Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / How the Bull Market Is Pricing Rate Cuts
Transcript
- Lucas: So the S&P 500 closed at 7,786 on Friday, up about four tenths of a percent on the week, while the Dow actually slipped half a percent. And the funny thing is, the Fed funds rate is still sitting at 3.63 percent, where it's been for over a month. Luna: Right, so stocks are near highs, but the Fed isn't cutting. That's the disconnect we keep hearing about. Lucas: Exactly. And I think the market has finally accepted that cuts aren't coming as fast as it hoped at the start of the year. At the beginning of 2026, futures were pricing in maybe three or four cuts. Now? The effective rate has been flat since July, and the market seems okay with that. Luna: So what changed? Why is the market okay with higher rates for longer? Lucas: Partly because the economy isn't collapsing. Real GDP growth slowed to 1.5 percent annualized in the second quarter, but it's still positive. And corporate margins have been resilient. But there's a rotation happening underneath. Small caps are outperforming, which is odd if you think higher rates hurt smaller companies more. Luna: The Russell 2000 was up 1.7 percent on the week, right? That's a big move. Lucas: Yeah, the Russell is at 3,068, and it's been leading. I think what's happening is that the market is repricing rate sensitivity. Small caps had been beaten down on fears that they'd get crushed by high borrowing costs. But now that rates have stabilized, investors are looking for value there, especially in sectors that benefit from domestic growth. Luna: So it's not that small caps love high rates, it's that the fear of rising rates is gone. That makes sense. Lucas: Precisely. And you see the same repricing in tech, but in a different way. Cloudflare is up 1.7 percent this week, closing at 315.78. CrowdStrike, on the other hand, dropped 3.6 percent. Those aren't macro moves; they're company-specific. But the market is no longer treating all tech as a rate bet. Luna: So what separates the winners from the losers in tech right now? Lucas: Cash flow and AI narrative. Cloudflare has been riding the AI infrastructure wave, and investors are willing to pay up for that growth. CrowdStrike had a bad week, maybe some profit-taking after a run. But the point is, the market is being selective. It's not a rising tide lifting all boats. Luna: And that selectivity is showing up in the mega-caps too. I saw that Berkshire increased its stake in Alphabet. Lucas: That's a big deal. Berkshire making Alphabet a top-three holding is a value investor saying, 'I'm willing to pay for growth, but at a reasonable price.' Alphabet isn't the cheapest stock, but compared to some AI names, it's reasonably valued. And it throws off cash. Luna: So is that the playbook now? Buy cash-rich companies with AI exposure but not insane valuations? Lucas: Partly. But I think the bigger theme is that the market is learning to live with a 3.6 percent fed funds rate. The 'higher for longer' narrative has shifted from a threat to just the backdrop. And that's why the VIX has been quiet even as the S&P makes new highs. Luna: But the Dow is down on the week. Isn't that a warning sign? Lucas: The Dow is a narrow index. It's got a few big industrials and financials that are sensitive to rate expectations. The fact that the S&P and the Nasdaq are up while the Dow is down tells you the market is rotating into growth and small caps, not fleeing risk. Luna: So what would change the picture? What would make the market start pricing in cuts again? Lucas: A real slowdown in jobs or a spike in unemployment. The Fed is data-dependent, and right now the data is mixed. GDP growth is slowing, but it's still positive. If we see a couple of weak jobs reports, the market will start pricing cuts again, and then you'll see a shift back into rate-sensitive sectors. Luna: Speaking of data, the next jobs report is out in a few weeks. That could be a catalyst. Lucas: Absolutely. But for now, the market seems comfortable with the idea that the Fed is on hold for a while. And that's actually a healthy setup for a bull market. It's not running on cheap money anymore; it's running on earnings and cash flow. Luna: So if I'm an investor, how do I position for this? Do I chase small caps or stick with mega-cap tech? Lucas: I'd say diversify, but with a tilt toward quality. Small caps have been leading, but they're more volatile. Mega-cap tech has been the engine, but it's priced for perfection. The sweet spot might be mid-caps or companies that are profitable and growing, like a Cloudflare or a Datadog, even though Datadog had a rough week. Luna: Datadog was down 2 percent this week. But it's still up huge over the past year. Lucas: Right, and that's the thing. In this market, you have to be patient. A down week doesn't mean the thesis is broken. It's about whether the company is executing on its AI or cloud strategy and generating real cash flow. That's what separates the winners from the losers in this phase. Luna: That makes sense. And it's interesting how the market has shifted from just buying anything with AI in the name to being more discerning. Lucas: Exactly. The easy money was made in the initial AI rally. Now it's about fundamentals. And that's why you see Berkshire moving into Alphabet — it's a recognition that even in a bull market, you need to pay attention to valuation. Luna: Before we go further, I want to take a quick step back. We talk a lot about investing here on the show, and if our conversations have helped you think about a decision differently — whether it's about rates, small caps, or just how to approach the market — maybe consider supporting us. It's what keeps the show ad-free and independent. You can do that at buy me a coffee dot com slash fexingo. Lucas: Yeah, that's a great point. It really does help us keep doing what we do, and it's not expected, but it's appreciated if you find value in these episodes. Luna: And we're back to the market. So, Lucas, you were saying about valuation and being discerning. How do you actually apply that in practice? Lucas: Well, one thing I look at is the price to earnings ratio, but not in isolation. I compare it to the growth rate. A company growing earnings at 20 percent a year can justify a higher P/E than one growing at 5 percent. The trick is finding companies where the growth is durable, not just a one-time pop. Luna: And with rates staying put, does that change how you value growth? Lucas: It does. Higher rates mean future earnings are worth less today, so you need stronger growth to justify the same price. That's why you see a divergence between companies that can deliver that growth and those that can't. The market is punishing the latter. Luna: So it's a stock-picker's market, more than a passive index story. Lucas: For now, yes. The index still works because the mega-caps are so heavy, but to outperform, you need to be selective. And that's actually a healthy sign for a bull market in its later stages — it's not just a rising tide. Luna: Well, we'll see if that continues. Thanks for breaking it down, Lucas. Lucas: Anytime. And remember, keep an eye on the data — especially the jobs report. That could be the next big move.