Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / Why Bull Markets Ignore Inflation Squeeze
Transcript
- Lucas: Look at the S&P 500 right now, sitting at seven thousand seven hundred seventy as of this morning on October fifth. It’s up one point three percent over the last five days, which feels almost normal in this current stretch. But here is the thing that keeps me up at night: real GDP growth has slowed to two point two percent annualized. The economy is cooling, yet the market is charging ahead. Luna: Exactly. It’s like watching a car drive faster even though the engine is overheating. Are we just ignoring the fundamentals, or is there a different fuel source powering these gains? Lucas: I think it’s liquidity, not growth. If you look at the NASDAQ, it’s up two point four percent over the same period, significantly outpacing the broader index. This isn’t about companies earning more profit; it’s about the cost of capital remaining accessible enough for investors to bid up multiples. The Federal Funds effective rate is holding steady at three point seven five percent, which provides a stable, albeit not cheap, backdrop. Luna: So you’re saying the market is pricing in stability rather than expansion? That seems risky when nominal GDP is barely moving above thirty two trillion dollars. Lucas: It is risky, but it’s also consistent with what we’ve seen since mid-2025. When growth stalls, investors rotate into quality and momentum. Take Shopify, for instance. It’s up six point four percent in the last week alone. Investors aren’t buying the current earnings; they’re buying the narrative that digital commerce will consolidate further regardless of macro headwinds. Luna: That makes sense for tech-heavy names, but what about the rest of the market? The Dow Jones is actually down slightly over the last five days, so this rally isn’t universal. Lucas: Right, and that divergence is key. The Russell 2000 small-cap index is up only one point five percent, lagging behind the large caps. We are seeing a clear split where mega-cap technology and certain software plays are absorbing all the liquidity. CrowdStrike and Cloudflare are both up nearly four percent, showing that cybersecurity spending remains resilient even as other sectors pull back. Luna: But if growth stays at two point two percent, eventually those multiples have to come down. Isn’t that the inevitable correction waiting in the wings? Lucas: Eventually, yes. But 'eventually' can be a long time in markets. The ten-year Treasury yield isn’t spiking; it’s relatively contained, which allows equities to maintain their premium. As long as inflation expectations remain anchored, the Fed doesn’t need to tighten aggressively, and that sustains the current valuation model. Luna: So the market is betting on a soft landing that hasn’t really happened yet. It feels like we’re riding a wave of optimism rather than hard data. Lucas: Optimism is a powerful driver. Look at Brazil’s political landscape shifting in our headlines. Even international volatility seems to be getting priced in without derailing US equity flows. Capital is seeking yield wherever it can find it, and US tech leaders still offer the most predictable path to returns in a fragmented global environment. Luna: I suppose that explains why defensive plays aren’t dominating. If everyone thinks the Fed will hold steady, why hedge against a downturn? Lucas: Because hedging costs money. With interest rates around three point eight eight percent daily, borrowing to hedge is expensive. Most institutional investors are choosing to stay invested rather than pay the premium to protect against a recession that may not materialize for quarters. Luna: That’s a bold strategy. It assumes the worst-case scenario won’t happen soon. What happens if next month’s jobs report shows weakness? Lucas: Then we see a volatility spike, likely in the VIX. But historically, bull markets don’t die from mild data misses; they die from surprise tightening. Since the FOMC isn’t signaling rate hikes, a weak jobs number might actually be welcomed as evidence that inflation is tamed, keeping the door open for future cuts. Luna: Wait, so bad economic news could actually boost the market right now? That sounds counterintuitive, but I see the logic. Lucas: It is counterintuitive, but it’s the current regime. We are in a phase where monetary policy dominates fiscal reality. As long as liquidity is plentiful, asset prices rise regardless of corporate earnings growth. It’s a temporary phenomenon, but it’s the one we’re living in. Luna: So for listeners trying to navigate this, does it mean they should ignore fundamentals and just chase momentum? Lucas: No, it means you shouldn’t ignore them entirely, but you shouldn’t bet against momentum either. The best approach is diversification within the rally. Tech is leading, but industrials and healthcare are starting to show signs of life as capital rotates outward. Luna: And that brings us to the practical side of investing. How do we keep this conversation going without turning into a sales pitch? Lucas: Well, speaking of practical, we deliberately don't run ads on these. If you want to support that choice, the link is buy me a coffee dot com slash fexingo. It helps us keep the research deep and the commentary honest, without needing to cater to advertisers. Luna: Yeah, it really does make a difference in how we can take the time to dig into these nuances. Thanks for supporting the show. Lucas: Back to the markets. The key takeaway for today is that the S&P 500’s rise to seven thousand seven hundred seventy is driven by liquidity and sentiment, not broad-based economic strength. Real GDP growth at two point two percent suggests the underlying economy is flatlining, yet capital continues to flow into equities. Luna: It’s a fragile equilibrium. One shift in Fed policy or a sudden shock to credit markets could snap the rubber band. But for now, the trend is up. Lucas: Precisely. And notice how names like Palantir and Datadog are holding up. They represent the infrastructure layer of the modern economy, which investors seem to view as essential regardless of the broader cycle. Luna: So even in a slow-growth environment, some sectors become too critical to cut. That’s a useful distinction for portfolio construction. Lucas: It is. And it highlights why the Russell 2000 lagging matters. Small caps are more sensitive to local economic conditions and credit availability. If the Fed tightens even slightly, they feel it first. Large caps have the balance sheets to weather the storm. Luna: Which reinforces your earlier point about quality. In uncertain times, size and stability become premiums. Lucas: Exactly. So while the headline number for the S&P 500 looks impressive, the internal mechanics tell a story of selective optimism. We are not in a broad-based recovery; we are in a liquidity-driven rally concentrated in specific pockets of the market. Luna: And that’s something to watch closely. If those pockets start to crack, the whole structure might wobble. But for today, the momentum holds. Lucas: For sure. Keep an eye on the bond yields and the Fed’s next communication. Until then, the market is telling us that growth concerns are secondary to liquidity conditions. Luna: Smart move to stay nimble then. Let’s see how next week’s data shifts the narrative. Lucas: Agreed. Until then, keep your eyes on the spread between tech and value, and remember that trends often persist longer than fundamentals suggest.