Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / How the Fed Pivot Is Widening the Growth Gap
Transcript
- Lucas: So the Fed held rates steady yesterday — no surprise there. But what caught my attention was not the hold itself. It was how Chairman Warsh rewrote the statement. The old language about 'some additional policy firming' and the bias toward cutting are both gone. Luna: Right, and Gundlach was on CNBC saying Warsh is not going to be the easy-money chair that some hoped for. That's a pretty direct warning. Lucas: Exactly. Warsh abstained from giving any rate forecast, but several FOMC members signaled a hike later this year. So the market is waking up to the idea that rates stay right here — maybe even go up — for a while. And that is creating a fascinating divergence under the hood of this bull market. Luna: I saw that divergence in the numbers this week. The S&P 500 is up 0.8% in five days, the Nasdaq is up almost 2%. But then you look at names like Datadog and Cloudflare — down 4% and 3.3% respectively. That's not a uniform rally. Lucas: It's the opposite of uniform. The Russell 2000 is up 0.6% in the same window, which is fine, but not the blowout we saw a few weeks ago. Meanwhile ARKK — Cathie Wood's flagship — surged 4.7%. So what's going on? The market is sorting stocks by how much of their valuation depends on future cash flows far out in time. Luna: And when rates stay higher for longer, distant cash flows get discounted more heavily. So high-growth names with no near-term earnings get hit. Lucas: Precisely. Datadog and Cloudflare are both fantastic businesses — growing revenue, gaining share. But they're not yet profitable on a GAAP basis. Their stock prices are priced for perfection five years out. A 3.6% fed funds rate makes that perfection less likely. Luna: And ARKK owns a lot of those names too, yet it's up. So something else is driving that. Lucas: ARKK is up because of a handful of big winners — Tesla, Roku, Zoom — that have near-term catalysts. Tesla's energy storage business is ramping fast, Roku just announced a smart TV partnership, Zoom's enterprise segment is still growing. So ARKK is getting a rotation within growth: out of the narrative stocks and into the ones showing current-quarter revenue acceleration. Luna: That aligns with what I've been hearing from quantitative funds — they're screening for revenue acceleration and positive free cash flow yield. Pure narrative stocks are getting left behind. Lucas: And this is exactly the kind of environment where a Fed hold — especially a hawkish one — accelerates that sorting. If you look at the Russell 2000 surge from a few weeks ago, a lot of that was tiny biotechs and unprofitable tech companies rallying on the hope of rate cuts. Now that hope is fading. Luna: So the Russell 2000's relative outperformance may be fragile. The index is up only 0.6% this week, and a lot of the breadth came from low-quality names. Lucas: Right. The quality factor within small caps — companies with positive earnings, low debt — is actually doing fine. It's the junk that's rolling over. And that's a healthy correction, honestly. You don't want a rally where every tiny stock goes up indiscriminately. Luna: Speaking of healthy, our conversations about money and markets — they take time to research and produce. If you've gotten value from episodes like this one, a couple of dollars a month genuinely makes a difference. It's why we keep the show ad-free and independent. Lucas: Yeah, listener support is what allows us to drill into these specific corners rather than chasing clickbait. You can find us at buy me a coffee dot com slash fexingo. Even a small contribution helps cover research tools and hosting. Luna: Alright, back to the split. So if the market is rewarding near-term earnings, which sectors are actually benefiting right now? Lucas: Financials are a clear winner. Higher rates mean wider net interest margins for banks. The big money center banks — JPMorgan, Bank of America — have been grinding higher. Regional banks too, though they're more sensitive to deposit costs. Luna: Energy as well? Oil has been stable around $75, and the majors are generating a ton of free cash flow. Lucas: Energy is interesting because it's more about capital returns than growth. Exxon and Chevron are buying back stock and raising dividends. That's a great fit for a 'show me the money now' environment. But you have to watch for oil price volatility — if crude drops, the whole thesis weakens. Luna: And tech? The mega-cap tech names like Apple and Microsoft — they're profitable, they have huge cash piles. They should be fine, right? Lucas: They're fine, but they're not surging. Apple is up maybe 1% this week. Microsoft a bit more. They're not the leaders because they're already so large that their growth rates are single digits. The market is looking for acceleration, not stability. So the real action is in the mid-cap growth names that are inflecting to profitability. Luna: Can you give a concrete example? Something listeners can track. Lucas: Sure. Take a company like CrowdStrike — ticker c r w d. It's down 1% this week, but it's still up 25% year to date. CrowdStrike is profitable, growing revenue around 30%, and it's gaining share in cybersecurity. That's the kind of profile the market likes. Compare that to Cloudflare — ticker N-E-T — which is also growing fast but isn't profitable yet, and it's down over 3% this week. Luna: So the market is drawing a sharp line between profitable growth and unprofitable growth. And the Fed hold is the line-drawer. Lucas: Exactly. And this isn't a temporary thing. If the Fed stays on hold through the rest of 2026 — which is the base case now — then this sorting will continue. Companies that can show earnings per share growth in the next two quarters will outperform. Those that can't will lag, even if their long-term story is compelling. Luna: What about the SpaceX IPO? That's a narrative stock if there ever was one — huge vision, no public earnings yet. Lucas: SpaceX is a unique case because it's not just narrative — it has real revenue from Starlink and launch services. But the IPO pricing will be a test. If it comes out at a valuation that implies massive future profits, it could struggle in this rate environment. If it's priced reasonably, it could be a catalyst for the whole space sector. Luna: So for an investor listening right now, what's the one takeaway? Lucas: Look at your portfolio and ask: 'Does each holding have a clear path to higher earnings in the next six months?' If the answer is 'maybe in three years,' that stock might underperform until the Fed changes course. And based on yesterday's statement, that course change isn't coming soon. Luna: Good rule of thumb. I'll be watching the Russell 2000 quality indexes versus the broad index. If the gap widens, it confirms the rotation is real. Lucas: And we'll be watching it with you. That's it for today — Lucas and Luna, Bull Market Conversations. Stay sharp out there.