Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / Why the Bull Market Is a Data Center Arms Race
Transcript
- Lucas: So the S&P 500 is up seven-tenths of a percent over the last five days, and the Dow is barely moving. But if you look under the hood, there's a very clear winner this week, and it's not the broad market. It's the companies building and protecting the digital backbone of the economy. Luna: You're talking about the cloud and cybersecurity names, right? CrowdStrike is up almost fourteen percent in five days. Lucas: Exactly. CrowdStrike, ticker symbol c r w d, jumped thirteen point six percent. Cloudflare is up seven and a half. Datadog, five and a half. Palantir, nearly six. And interestingly, Shopify, which is more of a commerce platform, but it's riding the same wave, up two point seven. Luna: Meanwhile the Russell 2000 is down half a percent. So the market is really bifurcating. Lucas: That's the story. Small caps are lagging, the NYSE composite is down, but the NASDAQ is up one point six percent. And I think the reason is that we're in the middle of a data center arms race. Companies aren't just buying more software, they're fundamentally rebuilding their IT infrastructure to handle AI workloads, and that's creating a durable demand cycle for these specific vendors. Luna: And this is happening even as GDP growth slows to one point five percent annualized. So it's not a broad-based boom, it's a concentrated one. Lucas: Right. Real GDP growth came in at one point five percent for the April quarter, down from two point one. But the capex cycle in tech is separate from the consumer economy. These companies have massive cash reserves, they're borrowing cheaply, and they're spending aggressively on data centers and security. The interesting part is that even with the Fed potentially hiking rates, this spending isn't slowing. Luna: Let's talk about the Fed, because the headlines this week are all about Kevin Warsh and the possibility of a rate hike in September. The market's now pricing it as a coin flip. Lucas: Yeah, that's a big shift. Warsh is giving his Jackson Hole speech today, and the futures market is showing roughly a fifty-fifty chance of a hike. But here's the thing, the effective fed funds rate has been steady at three point six three percent for two months. The Fed hasn't moved, but the rhetoric is getting hawkish. Luna: So if they do hike, does that kill the momentum in these tech names? Lucas: Historically, rate hikes are bad for high-valuation growth stocks. But this time, the earnings growth might be strong enough to offset the discount rate impact. I mean, look at CrowdStrike, it's up almost fourteen percent in a week. That's not just a multiple expansion, that's probably some real earnings revision or a big contract win. Luna: Though we should be careful, we don't have specifics on the reason for that jump. It could be a short squeeze, too. Lucas: That's fair. But the broader trend is clear. These companies are benefiting from a structural shift in how businesses allocate their IT budgets. Security is no longer an afterthought, it's a board-level priority. Every data center buildout requires a security layer, so CrowdStrike and Cloudflare are essentially selling shovels in a gold rush. Luna: And Datadog is the observability layer, making sure all those systems actually work. They're up five point two percent this week. Lucas: Exactly. And Palantir, which is up five point seven, is the analytics layer on top. So you've got the full stack of the modern data center, and they're all moving together. That's not a coincidence. That's a theme. Luna: So for an investor, is this a case of staying with the winners, or is it too late to jump in after these moves? Lucas: I think the question isn't whether these stocks have run too far in a week, but whether the underlying demand will last for years. And I'd argue yes, because the AI buildout is still early. We're seeing the initial wave of spending, but there's a long runway. The key is to differentiate between companies with durable competitive advantages and those just riding the hype. Luna: What's a concrete way to tell the difference? Lucas: Look at gross margins and revenue growth. CrowdStrike has consistently high margins and subscription revenue. Cloudflare has a massive network effect. Datadog has high switching costs. But there are also names that might be overextended. You want to see that the growth is coming from actual customer adoption, not just price increases. Luna: And what about the macro environment? If the Fed does hike, could that trigger a broader sell-off that drags these high flyers down with it? Lucas: It could, and that's the risk. But even in a sell-off, the companies with the strongest fundamentals tend to recover faster. And there's another dynamic here. The Fed is hiking because the economy is strong, or at least that's the narrative. If that's true, then IT spending should hold up. If they're hiking to