Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / The S&P 500 Divergence Explained
Transcript
- Lucas: If our money conversations have helped you think about a decision differently, I want to mention that a small group of listeners already chips in monthly through buy me a coffee dot com slash fexingo. That support literally funds the research behind these deep dives. Luna: It is great to know there is a direct line between your curiosity and the quality of these episodes. We appreciate every single contribution. Lucas: Thanks, Luna. Let's get into today's market reality. It is September twenty ninth two thousand twenty six, and if you look at the headline numbers, things look deceptively calm. The S&P 500 is sitting at seven thousand six hundred fifty six, down just zero point six percent over the last five days. But here is the catch that most headlines are missing: nearly half the stocks in that index are currently moving at cross purposes with the rest of the market. Luna: That is a massive internal fracture. When you say half the constituents are fighting the trend, what does that actually look like on the ground? Lucas: It looks like a classic but dangerous divergence. On one side, you have the momentum leaders. Look at CrowdStrike, which trades as c r w d. It is holding up around two hundred fifty nine dollars despite the broader weakness. Then look at Snowflake, trading near three hundred fifty one dollars. These companies are posting strong revenue growth and benefiting from enterprise AI adoption. On the other side, you have the broader index weighting dragging them down because the median stock is stagnant or declining. Luna: So we are seeing a concentration of returns among a handful of high-quality tech names while the average company lags. Is this just a sector rotation, or is it something more structural? Lucas: It is structural, and it ties directly back to the liquidity environment we discussed in previous episodes. The Fed Funds effective rate is flat at three point six three percent, and interest on reserve balances is holding at three point nine zero percent. Capital is cheap enough to fuel speculation, but not cheap enough to lift all boats. So, liquidity is flowing into the safest, fastest-growing bets—like those cloud infrastructure plays—and bypassing everything else. Luna: That explains why the Russell Two Thousand is taking a beating. It is down one point five percent over the week alone, significantly worse than the S&P drop. Lucas: Exactly. The Russell Two Thousand is at two thousand seven hundred ninety five, and it is getting crushed by institutional flows. Small caps rely on local bank lending and higher-yield debt markets, both of which are tight right now. Meanwhile, large-cap tech firms like CrowdStrike have pristine balance sheets. They don't need to refinance expensive debt next year; they have cash. So when growth slows, big tech survives on scale and margins, while small caps get squeezed by financing costs. Luna: But doesn't this create a vulnerability? If the narrative shifts from 'growth at any cost' to 'profitability and stability,' aren't those momentum stocks exposed too? Lucas: They are exposed, but the market is currently pricing them as defensive. Consider Snowflake. It is up five point five percent over the last five days while the Nasdaq is down zero point seven percent. Investors are treating it as a proxy for enterprise software resilience. They believe that even if GDP growth—the latest reading shows real GDP growth slowing to one point five percent annualized—continues to weaken, corporations will still cut their Microsoft or Adobe budgets before they cut their data cloud contracts. Luna: That is a bold assumption. Corporate IT budgets are notoriously sticky, but zero-based budgeting has become common since the pandemic. Are we sure enterprises won't pull back? Lucas: We are not entirely sure, which is why this divergence is so risky. The problem isn't that Snowflake or CrowdStrike are bad companies. The problem is that their valuations have detached from the economic reality outside. If the labor market softens further, or if consumer spending dips, those enterprise deals could stall. And when they do, the multiple compression on these high-fliers could be violent. We saw similar behavior during the early stages of the rate hike cycles in twenty twenty two. Luna: So the lesson here is that correlation is breaking down. You can no longer assume that buying an S&P ETF gives you broad exposure to the American economy. Lucas: Correct. Buying the S&P 500 today is effectively buying a concentrated bet on about fifty mega-cap technology and healthcare firms. The other four hundred fifty companies are essentially noise in the index calculation. For a portfolio manager, this means you have to actively manage weightings. Passive indexing is becoming less passive because the index itself is becoming less representative of the broader market health. Luna: This brings up an interesting question about retail investors who might be chasing these momentum stocks because they see the headlines. How do you avoid getting caught in the crossfire? Lucas: You focus on cash flow generation, not just top-line growth. Look at Datadog, which is up five point five percent recently. It has moved from a pure growth story to a profitability story. Its operating margins are expanding. In a divergent market, margin expansion is the only shield against multiple compression. If a company is growing revenue but losing money, it gets punished. If it is growing revenue and keeping more profit per dollar, it gets bid up regardless of GDP. Luna: So profitability acts as a hedge against macroeconomic uncertainty. That makes sense. But what about the downside risk? If the Federal Reserve decides to hold rates steady for longer than expected, does that hurt these valuations further? Lucas: It hurts them in the short term because discount rates stay higher, lowering the present value of future cash flows. But historically, bull markets survive on liquidity, not growth. As long as the Fed keeps the federal funds rate flat around three point eight eight percent, there is enough excess capital seeking yield. That capital flows into these high-conviction names. The danger isn't the Fed; the danger is a sudden shock to corporate earnings expectations. Luna: A shock to earnings would break the divergence. Do you see any indicators pointing to that happening soon? Lucas: Look at the ten-year Treasury yield dynamics. While we don't have the exact yield number in front of us, the spread between short-term rates and long-term bonds is flattening. That usually precedes a recessionary signal. Additionally, consider the recent news about China introducing new criteria for humanoid robot IPOs. It seems niche, but it highlights how global supply chain investments are stalling. If Chinese manufacturing demand drops, it impacts US industrial exporters, which drags down the broader index further, widening the gap with tech. Luna: So we have a situation where tech is insulated by domestic enterprise spending, while industrials and small caps are exposed to global trade headwinds. That creates a two-speed economy within a single index. Lucas: Precisely. And this is where active management becomes critical. If you are sitting on a portfolio of small-cap value stocks, you are likely underwater relative to the benchmark. If you are in mega-cap growth, you are likely outperforming. The beta you get from the S&P 500 is no longer diversified risk; it is concentrated momentum risk. Luna: This feels like a moment where patience pays off more than aggression. Chasing the five-day winners is dangerous when the underlying economic engine is cooling. Lucas: Agreed. The key is to identify which momentum stocks have pricing power. Companies that can raise prices without losing customers are the ones that will survive the divergence. Everything else is just gambling on liquidity. Luna: So, stick to the businesses that control their own destiny through margins, rather than waiting for the broader tide to rise. Lucas: That is the playbook. Watch the margins, ignore the headline index level, and remember that half the market is currently irrelevant to the current rally. Luna: Smart advice. It forces us to dig deeper than the ticker symbols. Lucas: Always. Because in a divergent market, the surface data lies. Luna: Let's hope the next earnings season confirms these margins hold up. Lucas: If they do, we ride the momentum. If they don't, we pivot to cash. Luna: A clear exit strategy. That is better than most portfolios have. Lucas: Better than most, definitely. Keep your eyes on the fundamentals, not the noise. Luna: Agreed. Until next time, stay sharp.