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

Current market timer: HOLD

We invested 100% of our portfolio into US equities in early April. We’ve held it through the entirety of this incredible rally of nearly 15% in two months:

Many pundits were stubbornly holding cash and sat out the majority of this rally. Bearish investor sentiment was, and continues to be, elevated even though this bull market is one of the strongest on record.

What gave us the conviction to buy at the bottom and hold to all-time highs? Understanding the context of the current market environment, as well as the daily price action and positioning of other market participants. These are critical parts of market timing.

Today’s topics: Iran/US deal, Meta’s new business model, AI compute costs, IPO signals end of bull market, software rebound. Plus, new trade made in the portfolio!

Iran/US deal

As we predicted last week, Iran/US talks are evolving rapidly. The two parties reached a deal to extend the ceasefire by 60 days while they start formal nuclear talks. The naval blockade in Hormuz would be lifted and the Strait cleared of tolls or harassment. Iran would have to remove all naval mines within 30 days.

Here’s what’s up for discussion in the subsequent nuclear talks: Stop uranium enrichment and give up their stockpile of highly enriched uranium. Commit to UN inspections and never pursue a nuclear weapon again. In return, the US would gradually lift sanctions and release billions in frozen assets.

The ultimate goal is a comprehensive deal that trades Iran nuclear ambitions for resumption of global shipping. The catch is this: The deal is not yet signed by Trump. Major gaps remain — Iran wants a shorter uranium ban, and resisted giving up its stockpile.

Still, we think a deal is more likely than not because both are aligned in incentives. Both sides benefit from ceasefire (Iran for its survival, Trump for domestic politics). The hard part of finding agreement is done; now it’s just about price.

The timeline and process are largely resembling the China tariff negotiations in 2025. Once both sides realize it is mutually beneficial to cease fire, then there’s no reason to expect subsequent flare-ups. Extensions are credible, regardless of how wide the gap. And by the time the final deal is announced, the market will have already moved past it.

There is a strong case for a sell-the-news event upon announcement of the final deal. Markets have long anticipated a deal and already priced in the reopening. Stock indices are near highs while oil prices have pulled back. Once the initial excitement fades, traders take profit. This is what causes “sell-the-news” events.

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• Meta’s new business model

• AI compute is getting expensive

• IPO signals end of bull market

• Software rebound continues

• Our portfolio + New trade alert!

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

Current market timer: HOLD

For the past two weeks we've said stocks are over-extended and due for a pullback. Our shorts have been correct, however pullbacks have been shallow and dips are being bought aggressively.

It is very difficult to be bearish in this environment. The trend is extremely strong, for all the reasons we've been highlighting in recent posts. Instead of fighting the trend, listen to what the market and price signals are telling you.

Every investor wants to know if this is the top. To answer that, we need to look at the underlying drivers of the stock market…

Today’s topics: Nvidia earnings, AI demand, oil prices, interest rates, market outlook, our portfolio.

Nvidia earnings

Nvidia reported its quarterly earnings. Many investors expected a strong reaction but as usual, it disappointed and the stock fell 2%. In fact, it hasn’t had a strong post-earnings rise since 2022. That’s because traders almost always overhype the event. For those who are able to day-trade, it has become a reliable and highly profitable short the day after results are released.

Below was the options positioning immediately before the earnings event. Demand for calls (bullish bets) was at max while puts were at zero. Demonstrating extreme bullish sentiment and expectation that is nearly impossible to beat. Nvidia has been at the center of the AI boom; investors were already assuming strong growth. Because of that, it is harder for the company to surprise the market.

Whereas NVDA stock itself didn’t perform well, other companies connected to Nvidia did very well. These are often called “picks and shovels” businesses. They supply parts used in Nvidia systems. Memory companies stood out, with stocks up 6-10% in a single day. Other parts manufacturers did this:

A key reason for this reaction comes from Nvidia’s next gen rack system, called Rubin. Rubin will multiply the memory and componentry needs of AI data centers — some by as much as 400%. That’s why component producers (memory, circuit boards, power systems, cooling systems) continue to skyrocket.

On the other hand, Nvidia’s own chips are making up a smaller and smaller part of the system. And its profit margins are shrinking as well. That’s why NVDA stock was down, yet the AI ecosystem is simultaneously thriving. Demand for advanced systems is still increasing. The AI bubble is still growing.

We’ve highlighted this dynamic many times in the past. This is how capital cycles for new technologies naturally progress. Bottlenecks shift to new areas like CPUs, memory, and substrates. That is how we identify the next group of stocks with explosive growth.

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• AI demand is strong, even if NVDA weak

• Oil prices and interest rates falling

• Stock market outlook: Where we go from here

• Our trades and portfolio

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To the global macro investor, China has long been a complex thesis of raw scale, intense policy interventions, and structurally evolving capital cycles. For decades, the playbook was simple: short the Renminbi during capital outflows, go long on copper and iron ore during infrastructure-driven debt cycles, and buy tech monopolies as the consumer market digitized.

Yet, as the state pivots away from old-school real estate leverage toward a "productivity-centric" model, the old metrics are cracking. The State Council's GDP growth target—adjusted to a flexible 4.5% to 5% range—confirms that the era of blind, double-digit expansion is over. Policymakers are actively seeking a structural rebalance, defending a basic equilibrium in the balance of payments while attempting to manage domestic price recoveries.

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Welcome back to MktContext. We time the stock market.

Current market timer: HOLD

SPX just closed its 7th positive week in a row. Rallies of this speed and magnitude are often unstable. We are fully invested riding the bull wave, but recognizing that a pullback will be inevitable at some point.

This week we saw signs of exhaustion in the rally. Technical signals point to an interim peak and imminent selling to come. If our theory is correct, then a brief pullback could occur as early as next week.

We’ve been hearing from many investors that this market has been incredibly painful. Some were left sitting out the V-shape rally, others have been trying to time the market peak and getting run over. Lacking the proper framework for identifying turning points can be debilitating in this type of environment.

Today’s topics: Market is peaking, Xi-Trump meeting, inflation, our portfolio.

Technical analysis

The torrid rally in tech stocks continued this week, culminating in a blow-off top. There were several bullish news catalysts this week:

• US clears sale of Nvidia H200 chips to China

• Cisco (CSCO) earnings and pivot to AI

• Chip startup Cerebrus’ explosive IPO debut

• AMD’s strategic stake in Marvell

By the end of the week, positive news of Trump and Xi’s meeting in Beijing was overshadowed by a sharp gap-down/selloff on Friday. Traders had already priced in the good news earlier in the week, leading to a sell the news reaction (wherein good news is met with selling). It is often a sign of exhaustion and imminent reversal; exactly what you’d expect at a peak.

