Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / Why the Bull Market Ignores Rising Rates
Transcript
- Lucas: If our money conversations have helped you think about a decision differently, then consider that this show runs on listener support rather than ads. A couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo. It makes a real difference. Luna: Thanks for that. And it’s nice to know we can keep doing deep dives without interrupting the flow with commercials. So, let’s get into the weirdness of today's market. Lucas: It is weird, Luna. We are sitting here on September first, 2026, watching the broader market hold its ground despite some very hawkish rhetoric coming out of Washington. Governor Barr just went on air saying he would support a rate hike if inflation doesn't ease up. Normally, that kind of language sends the VIX spiking and pushes the ten-year Treasury yield higher. Luna: Right, and yet the S&P 500 is still hovering around 7,634 points. It hasn't collapsed. In fact, the Nasdaq is flat over the last five days. Where is the pain? Lucas: The pain is being absorbed by the cost of capital equation, but not in the way we used to see it twenty years ago. The Fed Funds effective rate is sitting at 3.63 percent, unchanged since July. But look at the nominal GDP. It’s roughly 32.5 trillion dollars now, expanding at a clip that suggests companies are passing price increases directly to consumers. Luna: So the revenue side is growing fast enough to offset the higher borrowing costs? That feels like a fragile balance sheet for a lot of mid-cap firms though. Lucas: Exactly. That fragility is why the Dow Jones Industrial Average has dropped 1.3 percent over the week. Those are older, industrial-heavy companies with slower pricing power. They feel the interest rate pressure immediately because their margins are thinner. But the large-cap tech and services sectors? They are insulated. Luna: Insulated how? If rates stay at 3.63 percent or go up, their debt servicing costs rise too. Unless they have zero debt. Lucas: Most don't have zero debt, but they have massive cash piles and predictable recurring revenue streams. Think about it: when nominal GDP grows, those subscription-based businesses raise prices without losing customers. The market isn't ignoring the rate hike talk; it's pricing in the fact that earnings will grow faster than the discount rate rises. Luna: That’s a sophisticated take. You’re saying the numerator of the valuation formula is growing faster than the denominator. But is that sustainable if inflation sticks? Lucas: It’s sustainable as long as the labor market holds. Look at the data: Real GDP growth slowed to 1.5 percent annualized in the latest quarter. That’s tepid. But nominal GDP is strong because prices are still creeping up. Companies are recording higher top-line numbers even if volume sales are flat. Luna: So investors are essentially betting that inflation will remain sticky enough to boost revenues, but not high enough to trigger a severe recession. Is that a safe bet? Lucas: It’s a dangerous bet if you’re leveraged. But for the index constituents, it’s working. Take NVIDIA. Their stock is moving premarket, driven by AI infrastructure demand that shows no sign of cooling. The market is willing to give them a premium P/E ratio because their earnings visibility is clearer than the Federal Reserve’s path. Luna: NVIDIA is the obvious example, but what about the rest of the market? Does this dynamic apply to smaller companies, or is this purely a mega-cap phenomenon? Lucas: This is almost entirely a mega-cap phenomenon. Look at the Russell 2000. It’s down 2.7 percent over the week. Small caps hate rising rates because they rely more on floating-rate debt. They don’t have the pricing power to pass on costs. So the bull market is becoming narrower, not wider. Luna: A narrower bull market. That usually means higher volatility later on. If the small caps continue to underperform, eventually the big caps might run out of room to carry the index alone. Lucas: I agree. But right now, momentum is everything. When you see CrowdStrike bouncing 13.8 percent in a single day, it signals that specific sector strength is overriding macro headwinds. Investors are picking winners based on product cycles, not macro forecasts. Luna: Product cycles trump macro forecasts. I like that. It explains why the VIX isn't exploding despite Governor Barr’s hawkish tone. People aren't worried about the Fed; they're excited about the next innovation wave. Lucas: Precisely. And there is another layer to this. The bond market is relatively calm. The ten-year Treasury yield hasn't spiked dramatically despite the talk of hikes. This suggests that long-term investors believe inflation is peaking, even if the Fed wants to squeeze it out one last time. Luna: So the disconnect is between short-term monetary policy tightening and long-term inflation expectations. Stocks are trading on the latter. Lucas: Yes. And remember, equity valuations are forward-looking. If the market believes that rate cuts will resume in early 2027, then today's 3.63 percent rate is just a temporary speed bump. The current quarterly rate is flat, which gives companies breathing room to plan their CapEx budgets without panic. Luna: Breathing room for CapEx. That’s key for the tech sector. They need to build data centers now to meet the AI demand we saw with Hugging Face’s recent robot news. If rates jump suddenly, that investment pipeline freezes. Lucas: It would freeze it hard. But the market assumes the Fed will blink before breaking the economy. Governor Barr is making noise, but Warsh and other officials are signaling caution. The market is betting on a soft landing where inflation cools just enough to allow stability. Luna: A soft landing is the holy grail. But if inflation re-accelerates, all these assumptions about nominal GDP growth could unravel. Are we complacent? Lucas: Complacency is always a risk. But looking at the S&P 500 at 7,634, the trend is intact. The pullbacks are shallow. When the Nasdaq is flat while the Dow drops, it tells us capital is rotating within the index, not exiting it. Smart money is staying invested in quality. Luna: Quality as defined by earnings growth and pricing power. It’s a defensive strategy disguised as aggressive growth. Interesting contrast. Lucas: It is. And it highlights why diversification across market caps matters more than ever. If you were all-in on small caps this week, you’re feeling the pinch. If you were in large-cap tech, you’re barely blinking. Luna: So the lesson for listeners is to look at where the earnings are flowing, not just where the headlines are pointing. Headlines say 'rate hike risk,' but earnings say 'growth continues.' Lucas: Exactly. Follow the cash flow, not the commentary. As long as nominal GDP supports corporate profits, equities will find a floor. The risk isn't in the rally itself; it's in the sudden shift of that narrative. Luna: What would trigger that shift? What breaks the spell? Lucas: A sharp spike in unemployment. Or a credit event where those floating-rate debts actually default. Until then, the market is dancing to the tune of AI productivity gains and stable consumer spending. Luna: Stable consumer spending despite 3.63 percent rates. That says something about household balance sheets. They’ve been resilient. Lucas: They have. And until that changes, the bull market has fuel. We’ll see if Governor Barr’s threats materialize into action next month. For now, the charts say hold. Luna: Hold tight and watch the earnings reports. Thanks for walking us through the nuance, Lucas. Lucas: My pleasure. Let’s keep an eye on those CPI prints next week.