The AI Trade, Rising Rates, and Why the Market Is Still Standing

There has been a lot going on this year. On again off again war, AI, private credit, private equity, a hedge fund blowing up, you name it. I sat down with Jason Trennert, founder of Strategas, and Chris Verrone, the firm's market strategist, to take a step back and dig deep to try and figure out where things stand and how the market is digesting all of this.

The Market is super concentrated

Jason is personally nervous because the market is so concentrated. If you look at the top ten holdings of the S&P 500, that's about 39%. If you look at the tech sector, it's about 36%. If you add in tech-adjacent companies like Amazon that aren't specifically in the tech sector, you're up over 50%. And then you see something like Situational Awareness blow up, which happened with the VIX below 20 and just a fifteen, twenty basis point increase in long-term interest rates. How can somebody lose that much money in what seems like a very quiet market? I explained it as a leverage and lack of hedging story. If you're four times levered and there's one bad data point, and if it's the same trade on both sides and it reverses on you at four times leverage, the capital is wiped out. Jason compared it to Long-Term Capital, noting that these famous blown-up hedge funds tend to be a little preachy. In other woes be careful what you name your business, the end of the story may be embedded in too much pride baked into the names

Chris's view is that every single time the leading stocks have corrected this year: 30, 40, even 50% in some names, from mid-May through last week, money hasn't wanted to leave the asset class of equities, it's just rotated. Why? He pointed out that at the prior S&P high on June 2nd, only about 50% of the S&P was above its 200-day average; today it's 75%, so even as the market has churned for eight weeks, the internals have gotten better, not worse. Chris thinks we haven't yet found the level of interest rates that gets money to leave equities, and his guess is it's higher than most people think. This is a key point. When rates go to a certain point, money will rotate out of the S&P. So what’s the magic number?