The result is a large spinning top candlestick on the weekly SPX chart after 6 straight weeks of green. This candle usually indicates indecision or a rejection of a key level — in this case the 7500 price level and major Fibonacci extension we mentioned last week:

Tops are often messy and difficult to time. However, due to the extent of this short-squeeze rally, a pullback is inevitable and a bit overdue. In the rest of this report, we discuss whether this is the start of a bear market or whether the rally can continue after a brief pause…

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Short squeeze continues…

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

Current market timer: HOLD

The market continues a relentless rally but looks due for a pullback. In times like these, our job is to ride the bull for as long as possible and not attempt to time the peak.

This week we got blow-out earnings results from AMD, SMCI, HUT, ALAB, and other AI-related names.

Chip makers are entering a blow-off top phase. Can this nosebleed rally continue?

Today’s topics: Nosebleed Nasdaq, volatility analysis, bifurcated consumer, AI agents, software rebound, our portfolio.

Nosebleed Nasdaq

The Nasdaq is on a tear, like nothing we’ve ever seen. It’s up 26% from the lows a month ago. It touched 3.5 standard deviations above its 200-day moving average. A statistical anomaly that hasn’t happened since — you guessed it — the dot com bubble.

It feels like QQQ has been gapping up almost every day, with some of those gaps left unfilled. Here at MktContext we tend to think “gaps get filled” meaning the stock will retrace the air pockets left behind. That could happen soon as the market needs to consolidate gains.

What’s driving this rally? Mag 7 is languishing (on a relative basis) even as QQQ breaks highs. That means this rally is not led by the most concentrated bunch. It is also not led by equal-weighted QQQ, which means there's no breadth to this rally.

McClellan Oscillator for QQQ is declining, confirming the lack of breadth:

It appears the rally is carried by a select few AI supply chain companies. GPUs, CPUs, networking, hardware, electronic circuitry, things of that nature.

This doesn't mean we immediately sell our holdings or go short. There are tactical ways to capture profits (we’ll discuss one in the paid section) but blow-off tops can continue longer than expected. Dips are still being aggressively bought in this tape. Don't fight the trend.

On Thurs we saw the first sign of a potential change in character as the index and chip stocks sold off mid-day. However, they gapped up again on Fri and were bought all day. Timing tops is hard.

After a rally of this magnitude, a pullback would be healthy and expected. But we don’t think it’ll be a deep selloff. Watch the chips, memory, and opto-electronics stocks for signs of what the leaders are doing.

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• Software stocks rebound

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SPX just experienced one of the most dramatic rebounds in history. It went from oversold to overbought in just 12 days. The speed of this move has left many doubting the rally.

In this report we discuss where the strength is coming from and how investors are positioned for the rally. We discuss our current portfolio, hot sectors we’re watching, and why we remain bullish on the market.

Today’s topics: Rise of retail investors, power grid investments, the next stage of Iran war, UAE exits OPEC, positioning, our portfolio.

Rise of retail investors

A major bank published research about the rise of retail investors. Retail (defined as any individual person who invests their own money) now make up 20% of trading volumes, rivaling institutions. Retail are no longer considered “dumb money” as they were in the past, thanks to widespread access to information and commercial trading platforms. Here are a few key findings from the report:

• Retail are often more nimble than institutions in entering or exiting trends. They were heavily involved in the Gold/Silver bubble in Jan, and provided strong support for the rally.

• Retail rose to prominence during Covid when people had time on their hands and stimulus checks to invest. Many thought this would be transitory, but instead it has become a structural force in markets.

• Access to information and AI has been a game-changer for retail. It is easier than ever to form an opinion on a stock and act on it. Trading systems are accessible even on phones, at MUCH lower cost.

• Social media can reveal where retail is moving next, as they are often vocal about trading intentions. They follow influencers for ideas. Highly mentioned stocks tend to perform well over a 20-day horizon (momentum effect). This has led to meme rallies seen in recent months.

• In large cap stocks, retail sentiment is a mean reversion signal. Stocks with trending sentiment over 5 days tend to underperform. This highlights dislocations where investors are overexposed, leading to corrections.

It is therefore possible to exploit retail herding behavior to improve our edge.

Consider the recent Iran-driven selloff in stocks. Whereas institutions capitulated (sold) early in March, retail held up for several weeks longer and only capitulated at the end of March, coinciding with the exact bottom in SPX. This was the key reversal signal.

As you can see, this cohort is sizeable enough to move markets. That means they should not be ignored. Watch what retail is buying, but also when they are selling. It is useful for market timing purposes.

It is also our belief that this structural shift is eroding the “Value Investing” edge (a.k.a. Warren Buffett-style). Retail participants prefer narratives and momentum over fundamentals. That means price can remain decoupled from fundamentals for extended periods.

When positioning diverges too far from fundamentals, momentum will crash. This is why modern stock markets oscillate between two speeds: Feverish momentum chasing or sharp selloffs. Identifying these turning points is what makes market timing work.

So what is Retail thinking now? After the historic drop for March, purchases are just starting to rebound now and still below average. Due to the speed of the recovery in SPX, many investors have been scared to chase the market higher and are stuck in cash. That means there is fuel left to propel the market higher.

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• Power grid investments

• The next stage of Iran war: Economic fury

• UAE exits OPEC

• Positioning and Our portfolio

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

Is the war over? After a 10% decline, the SPX has already recovered back above all-time highs. And yet investors have been skeptical the entire way up. There’s still a lot of cash sitting on the sidelines.

When there is pervasive bearishness, that usually means the rally has longer to continue, not less. In this report, we discuss what’s driving the rally and how much further it could go.

Today’s topics: Iran war update, why the economy is resilient, what stocks are leading, our portfolio.

Underlying economy

With the Iran war all but resolved, the market is rapidly re-evaluating the ongoing economic situation. SPX is telling the story as it rips to new highs. The oil-driven recession is invalidated. So what’s the next narrative everyone is latching onto?

No doubt there has been some disruption to global supply chains, particularly oil supply. But this is not a long-term problem. Markets are forward looking, and the likely and predictable outcome is a normalization of Hormuz logistical flows.

The narrative is shifting back to long-term fundamentals. Without the shroud of war, the underlying US economy is quite strong. Unemployment rate sits at an historically low 4.3% and GDP growth is running just under 2%. We already explained last week why zero job growth is not a problem.

In fact, US is going to produce the strongest growth of the G7 countries for 2026. A resilient economy absorbs all types of disruptions. So what are the sources of this strength? Let’s break it down…

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• Consumers and businesses have lots of cash

• Manufacturing and transport resurgence

• Stock earnings underpinning this rally

• Kevin Warsh’s nomination hearing

• Iran war update

• Which stocks are leading?

• Our portfolio

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

The short squeeze is on! The stock market rebounded from lows to highs in the shortest amount of time, ever.

The market is rapidly climbing the wall of worry. Several weeks ago we called the off-ramp and oversold conditions. We were fortunate to have bought the dip near lows.