fight inflation, that's a different story. Luna: So far, the data suggests the economy is slowing, not booming. But these tech earnings are still strong. Lucas: That's the paradox. The GDP number is one point five percent, but the tech sector is growing at double digits. That's why the market is bifurcated. The old economy is sluggish, but the new economy is thriving. And the question is, can that continue if rates go higher? Luna: What's your take on the September meeting, personally? Lucas: I think it's genuinely a coin flip. Warsh has been hawkish, but the economic data is mixed. Inflation is still above target, but GDP is slowing. If I had to guess, they'll hold rates steady, but the language will be hawkish. That way they keep their options open without spooking the market. Luna: So for the average investor, does this mean staying the course, or adjusting your portfolio? Lucas: I'd say don't overreact to the week to week moves. If you've been invested in quality tech names, the momentum is on your side. But it's also a good time to rebalance, make sure you're not overconcentrated in any one sector. And keep an eye on the Fed, because if they do hike, there could be some volatility. Luna: Speaking of keeping an eye on things, how are you personally tracking these data center stocks? Are you using any specific metrics? Lucas: I look at a few things. One is the five-day momentum, which we've seen. Another is the relative strength versus the S&P 500. And I also watch the options market for any unusual activity. But honestly, the most telling sign is the earnings revisions. If analysts are raising revenue estimates, that's a strong signal. Luna: And what about the broader market breadth? Even with the NASDAQ up, how many stocks are actually participating? Lucas: That's a good question. The Russell 2000 is down, the NYSE composite is down, so it's a narrow rally. I'd say maybe only a third of stocks are above their 50-day moving average. That's a warning sign. If the leaders start to stumble, there isn't much support underneath. Luna: So it's a market that rewards selectivity. You have to be in the right names. Lucas: Absolutely. And that's where the research pays off. You can't just buy an index fund and expect to capture this kind of momentum. You need to understand the themes and the fundamentals. Luna: That's been really helpful, Lucas. I think a lot of our listeners are trying to figure out how to navigate this split market. And today's episode gave some concrete ways to think about it. Lucas: I'm glad it's useful. And if today's conversation actually helped you think about a decision differently, the way we keep this show ad-free is through listener support. You can buy me a coffee at buy me a coffee dot com slash fexingo. It's a small way to keep these conversations going. Luna: Yeah, every bit helps. And it's because of listeners like you that we can dive into topics like this without any sponsor noise. Lucas: So, back to the data center arms race. One thing I want to emphasize is that this isn't just about the big names. There are smaller players in the supply chain, like component makers and cooling systems, that could also benefit. But those are riskier and require even more due diligence. Luna: Right. And for every CrowdStrike, there are plenty of companies that don't deliver. So it's about picking the ones with real competitive moats. Lucas: Exactly. And the moat for CrowdStrike is its platform approach, not just a point product. Cloudflare has a global network that's hard to replicate. Datadog's value is in the integrations. Palantir has the government contracts. These are durable advantages. Luna: What about the valuation risk? These stocks are trading at high multiples. How do you justify that? Lucas: I look at the price to earnings ratio, but I also look at the price to sales and the growth rate. If a company is growing revenue at thirty percent and has a PEG ratio under two, that's reasonable. But if it's growing at twenty percent and trading at twenty times sales, that's stretched. It's about balancing growth and value. Luna: And with the Fed potentially hiking, does that change the calculus? Lucas: It does. Higher rates mean the present value of future earnings is lower, so high-multiple stocks get hit harder. That's why you need to be even more selective. Focus on companies with strong cash flows and a path to profitability, not just story stocks. Luna: So what's the one takeaway you want listeners to have from today? Lucas: The bull market is still alive, but it's not broad. It's being driven by the data center economy. If you're invested in that theme with quality names, you're in the right place. But be aware of the risks, stay diversified, and keep an eye on the Fed. Because the next few months could be volatile. Luna: I think that's a great note to end on. Thanks for joining us on Bull Market Conversations. Lucas: Thanks, Luna. And thanks to all our listeners. We'll see you next time.