🍔Crowded Trade Unwind

Nvidia earnings results was "sell the news" again

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

As broader indexes remain stuck in a range, weird moves are occurring under the surface. SPX sits near its all-time highs, but there has been volatile rotation between sectors creating winners and losers.

This week we discuss developments in the AI trade, including earnings from Nvidia. Investors sold the news on NVDA despite strong results. The AI bubble grows ever-larger.

Finally, recent crowded trades are unwinding. Semiconductor stocks are falling under the weight of exuberant expectations, while washed-out software stock are squeezing higher. Positioning is still very elevated and we think this trend can continue.

Today’s topics: Citrini’s big short, tariff update, macro surprises, first to cut capex, Nvidia earnings, crowded trade unwind, dispersion market.

Citrini’s big short

For those who don’t know, Citrini is a respected equity researcher specializing in thematic investments. They have been early and correct on the semiconductor trade and many hot investment themes of late. They’re the real deal.

Last week they published an article outlining a hypothetical scenario in which AI adoption drives mass unemployment by 2028. It went viral on Wall Street and tanked the markets this past Monday. You can find the piece via Substack or Google. The thesis boils down to “AI will replace everything and humans too.”

We have a lot of respect for Citrini’s work but this one was disappointing. It’s devoid of analysis and nothing more than fear-mongering, emotional, doomsday fiction. There’s nothing to debate because there’s no tangible arguments. It’s all conjecture.

Here is a fact: Despite the supposed collapse in software, demand is still rising for programmers (light blue lines below), even as the overall job market has been sluggish:

Rising demand for software engineers

We’ll let you in on a dirty secret in the Substack/newsletter business. Fear sells. Investors eat it up like candy. The author sounds smart without having to prove anything of substance. Moreover, the big crash/recession is always on the precipice but never arrives, so the thesis can never be disproven.

Recession signals can be false alarms. As the saying goes, “Economists have predicted 11 of the past 8 recessions.” Statistically, it is much better to be bullish because markets trend upwards the vast majority of the time.

What are we supposed to do with the information gleaned from Citrini’s article? Short QQQ? Short software stocks? Short planet earth? Good luck.

“There will be a -38% market crash sometime in 2026 or 2027 or beyond” is not a forecast. You can’t act on this info. There’s no timing, no setup, no catalyst, no entry criteria. The same goes for recession calls without a defined timeline — it’s bound to happen eventually but do you sell now or wait for unemployment to spike? How fast and how deep? What if SPX keeps appreciating? Putting the plan into motion requires more than just a call.

The takeaway is this: Be wary when reading doom and gloom. Especially news articles and newsletters. Readers have a visceral fear of market selloffs; this is what keeps writers and journalists employed.

If MktContext turns bearish, we will detail exactly the reason, the trigger for the trade, and parameters of the exit (i.e. re-entry price or stop-buy). We put our money where our mouth is and give live sell signals in advance of when we trade them.

Anyway, back to stocks. The net result of Citrini’s hit piece was a renewed selloff in stocks perceived to be at risk from AI disruption. Software stocks like Workday, Adobe, and Oracle declined sharply. Other names listed in the report like Capital One, American Express, DoorDash, KKR were hit too.

When stocks sell off on fictional tales, there’s a good chance the bottom is near. Capitulatory selling occurs when shareholders are exhausted from the barrage of negative headlines and finally throw in the towel. It is not based on logic but fear and portfolio-preservation; it’s very human. With IGV software down -35% and a dozen other disrupted industries falling in tandem, we think the market threw in the towel this week.

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Tariff update

Last week, Trump instated a new 10% global tariff after the original tariffs were deemed illegal by the Supreme Court. He is using authority of Section 122 which allows the President to impose import restrictions to address “international payments problems”. He later increased this to 15%, which is the maximum that can be imposed by this route.

The 15% tariff can only remain in place for 150 days (until late July), after which Congress needs to approve an extension. Renewing repeatedly could face further legal challenges. There is also the uncertainty of how existing trade agreements will be handled:

More likely, other legal authorities like Section 232 (national security) or Section 301 (unfair trade practices) will be used to cement the tariff regime.

US Trade Rep Jamieson Greer clarified that existing trade deals are unaffected by the 15% rate, and prior exemptions (critical minerals, pharma, electronics, USMCA-compliant goods) will remain in place. With these carve-outs and exemptions, the effective tariff rate is only at around 14% compared to 16% at the beginning of the year. If Section 122 tariffs expire, this would fall to 9%.

We think the effective tariff rate will continue to come down, just as it has in the past several months. Part of this is due to Trump’s weak results in off-year elections, highlighting political constraints on further tariff aggression. As we said last week, peak tariff terror has passed and the market has a clearer pathway to a rally.

The rest of this article is for premium members. Upgrade now to continue reading:

• Macro surprises

• First to cut capex

• Nvidia earnings

• Crowded trade unwind

• Dispersion market

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