Our IWM position is up 15% from the low and outperforming the SPX. Short-term trades given in prior weeks are outperforming as well (MRVL +30% since).

Many investors are in disbelief of this rally, still holding cash waiting for a dip to re-enter. But there are no dips in a lock-out rally. Without a plan to re-enter, they are missing some of the strongest rally days in the entire year. Hence why market timing is essential.

Today’s topics: Why investors are still worried about recession, ceasefire progress, three pillars of a bull market, our portfolio.

Wall of worry

A Wall of Worry is a classic psychological effect where the market keeps rising in the face of skepticism. Lately we are hearing from clients, peers, and social media plenty of “reasons” why the market should not be at highs. The reasons generally revolve around the Iran ceasefire, the status of Hormuz, elevated oil prices, Fed rate hikes, AI disruption, private credit, and overall market fragility. Plenty of reasons to be worried.

When the market rebounds sharply, investors are caught short or holding cash. The natural reaction is to assume the rally is false and that markets will fall back down. Hence why bearish arguments abound, put forth to justify incorrect assumptions.

The point people miss is that markets look through headwinds as long as the outlook is improving. Think back to Spring 2020 where markets rebounded well before vaccines were announced or lockdowns were lifted:

Similarly in the April 2025 selloff, the 90-day tariff pause was followed by a US-China trade deal shortly after. Markets never retested the lows.

Paradoxically, the wall of worry is necessary to fuel a durable rally. As bears begrudgingly capitulate, their buying adds fuel to the rally. This is market psychology at play.

The question is: Are you fully invested? Or still holding cash, watching this soaring market from the sidelines?

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

We’ve been calling for the off-ramp from the Iran war and the oversold rebound in markets. This has occurred in spectacular fashion within the span of two weeks. The US and Iran are working on a negotiation but the prospects are grim.

Under the hood, there is huge divergence within tech stocks. Certain mega cap stocks like PLTR and TSLA (which we gave as a short idea) are breaking under key supports. Meanwhile, leaders in chips and opto-electronics are breaking to new highs.

Can markets hold this gap-up? Should you be buying here? One thing is for sure — you don’t want to be sitting in cash waiting for the dip that never comes.

Today’s topics: Temporary ceasefire, how the Iran situation resolves, macro and inflation, new portfolio changes.

Temporary ceasefire

On Tues evening, just hours before Trump’s “bomb power plants“ ultimatum was set to expire, Iran and US came to a two-week ceasefire agreement. Both sides are claiming victory, which begs the question: Who blinked?

Iran’s mosaic defense and asymmetric endurance strategy was on full display as they endured against a stronger successor. Because of it, Trump finally understood that Iran does not bend to pressure, and further escalation (hitting power and desalination plants) would not yield strategic results.

We know that last week, Iran rejected a temporary ceasefire and walked away from negotiations. They were comfortable continuing the war thanks to their “preservation” strategy and leverage over Hormuz. Something must have changed to bring them back to the table.

By Trump’s own admission (below) the US accepted Iran’s 10-point plan, as opposed to Trump’s own 15-point plan. This includes removing sanctions and allowing Iran to continue enriching uranium and continue commanding Hormuz. These are meaningful concessions that the US would be ill-advised to agree to unless truly out of options.

It is surprising that Trump would agree to Iran’s terms, which is why the market is highly skeptical this ceasefire will hold. Here’s why:

From the get-go, nuclear disarmament was a strategic priority for the US; allowing enrichment would legitimize Iran’s nuclear program. If the world’s largest military couldn’t stop Iran, no other country and no future US president will dare try again.

Yielding Hormuz to Iran is a huge strategic blunder as well. For one thing, they have the power to disrupt global trade. It gives them leverage over their Gulf neighbors. It also damages the global dominance of the US Dollar as Iran can stipulate trade in Chinese Yuan or Bitcoin. Not good for a US that relies on trade deficits and external debts with the rest of the world.

If Iran imposes a toll on ships passing through Hormuz, they would earn more off of other nations’ oil than they earned selling their own! They would become one of the wealthiest chokepoint operators in maritime history. And that’s before money received from unfrozen assets, restitutions, and sanctions lifting.

So the country with no navy, no air defense, no Supreme Leader, no missile production, and no nukes… managed to extract a major concession from the US. This is not an indictment of Trump or the US military — who certainly did immeasurable damage to the regime. But it appears that Trump was more eager for an off-ramp than Iran. This is crucial to understanding the ceasefire’s durability and the new world order.

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What happens after 2 weeks?

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• What comes next

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

It looks like the off-ramp we’ve been predicting has finally come true. After a classic Trump TACO, the stock market is bouncing back from its worst-case assessment of a prolonged quagmire in Iran and oil-driven recession.

The oversold conditions we highlighted last week are now fueling a short squeeze. And it’s happening right on the March 31st options expiry — a date we gave as a reversal point. NOT a coincidence.

That said, the war is not over. There’s still the thorny issue of finishing what Trump started, and the Strait of Hormuz remains structurally closed. Troops have hit the ground in Iran as we write this. Oil prices are still at heir highs and many pundits are now calling for a recession this year.

Does the market continue its rally? Or do stocks have more to fall? We answer that in today’s note.

Today’s topics: War off-ramp, stock market impact, real rates, technical analysis, our portfolio, 4 trade ideas

Off-ramp prepared

After five weeks of conflict, the US stance on the war has finally shifted. This week Trump introduced the off-ramp that we called for in The End Phase. The administration made several tone shifts that further confirm this off-ramp strategy:

Firstly, Trump said he’s willing to end the campaign “even if Hormuz remains largely closed.” In other words, a unilateral withdrawal from the war without waiting for a surrender. This is politically messy, particularly for Gulf countries who may face more attacks afterwards, but the least bad outcome for markets.

Secondly, they reframed military objectives to conveniently exclude uranium extraction, Hormuz reopening, and regime change. In fact, they claimed the “regime is already changed”. Moving the goalposts this way allows them to claim victory early and therefore truncate the conflict.

Thirdly, Trump told allies (namely Europe and UK) to send their own naval forces to reopen the Strait and get the oil themselves. Another subtle admission that the US will not be extending its part in the conflict much longer.

The importance of this shift cannot be understated. Prior to this week, markets had been pricing the possibility of a multi-month ground war against an unwavering opponent and extensive damage to energy infrastructure. Tuesday’s announcement effectively rules out this worst-case scenario, even though the war still has at least two more weeks to go (according to Trump).

Iran was never going to agree to the US’ negotiation terms, but now that does not matter. No deal is needed to end the war. Rightfully or wrongfully, the US can simply walk away.

This light at the end of the tunnel sparked a sharp bounce back in SPX. As we have said before, the conflict doesn’t need to be fully resolved for the market to bottom. It just needs the news flow to not get worse.

