members’ forecasts, they are also expecting rate cuts in 2027. This does not look to us like a unanimous Fed hell-bent on raising rates.

“…inflation has been running well ahead of the Fed’s long-stated inflation goal of 2%. That’s been going on for more than five years.”

-Kevin Warsh, FOMC Presser

Sure, Warsh spent a lot of the meeting emphasizing inflation, as evidenced by the quote above. But what people forget is that Warsh believes in trimmed mean inflation (i.e., excluding the extreme components) rather than official CPI. Trimmed mean is only around 2.3% right now; pretty close to the stated goal of 2%.

It’s no coincidence that Warsh proposed an overhaul of Fed internal processes, including data sources and the measurement of inflation. He wants to tamp down inflation by changing the definition. What better way to kill two birds with one stone (cut rates while keeping inflation low and jobs high)?

Recall Warsh’s belief that inflation is structurally falling due to AI productivity. That allows the Fed to cut rates regardless of the data.

Here are some other quotes that belie Warsh’s dovish views:

• “I don’t believe we have a cruel choice.” Meaning they don’t have to choose between inflation and jobs. They can have both.

• “There was one proposal on the table. There was no discussion of any other proposals.” The Fed only considered holding rates steady, and did not consider hiking.

• “The price of oil… does not have first-order consequences to what we’re doing.” They are looking past the short-term spike in oil prices, not assuming it will impact inflation.

• “If I look at the housing markets as one example… broadly I would say there Fed policy appears to be somewhat restrictive.” High interest rates are hurting the housing market.

Overall, Warsh was trying to build credibility on inflation control without resorting to rate hikes. That’s good news for investors because it keeps long-term interest rates in check. Otherwise, bond markets would panic, which would ironically cause more damage.

The only concern we had was his intent to get rid of forecasting. Warsh thinks the market should focus less on Fed messaging and more on economic data. He wants to leave the responsibility of interpreting data to the markets. Therefore, he wants the Fed to give as little guidance as possible.

“…financial markets perform best when they react to incoming data… The more that markets are paying attention to what’s happening in the real economy, deciding what’s good data and what’s less good data, the more financial markets can price what they believe is the most likely and what are the tail risks.”
-Kevin Warsh, FOMC Presser

When markets face uncertainty, it results in higher volatility. Long-term interest rates shift higher to reflect the uncertainty. That’s bad for stocks.

Ultimately, we think the Fed will pause interest rates for the rest of 2026. We think it unlikely that Warsh, as Trump’s appointee, would allow a hike. But the market was used to being spoon-fed (pun unintended) outlooks from the Fed, so the change in stance was a bit jarring for markets.

Warsh was given every opportunity to signal future rate hikes, but he didn’t. We don’t think hikes are a real consideration for him at this time. In other words, the market overreacted to the meeting. We continue to think short-term interest rates will come down — in the next section, we’ll structure a trade to take advantage of this view.

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Welcome back to MktContext where we study the US economy and time the stock market.

Current stock market timer: BULLISH

Markets rallied sharply on Trump’s announcement of a forthcoming deal with Iran. Oil prices have already been in a steady downtrend of late, barely reacting to confrontation. This week’s news sent oil straight down.

And yet the consensus of Wall Street analysts remains the same: Oil to $200, unchecked inflation, possible global recession.

Readers of MktContext know that we have been bullish on the Iran deal, bearish on inflation, and bullish on the economy. By understanding this context, we were able to buy SPX near the lows in early April. We’ve been riding the bull ever since. We are still holding and expecting new highs.

Today’s topics: Iran deal, gold trade update, tech red flags, inflation, positioning unwind, 2 stock picks.

Iran deal

Markets rallied sharply on Trump’s announcement of a forthcoming deal with Iran. He canceled a scheduled strike (“we’ll hit Iran very hard tonight!”) and cited rapid progress on a memorandum of understanding (MOU).

As is often the case, the language used by the President was vague. Agreement “pretty much wrapped up.” Documents at a “fairly final stage.” No concrete deadline given.

Iranian news media denied approval of the final MOU text; however, the Foreign Minister Abbas Araghchi made a statement that the MOU has “never been closer”. It appears that authority is still scattered over there.

Does this mean we should doubt the deal? No. The terms of the agreement might not be as expected (US likely made concessions, especially on nuclear) but the deal will be concluded one way or another. Threats of bombings are nothing more than pressure tactics to nudge the opposition to sign.

The key dynamic to understand is incentives. Trump can’t actively initiate war without congressional approval (which will likely fail) and he is hamstrung by the upcoming midterm elections. Inviting retaliation at this stage of the conflict is a losing proposition.

Oil prices have been in a downtrend well before this news hit the tape. The concerns around oilfield shutdowns, long espoused by Wall Street analysts, appear unfounded. In actuality, oil demand has shrunk and supply has circumvented the naval blockade.

Every day there are more reports of tankers transiting the Strait despite the ongoing blockade (image below). Some are paying Iran’s toll. Some are guided by CENTCOM. Some are “shadow fleet” avoiding detection. Regardless of how, oil is flowing. A deal with Iran, signed or not, is merely a sideshow.

Gold short

The gold short trade we gave last week is in the money. Due to the sharp drop in price and spike in volatility, the put options paid off more lucratively than outright GLD shorts.

Note the similarities with the oil chart from earlier.

If you haven’t already, we would recommend taking profit on the bulk of this position, leaving a small runner for further downside. The reason is because interest rates have stalled their rise, oil prices are falling, and the recent positioning unwind may soon be over (more on that later).

It’s significant that gold is falling alongside stocks. Gold is supposed to be the safe haven asset, the defensive holding that everyone flocks to in times of stress. But right now, investors are forced to raise cash. And that creates an entirely different dynamic.

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