By Thurs we got a classic bad news/good price setup. Even as the US bombards Iran with missiles, oil prices rise to new highs, and a ground incursion looks imminent, stocks staged a strong rally. When markets rally in the face of bad news, that means the worst is already priced in — a classic bottoming sign.

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What this means for stocks…

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

Stocks suffered another week of losses, and for the first time we saw sustained selling pressure. Several major indices entered correction territory (-10% from highs).

We have been wrong in our assessment of the Iran war outcome, and the conflict is rapidly evolving into something more prolonged and dangerous. The market is starting to price the risk of recession.

In times like these, we think it prudent to manage risk by reducing exposure to stocks. That is exactly what we did this week.

Today’s topics: Iran negotiations and potential escalation, impact on markets, tech selloff, portfolio changes and 3 trade ideas.

Negotiations begin

The fourth week of the war saw a shift from open confrontation to potential diplomacy. On Monday, Trump announced he would delay destroying power plants by 5 days (not other sites though, those continue to be bombed) and concurrently start negotiations with Iran.

Iran publicly denied negotiations are happening, but this is just a guise meant to maintain regime legitimacy and keep hardliners happy. There is evidence that dialogue is indeed happening, as it is mediated by officials from Oman, Qatar, Egypt, Turkey, and Pakistan.

The question now is whether the two sides can meet in the middle. The US released a list of 15 demands that includes nuclear and missile disarmament. For that reason alone, the demands will be unacceptable to Iran. And as these talks are happening, the US and Israel continue to strike industrial/weapons facilities, which frankly damages US’ credibility for any serious settlement.

Iran’s security doctrine is based on using proxy groups, missiles, and nukes as a strategic deterrent against the US and Israel. Nuclear development is a symbol of national sovereignty that they have invested heavily to sustain. Accepting disarmament would be a huge strategic risk, akin to acknowledging permanent defeat.

So Iran countered with its own 5 demands centered around security guarantees, reparations, and full sovereignty over Hormuz. We predict this will be unacceptable to Trump as he hopes to control oil flow in the region going forward.

The negotiations are a good start, and demonstrate that both sides want an offramp. However, given two unwavering positions, these talks are likely a non-starter. Therefore, the war must enter the next stage of escalation — precisely what the markets started to price in this week.

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More escalation

If talks fail, the US/Israel likely ratchet up pressure with more hits on energy infrastructure, hits on civilian infrastructure (water de-salination plants, power plants, etc.), and a ground invasion. Iran will retaliate commensurately.

Saudi Arabia and UAE are considering entering the war, as are Western allies (UK, France, Germany) who have had their remote bases struck. This may sound like World War, but in reality it is World vs. Iran. Iran’s military capabilities are severely eroded, and no major power has been willing to stand alongside them — not even Russia or China.

On the ground, the US has two possible choices: a full-scale invasion, or calibrated incursions. The US is unlikely to go full-scale at this time because of the huge costs of prolonged and attritional combat. The US has taken several weeks just to bring 10K soldiers to the region, whereas Iran is ready to defend with ~1M soldiers. After all this, Trump is against ground invasion and still has political constraints.

The more likely course of action is calibrated military escalation. This means tactical incursions or seizures of high-value strongholds. For example, Kharg Island (Iran’s oil terminal and financial lifeline), seizing Iranian oil tankers, or forcefully re-opening Hormuz.

But this won’t end the war. It just results in an unending cycle of confrontation and negotiation. As long as no progress is made, Iran will consider this a “win” and continue fighting forever. The regime survives, the region is mired in prolonged conflict, Hormuz remains closed, oil prices stay high, and the world verges on recession.

Even though Iran’s military is vastly overpowered, they have some tricks. The regime employs mosaic defense and asymmetric endurance. Their strategy is built around outlasting enemies, not winning quick battles. They absorb assassinations/strikes thanks to decentralized command and underground infrastructure. They retaliate with cheap drones/missiles/proxies to bleed foes economically and politically. They drag out fights into attrition wars because they can endure longer than Western democracies.

Leaders like Khamenei have drilled “preserve the system” since the 1979 Islamic Revolution. No martyrs and no mass army charges; only endurance and measured retaliation. Fight smart, and seek secret offramps to live another day.

Ironically, Trump has a very easy exit. All he has to do is concede the Strait and fully withdraw troops. Let Iran have their missiles and nukes. But this would amount to admitting defeat which means he would never do this. And by refusing to concede in negotiations, he has talked himself into a corner, strategically speaking.

The other offramp is a phased agreement. Iran agrees to restrict portions of its nuclear program, while the US reciprocates through partial lifting of sanctions. Both sides claim strategic victories. Hormuz is reopened, but Iran receives taxes on transit. This is a pragmatic but unlikely solution, as both sides take an all-or-nothing approach.

Impact on markets…

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

The market entered a downtrend this week as investors are now realizing the Iran war will last much longer than initially expected. However, we believe we’re now entering the end phase of the war.

The SPX selloff is already well advanced in both time and price. We are viewing this as a pullback within a bull market, and expect higher highs to come next.

But there’s a catch. The US needs to make one final push in Iran before withdrawing. A devastating climax, the goal of which is to ensure Iran can’t fight back. This will likely happen within the next two weeks.

We outline what all that means for stock markets. If you are in cash right now, this could be the dip to buy.

Today’s topics: Updates on Iran war, light at the end of the tunnel, end phase, implications for stock markets, FOMC review, gold failing as safe haven, oversold technical conditions.

Escalation in Iran war

The war in Iran continued to escalate. Two reasons why this week was significant: 1) energy infrastructure was hit for the first time, and 2) natural gas facilities have been hit for the first time.

Iran’s South Pars natural gas field was hit, as was Qatar’s LNG export facilities, Saudi Arabia, Kuwait, Bahrain, UAE, and some others. Up until now, strikes were mostly contained to military targets, but it appears that gloves have come off. Trump has called for a de-escalation of strikes against oil and gas facilities.

Notably, this marks the first strike on Iran’s oil production facilities. In turn, the Islamic Revolutionary Guard (IRGC) announced retaliation is not yet finished, and issued a list of energy sites across the Gulf that they would target.

The strike on Iran’s facilities was done by Israeli forces without the explicit approval of the US. A stark reminder that the US and Israel are not perfectly aligned. Trump wants a limited win and is indifferent to long-term instability; Israel wants prolonged involvement by the US to bog down Iran. The outcome of the war may be outside of the US’ control.

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The US’ dilemma

The “quick end” narrative is failing. Trump initially characterized this war as a “minor excursion” against a military that was supposedly “obliterated”, and that it would be over in a matter of days. Those claims are now contradicted by the President’s desperate pleas for NATO and China to intervene.

The US now finds itself in a quagmire similar to Iraq and Afghanistan. It has overwhelming military dominance and are exacting a tremendous toll. But the opponent is surviving and fighting back with small strikes and guerilla warfare.

Trump’s remaining escalatory options are all bad. He can try to secure the Gulf indefinitely, but this is expensive and may not even be possible. He can invade and hold Kharg Island, said to be Iran’s financial lifeline, but the costs would also be high, as would be overturning the regime.

The “least bad” option is a diplomatic offramp — declare Iran’s military degraded, concede control of the Strait, and let Gulf countries/oil importers deal with the fallout. Though embarrassing for Trump, this would be more favorable than a prolonged, unwinnable war.

Light at the end of the tunnel?

We continue to believe US involvement in Iran will last weeks, not months, let alone years. This has always been the timeline maintained by Trump, and we outlined reasons why he is incentivized to stick to this plan.

Interestingly, the market (as measured by options pricing) is losing faith in this outlook and is starting to assume this war will last for months longer. An understandable reaction, since Trump repeatedly saying “almost over” has always led to further escalation from both sides.

Nevertheless, there were some positive developments this week. Israeli Prime Minister Benjamin Netanyahu announced they would no longer target Iran’s energy infrastructure, and that “the war will end way faster than we think”. He also claims Iran no longer has uranium-enrichment capacity, and committed to helping reopen Hormuz.

Shortly after the market closed on Friday, Trump published a Truth post claiming that Iran’s military is severely hampered, and the US is considering winding down the mission:

That led to stocks bouncing sharply higher near the close, after an ugly trading session (made worse by quad witching expiry of options and futures, which often leads to unusual volatility).

By now, the market knows not to take Trump at face value. As we’ve said before, the administration has been talking up markets, keeping a lid on oil prices, as the invasion reaches fever pitch. This week was perhaps the first time that the market realized this will be a protracted battle.

Going back to Trump’s Truth post, the important line is this: “The Hormuz Strait will have to be guarded and policed by other nations who use it”. This effectively gives Trump a plausible withdrawal path without the laborious work of actually keeping the Strait open. He’s saying, “Our job is done here, it’s now others’ job to keep it going.”

It also gives Iran some leeway to continue controlling the Strait, perhaps even levy a toll on traffic. A concession that Iran may quietly accept, as it cements their stranglehold on world oil (the strongest military in the world could not take it) while extracting economic rent from the entire Gulf region.

But here’s the catch: Before withdrawing from the region, the US needs to make a final push to ensure Iran’s offensive forces are neutralized. This could be a ground invasion, a takeover of Kharg Island, or some other devastating climax. The goal is to ensure that Iran cannot fight back once the US withdraws. This will likely happen within the next two weeks as thousands of Marines are en route to the Gulf.

This is Trump’s true meaning of “very close to meeting our objectives”.

End phase of the war…

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

Our tactical longs in IWM/SPX given last weekend made a small profit. We expected Trump to off-ramp from Iran, and that has indeed occurred. However since then, the war has escalated and a resolution appears further away.

This week’s note discusses the latest developments and how we see oil prices playing out in the near-term. Importantly, we discuss why this shouldn’t drive inflation nor impact the US. Too many people are calling for a recession but historical data does not support this view.

We also discuss technical analysis and positioning in the market. The market is heavily short or hedged, which raises the possibility of an upside squeeze. This could be the dip to buy!

Today’s topics: Update on Iran war, oil prices, inflation, impact on economy, liquidity, technicals, and our portfolio positioning.

Fog of war

The situation continues to develop in Iran, with both sides ratcheting up tensions and the Strait of Hormuz still closed to most shipping traffic. There’s been a mix of escalatory and de-escalatory words/actions from both sides, which leaves market observers more confused than fearful. Here’s a smattering of headlines from this week:

• Trump declares war “pretty much complete”; IRGC declares war is still on

• Israel launches new wave of strikes; Iran retaliates

• Iran president announces willingness to de-escalate

• Neighboring ships and ports attacked in the Persian Gulf

• Trump insists war will end soon, but plans at least two more weeks of strikes

• Reports of sea mines being planted in Hormuz; Deputy of Iran denies it

• Iran moves from reciprocal to continuous strikes

• Khamenei’s son, Mojtaba, announced as successor but is gravely injured

• Mojtaba keeps Hormuz shut and threatens to open new war fronts

• Several US military aircraft hit

• US bombs Kharg Island (Iran’s major oil export terminal)

So where does the war stand today? After naming Khamenei’s son (a more extreme version Khamenei senior) as successor, Iran is putting up strong resistance and counter-attacking US and neighboring Gulf countries.

Iran has also shut down the Strait of Hormuz, through which much of the world’s oil supplies and other commodities transit. Iran is now holding the world’s oil hostage, and won’t stop until it gets lasting guarantees of protection. This is their key bargaining chip.

As we expected, Trump declared the war is “nearly complete” which gave brief reprieve to markets. But Iran is pulling all stops and refuses to negotiate nor surrender. This puts Trump in a difficult position: He can’t withdraw, lest he cede the strategic Hormuz chokepoint and also face embarrassment of failure.

At the same time, Israel wants to topple the Iranian regime and see the war to its full conclusion.

Trump’s only option is to raise the stakes and fight on. Airstrikes can only get them so far when nuclear targets are underground and Iranian militia are dispersed. Hence we are now hearing rumors of a possible ground invasion by US troops. Trump is trying to up the ante against an opponent who will not fold; we fully expect escalatory actions over this weekend.

In our estimation, the next step for the US is a ground invasion to take/destroy Iran’s 460kg of Uranium stockpiles and oil stockpiles/infrastructure. Only then might Trump announce “mission accomplished”. But not only is this a Hail Mary, it doesn’t actually do anything to reopen Hormuz nor get the Iranians to fold.

Mosaic defense

What has surprised us so far is Iran’s ability to put up resistance despite losing much of its weaponry. With a couple of low-cost drones and fast boats, Iran can plausibly threaten Hormuz for as long as it wants. A remarkably cheap way to deprive the world of oil. The world is witnessing a new era of drone and AI warfare in real-time.

There are different proxy groups and decentralized military forces (31 provincial commands acting autonomously with their own weapons, intelligence, and decision-making!) operating in Iran. This is called “Mosaic Defense”. It’s also why killing the leaders does nothing to the regime or its battle capabilities.

Therefore, this war is unlikely to be winnable for the US without heavy troop casualties and draining financial resources. Iran has ways of prolonging the battle, while the US has already spent $25B and years’ worth of supplies in just two weeks. The US is quickly running out of high-tech munitions — these weapons require complex manufacturing, with years of backlog from underinvestment.

At the same time, there has not been enough financial distress to push the US to abandon its objectives. Neither has Iran felt they’ve inflicted enough harm to extract maximum leverage. In short, the war rages on.

The key question is what this means for oil prices and the global economy…

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

In this week’s note, we discuss the full ramifications of the US’ war with Iran. We predict the next developments, as well as oil prices and stock market direction.

This could be the dip to buy.

Admittedly, we are not geopolitical experts. We do, however, know how Trump operates and can glean his future actions.

And sometimes, the right call is to be contrarian.

Strap yourselves in because this is going to be a long one…

War with Iran

By now, you'll have heard the US attacked Iran and killed their Supreme Leader Ayatollah Khamenei. The big question mark that remains is how this will affect markets going forward. There’s a lot of misinformation (and frankly, fear) so it's important we remain objective.

To recap: The US launched air strikes on Iran after failed nuclear talks and rising civil unrest. They targeted key officials but also weapons sites. The goal being to disarm nuclear weapons, install a US-friendly government, and exert stronger control over the Strait of Hormuz — a key shipping corridor that carries significant oil supplies to Asia including China.

It's not a coincidence that China is tangentially impacted. We have previously written about Hormuz and Malacca, and the strategic importance of these two shipping corridors. Controlling the straits gives the US long-term strategic leverage in the region.

Iran’s response was aggressive, more so than the US was anticipating. Iran launched retaliatory missile and drone strikes against neighbors like UAE, Bahrain, Kuwait, Saudi Arabia. Pushing those regional partners into the arms of the US.

Iran also shut down the Strait of Hormuz and attacked oil tankers passing through. Effectively denying oil exports to the world. Oil export is the financial lifeline of Middle Eastern countries, not to mention the Asian countries which depend on the oil. So effectively, Iran has turned the rest of the world against them and backed themselves into a corner.

Trump was likely expecting a Venezuela-style surgical strike and quick resolution. Instead, Iran put up resistance and this fight will likely last weeks, if not months. Both sides have threatened extensive violence, which makes resolution appear to be a distant possibility.

In the meantime, global oil and natural gas prices are skyrocketing. Markets are freaking out over inflation, much like when Russia invaded Ukraine and curbed global energy supplies. Investors are fearing an extended conflict and worst-of-the-worst outcomes, but that’s where we think they’re wrong.

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Incentives determine actions

To understand how different parties will react, seek to understand their incentives. This will often tell you how the future will unfold.

USA: Publicly, Trump has said they won’t make a deal without Iran’s unconditional surrender, and has floated the idea of sending ground troops in. He has used the feared words, “For as long as it takes”. But of course, Trump does not always mean what he says.

Despite hardline overtures, Trump has always been against prolonged combat, particularly with a fast-approaching midterm election which he appears to be losing. An extended battle with Iran is undesirable because it threatens higher inflation (key issue for consumers), a weak global image (he already failed on Russia diplomacy and needs a win), mixed messaging on objectives (voters despise “forever wars”), and congressional challenges against his war powers.

In Venezuela, despite kidnapping Maduro, the same regime largely remains in power today. It’s a “head of the hydra” situation. But as long as the regime provides the US with oil, Trump appears to be satisfied. Therefore, a minimal change of leadership in Iran may be enough for him, even if cosmetic.

Put simply, Trump wants a quick resolution with minimal American casualties. He cares more about the appearance of change than actual substance. This mirrors his M.O. of tariff threats back in April, which were also posturing.

Iran: During previous negotiations, the regime’s demands were irreconcilable, so now they are bombing neighbors in the hopes of forcing concessions. Striking Gulf assets and Hormuz tankers hurts US allies/economy; Iran is hoping the costs are high enough that partners like Saudi or China pressure the US to negotiate.

The US and Israel together have hit more than a thousand Iranian targets in two days. For all intents and purposes, Iran’s war capabilities have been neutered. They hold the world’s oil supplies hostage, but there’s little else they can do. A lot of bark, no bite.

But the Iranian regime is vast, with sprawling layers of religious authority and armed branches. Removing Khamenei only accelerated his looming death; it did little to unseat the deeply embedded institutions that support the regime. Even as the US mows down newly-replaced leaders, the armed forces will not just go away. This means lasting regime change is unlikely — unfortunate news for Trump and Iranian citizens.

Fortunately, the regime is not looking to destroy the world. They merely want self-preservation. Like any dictatorship, they seek to retain control over policy, military, proxies (e.g. Houthis, Hezbollah), and their population. Ideally, sanctions relief as well. And they will likely give up nuclear arms to get it.

Therefore, Iran’s strategy is pretty clear: accelerate attacks to exert max pressure on Trump to end the war. Despite the bombings, Iran wants to settle. This is an existential moment for a regime that has already suffered a heavy blow. Diplomacy is the only way out.

Our prediction: similar to Venezeula, a “new” leader will emerge in Iran, one linked to the old regime. He will negotiate a ceasefire, give up nukes, and reopen Hormuz. Trump gets his "win” but the repression in and around Iran will remain the same. After all, Hamas and Hezbollah have survived far more devastating assaults than this.

The Gulf states are somewhat at odds with US interests. Saudi Arabia and Israel want lasting regime change in Iran, but Trump wants cosmetic change and a swift ending. So even if the US declares truce, Gulf leaders may continue attacks against Iran.

That said, Gulf states also have a strong incentive to end the conflict quickly. In addition to oil exports being an economic lifeline, the war also damages tourism/investment interest (e.g. Dubai) and invites proxy attacks. This is anathema to the monarchies’ stability.

China deserves a mention here as they are Iran’s biggest supporter/financier. They have been relatively restrained in their reaction to the US’ attack. Instead, they urged both sides to stop fighting.

While China is economically aligned with Iran and get much of their oil through Hormuz, their policy is to not get involved with external conflict, especially one that is spearheaded by the US. This is similar to their response to the Russia/Ukraine war, despite Russia being a perceived ally. Ultimately, they prioritize power projection on Asia and not the Middle East.

Conclusion: For Trump, the best outcome would be one similar to Venezuela, i.e. striking a deal with whoever replaces Khamenei. The deal would likely involve nuclear disarmament plus some oil concessions. Trump and his voter base have no interest in a drawn out conflict as American casualties are already mounting. So Trump will have to abandon earlier calls for regime change. For this reason, we think a conclusion to the conflict is on the near horizon.

How will this affect oil prices and stock markets? Let’s explore further…

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To truly understand an economy, one must sometimes step off the trading floor and look at it from a thousand feet in the air.

Imagine floating in a hot air balloon at dawn just outside Mexico City. As the morning mist burns off, the massive silhouettes of the Sun and Moon Pyramids at Teotihuacan materialize below. From this height, you can trace the Avenue of the Dead, a perfectly straight axis planned nearly two millennia ago. It is a masterclass in structural longevity.

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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:

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.

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

We got the long awaited Supreme Court ruling on tariffs this week. Trump announced a new 10% global tariff… and markets responded with a yawn. It is apparent that tariff terror has largely passed, with little to no sustained impact on inflation.

Instead, we focus on the things that actually matter right now: The AI capex cycle and the possibility for a bullish “truce” in the arms race. We discuss more in depth below.

While we see the potential for a strong rally in the coming months, there is still reason to be concerned. The shock absorbers have been removed from the market, making it vulnerable to a February selloff. Will we see a repeat of the 2025 bear?

Today’s topics: AI capex, Mag 7 implications, capex cuts, tax refunds, positioning, technical analysis, our portfolio.

Tariff ruling

The US Supreme Court struck down Trump’s tariffs, as widely expected would happen. However, no judgment was given on whether refunds are due. Trump responded by saying he would reinstate the tariffs under a different legal authority. He subsequently announced a new 10% global tariff lasting 150 days.

Over 1500 companies have already filed for refunds totaling $170B. However, we think there is little to no chance these refunds will be issued.

In contrast to the cataclysmic reaction to the April tariffs, market ignored the new 10% tariffs. Trump himself has repeatedly shown these to be empty threats. Markets rallied due to the removal of this uncertainty overhang, particularly tech and consumer companies which were the primary beneficiaries of cheaper imports.

Inflation markets were also muted. At this point, tariffs have not demonstrated a flow-through to higher inflation, and only a small impact on employment. In our view, peak tariff terror has passed. With this overhang out of the way, the rally setup looks much cleaner.

AI capex overheated

For the mega cap tech stocks, the market cycles between “more capex is good” and “too much capex is bad”. The current narrative is the latter, evidenced by negative stock price reactions to recent announcements by hyperscalers. Capex budgets have been aggressively increased for the coming year, and are now set to make up 2.2% of GDP:

Google co-founder Larry Page was quoted saying “I’m willing to go bankrupt rather than lose this race.” In case it wasn’t already clear, this is not AI hype; it’s capital war.

Capex spending is only good when it can generate a profit. Investors push back on spending when ROI is questionable, and not enough to justify growth ambitions. This is what led to the selloff in Oracle (ORCL) which is down -60% from highs. As shown in the chart below, investors want companies to slow down capex:

We also see this response in CDS markets, which are insurance policies against bond defaults. Big tech companies issued $100B of bonds so far in 2026, and investors demanded record protection against it. That signals investors’ appetite to fund the capex train. At some point, the market maxes out of capacity to absorb any further debt, creating refinancing troubles down the road.

As technology progresses and Chinese competition remains ever-present, the capex becomes ever-harder to justify. Moore’s law says that things should be getting cheaper, not more expensive. It is likely that big tech companies will soon start walking back their capex plans in light of investor reactions.

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Implication for Mag 7

Capex by hyperscalers is set to reach 92% of cash flow, effectively soaking up all excess cash generated by these lucrative businesses. As a result, stock performance is tied to their ability to monetize investments…

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Welcome back to MktContext where we explain what’s happening in the US economy, and use that to time the stock market.

The SPX continues to go “violently nowhere” — sharp ups and downs that net out to nothing. Index volatility remains contained, whereas individual stock volatility is at record highs. Over the past month, the SPX is roughly flat and yet the average S&P500 stock moved 10.8%.

Under the hood, there is major dispersion between stocks. As we said last week, the current market is very split. Lots of stocks are at their highs, but simultaneously, lots of stocks are at their lows. Historically, this has preceded major drawdowns.

And yet the US economy continues to chug along. Companies are reporting good earnings. All the pieces are in place for a bull market — we just need the Mag 7 and mega cap tech sector to cooperate.

In today’s note, we’ll discuss what’s happening to different sectors of the market (AI is taking over!) and how the market could progress going forward.

Today’s topics: Jobs, earnings, AI taking over the world, contrarian indicators, technicals, our portfolio.

Jobs plentiful

Positive economic data continued to roll in. This week we got payrolls, unemployment rate, and hourly earnings all surprising positively.

For a long time, the market has been worried about slowing jobs data. But those figures are muddied by changes in labor supply, labor hoarding, immigration cuts, and post-Covid normalization. As a result they have been misleading economists to predict imminent recession, even as the economy proves to be resilient.

A better indicator is Average Hourly Earnings. The logic is simple — this metric captures hourly pay, which employers will cut in a downturn. Instead, AHE has been consistently growing around 0.3% every month. There hasn’t been a single negative print since 2021:

Taking this into account, all of a sudden the whole picture becomes clear: the US economy is currently experiencing a recovery. This is why recession is a very unlikely outcome at the moment.

Unfortunately, good news is bad news as positive economic data means less likelihood for rate cuts. That’s why the market sold off on the news. Rate-cut odds for the entire year 2026 fell sharply, as shown below. But we think the market has it wrong, as Kevin Warsh is likely to cut rates anyway, given his political/economic leanings. We did a deep dive on Warsh here.

For now, the Economic Surprise Index is moving higher, which is what investors want to see to confirm the economic reacceleration thesis. As long as this blue line is moving up and to the right, the economy is getting better and better.

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Earnings update

With about 60% of the S&P500 having reported earnings, here’s how the companies are doing. 79% are beating earnings estimates. Earnings are growing 13% from last year, which is astounding velocity. Clearly, the momentum which began in 2023 has continued.

The progression chart below shows the current earnings cycle (thick black line is 2025 Q4). After the lull since April 2025, it has been revised sharply higher in recent months. Needless to say, estimates were too pessimistic in the past year. Of particular note is the 2026 Q4 earnings (magenta line near top of the chart) which shows steady growth in future earnings expectations.

Earnings conference calls have frequently highlighted AI productivity gains and OBBBA tax incentives as primary drivers of growth. Fiscal policy support has been a key tenet of our bullish thesis for this year, and it is working. 2026 and 2027 earnings are now rising 15%, an incredible pace; in the chart below, you can see the estimates inflecting higher:

Lastly, we are seeing positive earnings revisions. This means stock analysts are collectively raising their forecasts for future earnings. It’s a major contributor to stock price movements. Without it, the SPX can’t stay supported and rise higher.

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Welcome back to MktContext where we explain what’s happening in the US economy, and use that to time the stock market.

Weeks ago we warned that equity positioning is overstretched and there is risk to the downside. “When everyone has already bought, there is no one left to buy.” We urged caution as we knew there could be large overreactions to negative news.

Last week we said markets are “highly fragile” and that’s exactly what we got. Markets have done a huge round-trip, a big selloff and huge intraday swings both up and down. As predicted, negative gamma effects exacerbated moves in both directions since dealers must buy into strength and sell into weakness.

SPX is closing just shy of its record high, but Nasdaq has taken a deeper hit. Has the positioning cleared? Or will we get more downside?

The index movements further mask a wide dispersion at the individual stock level, especially in software stocks which are undergoing their own recession. This week’s note discusses the software crash, and whether now is the time to be buying software stocks.

Today’s topics: Death of software, macro getting better, 2026 outlook, positioning marks a bottom, new trade alert, our portfolio and SPX breakout.

Death of software

This week we saw a sharp unwind in software stocks that dragged the Nasdaq down (dubbed “SaaS-pocalypse”). We initiated on this topic several weeks ago arguing that software is getting democratized and the SaaS pay-per-user business model is under pressure. The market is now waking to this reality, sending the IGV ETF down -33% to April lows:

The latest catalyst appears to be Anthropic’s release of new plugins for Claude Cowork (an autonomous AI agent). These plugins are able to perform the functions of entire departments including Legal, Sales & Marketing, Finance & Accounting, Data Analysis, and Productivity & Search.

The major concern is that AI agents can take over what software accomplishes today. When one agent can automate what ten humans used to do, that’s ten subscription revenues that the software vendor loses. The data is already showing per-user pricing dropping off.

It is estimated that in the long run, AI agents will steal 60% of profit from software companies:

The productivity gains from AI agents are staggering. Companies are reporting 3-4x productivity gains and 2x revenues-per-employee. Software vendors are forced to switch from the old per-user model to a fixed pricing model with AI-assisted workflows, or face obsolescence. The very AI features vendors are building to retain customers are giving those customers the tool to shrink their contracts.

It is tempting to argue against this regime change with reasons like “AI generated software can’t be trusted” or “software is deeply embedded in workflows and can’t be replaced”. That misses the point entirely.

Software vendors have gouged customers for decades and customers are now looking at this area for obvious cost cuts. Instead of paying for an extra seat, they can eliminate that need altogether. In this way, software companies have lost their pricing power due to disruption, even if they don’t lose demand any time soon.

Contagion risk

The software selloff is infecting Bitcoin. Both assets have sold off in lockstep since August. There are no coincidences in financial markets, and it is likely that venture capital investors are overleveraged in both assets, leading to margin calls and cross-liquidations.

On top of that, software concerns are infecting the private equity and private credit markets. For years, lenders like Blue Owl and Ares earned attractive returns financing software startups with predictable subscription revenues. These investors are now forced to revalue their books as growth slows drastically and a wall of debt is set to mature:

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Where’s the bottom?

So where do software stocks bottom? Surely, not every company will vibe-code their own software for the hundreds of products they use. And those that do can’t also replicate the required maintenance, design iteration, and database management.

What will happen is that “low effort” software will be replaced. SaaS products that were really just a database and a login screen can no longer command premium pricing. Software companies need a real moat to survive (think deep integration across enterprise workflows) or leadership that is willing to evolve with the times.

For now, the broader software landscape remains in a recession. Slowing jobs growth and AI efficiencies are still pressuring per-user revenues. To make matters worse, IT budgets are getting reallocated away from software spending towards new AI projects.

That said, the selloff is starting look overdone. The IGV ETF is near April Liberation Day lows, with valuation levels at extreme lows (particularly relative to chip stocks). Below shows hedge fund positioning in chip stocks (brown line) versus software stocks (blue line) is at a generational wide spread. When momentum is at extremes, it is liable to mean-revert.

So a trade is setting up to long software stocks outright, or against a short in chip stocks. For us to be interested, we want to see IGV form a base over the next few weeks (if not months). For example, in the 2022 tech recession (chart below), IGV formed a year-long base before finally breaking out. Structural concerns do not go away overnight. Wait for the consolidation to occur before stepping in.

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• Macro getting better

• Positioning marks a bottom

• Technicals are bullish but shaky

• New trade alert

• Our portfolio and impending breakout

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Welcome back to MktContext where we explain what’s happening in the US economy, and time the stock market.

Topic of the week is the historic meltdown in precious metals, particularly gold and silver.

We also had a very intense week of price reactions as SPX and Nasdaq whipped around without making real progress. Let’s talk about what happened.

From Jan 21 to 28, the Mag 7 rallied sharply with multiple gap-up days, on the expectation of strong earnings reports. We previously noted that positioning had risen sharply which gave us pause. The view on the Street was Mag 7’s earnings results would catalyze a breakout of the consolidation range.

As we wrote last week, “When everyone has already bought, there is no one left to buy.”

Mag 7 earnings results were indeed strong but Nasdaq sold off on the week. This creates a “good news bad price” setup where good news fails to drive stocks higher. It is a key indication that everyone has already bought, leaving no buyers for the news.

With multiple failed attempts at the break of all-time highs, we need to reassess the outlook for SPX and QQQ. Will we get a continuation of the rally? Or are we setting up for a deeper bear market similar to 2022 and 2025?

Today’s topics: Gold/silver crash, FOMC, Kevin Warsh, tech earnings, macroeconomy, technicals, our portfolio.

Gold and silver crash

This week, gold and silver finally collapsed under the weight of their parabolic rise. what started as a wobble on Thursday turned into a full-blown implosion on Friday. The move was triggered by a series of margin hikes on speculators, a trading halt in Shanghai, and a leveraged ETF liquidation.

This toxic cocktail triggered a massive downside grab for liquidity, but there were no buyers. Only a giant air pocket underneath. The result: a -14% drop in gold and -37% drop in silver within one day.

This parabolic rise and collapse is a good pattern to recognize as the same can happen to individual stocks. Coincidentally, here is SNDK on the same day after reporting blowout earnings and gapping over 20%, then waterfalling back down. SNDK is up 136% in January alone and 1500% over the past twelve months. (It is not a penny stock; it’s a mega cap tech company!) Learn to recognize when these types of moves are happening and signs of exhaustion.

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FOMC

The Fed meeting went as expected. They remained on hold, with 2 dissenters (Miran and Waller) who wanted a 25 bps cut.

Key to their decision was the labor market showing signs of stabilization, while inflation risk is lower. The whole point of cutting rates in the past several meetings was to support jobs, but that may not be necessary anymore. Hence, rate cut odds fell:

Fed members see some uncertainty in the economy, but things are generally on the up and up; consumer spending resilient, fixed investment expanding, shutdown distortions dissipating. We’ve been talking about the reacceleration thesis for a while now, so it’s nice to have the Fed confirm.

Powell declined to comment on the DOJ subpoenas or whether he will stay on the board after his term as Chair ends. Market continues to discount Fed messaging, on the assumption that the next Fed Chair will push several cuts in 2026.

The risk with this thinking is that the new Chair fails to convince the others to cut (it is a vote, after all) and inflation concerns take a higher turn. The market won’t get the cuts it’s hoping for, which will be bad for stocks. On that note, let’s talk about the next Fed Chair.

Who is Kevin Warsh?

Trump announced the next Fed Chair to be Kevin Warsh. The debate is focused on whether he will cut rates or not, but that misses a huge point about Warsh’s ideologies…

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• Kevin Warsh and the impending Fed regime change

• Tech earnings

• Fundamentals strong, technicals shaky

• Our portfolio and the coming consolidation break

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