Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / Why Momentum Stocks Are Surviving Weak GDP Growth
Transcript
- Lucas: Look at the numbers coming out of the S&P 500 right now, specifically that 7,658 level we’re sitting at as of early October. It’s weirdly stubborn given that Real GDP growth just ticked down to 2.2 percent annualized for the latest quarter. Most traditional models would say the market should be repricing lower when the economy slows like this. Luna: Right, but if you look at the composition, it’s not the whole index driving this. It’s that narrow band of high-momentum names that seem completely detached from the macro drag. Lucas: Exactly. And I think we need to drill into why CrowdStrike and Shopify are up nearly five percent over the last five days while the Dow is down almost two percent. This isn’t just broad optimism; it’s a rotation into companies that are proving they can grow revenue even when consumer spending is flattening out. Luna: So you’re saying the market is rewarding operational excellence over macro tailwinds? That feels like a dangerous game if rates stay stuck at 3.90 percent. Lucas: It’s definitely a risk, but let’s look at the mechanism. When the Fed holds steady, liquidity doesn’t dry up instantly. Instead, capital chases yield within equities. Companies with strong free cash flow become the new safe harbor. CrowdStrike isn’t just selling software; they’re selling insurance against a threat landscape that gets worse every day, regardless of GDP. Luna: But does that justify the multiple? When you pay for certainty in a slowing economy, you’re paying a premium that could evaporate fast if inflation ticks back up. Lucas: That’s the crux of it. We’re seeing a bifurcation. The 'broad market' might be flat, but the 'quality growth' segment is rallying. Take Shopify. Up nearly five percent while the rest of the retail complex struggles. They’re capturing merchant share because their platform efficiency allows smaller businesses to survive margin compression. It’s a structural shift, not a cyclical bounce. Luna: I see what you mean about the structural piece. But isn’t there a fear that once these momentum stocks get too crowded, any small miss sends them flying sideways? Lucas: Absolutely. And that’s where the VIX comes in. It’s low, which means complacency is high. But here’s the thing most people miss: the underlying volatility in individual earnings reports is actually decreasing for these leaders. They’re becoming less risky, not more, even as their multiples expand. Luna: Wait, less risky? How do you square that with the fact that Alphabet and Micron are moving sharply on premarket news? That sounds like event risk to me. Lucas: Good point. The big tech giants are still volatile because they’re tied to capex cycles. But the mid-cap momentum plays, like the ones we mentioned earlier, are insulated. They’re not building AI data centers; they’re providing the infrastructure that makes those data centers profitable. That’s a different risk profile entirely. Luna: So you’re drawing a line between hardware-heavy tech and software-infrastructure tech. Is that where the real alpha is hiding right now? Lucas: I think so. Look at Palantir. Flat over the last five days, but still trading near 189 dollars. It’s not exploding upward, but it’s not falling either. It’s consolidating. Meanwhile, pure-play cybersecurity names are ripping. Investors are rotating out of generalist AI bets into specific, recurring-revenue security models. Luna: Recurring revenue is king when growth is slow. You lock in customers before the budget cuts hit. That’s a defensive move disguised as an aggressive one. Lucas: Precisely. And let’s talk about the bond yields for a second. The ten-year Treasury is stable, which keeps discount rates predictable. If yields spiked, those high-multiple stocks would crash. But since they’re flat, the denominator effect isn’t punishing growth stocks yet. Luna: But Kashkari just said inflation is still too high. If the Fed has to hike again, all this momentum logic falls apart. Lucas: Kashkari is being cautious, yes. But the market is pricing in a hold. Look at the interest on reserve balances—it’s flat at 3.90 percent. The money market is telling us liquidity is abundant. So long as that stays true, the S&P 500 can hit records on weak growth, provided the winners are clear. Luna: So the lesson is: don’t bet against the momentum until the Fed moves. Until then, ride the wave of quality names. Lucas: Before we go deeper into the sector specifics, I want to mention something important about how we produce these conversations. We deliberately choose not to run ads on these episodes because we believe financial advice should remain unbiased and free from commercial pressure. If our money conversations have helped you think about a decision differently, the link is buy me a coffee dot com slash fexingo. Luna: Yeah, it really helps keep the focus on the data rather than the sponsors. Thanks for supporting that choice. Lucas: Back to the divergence. Let’s look at the RUT, the Russell 2000. It’s down 1.1 percent. Small caps are getting crushed while large-cap momentum rallies. Why the disconnect? Luna: Because small caps rely heavily on domestic credit markets. When rates are sticky, their refinancing costs go up. Large caps like Microsoft or Amazon have global balance sheets and can borrow cheaply anywhere. Lucas: That’s a crucial distinction. It’s not just about size; it’s about access to capital. In a 3.90 percent rate environment, the cost of capital becomes the moat. Companies with strong balance sheets and recurring revenue—like the ones we discussed—have a massive advantage over speculative small caps. Luna: So the market is essentially pruning the weak links in the small-cap space while rewarding the fortified giants. Is that sustainable? Lucas: It’s sustainable as long as earnings growth remains positive. And here’s the kicker: nominal GDP is still growing at 32,563 billion dollars. Even if real growth is 2.2 percent, the dollar amounts are expanding. Companies are selling more in nominal terms, which supports revenue. Luna: Nominal growth saves the day. Inflation hides in the nominal numbers. So even if volume is flat, price increases keep the top line moving. Lucas: Exactly. And for high-margin software companies, that price increase flows straight to the bottom line. That’s why EPS beats matter more than revenue beats right now. Investors are hungry for profit, not just top-line hype. Luna: Which brings us back to CrowdStrike. Their margins must be incredible compared to a manufacturer trying to pass through raw material costs. Lucas: Significantly higher. Software marginal cost is near zero. Manufacturing marginal cost is steel, labor, shipping. In an inflationary environment, the software model wins on profitability stability. Luna: It feels like we’re witnessing the end of the 'growth at any cost' era and the start of the 'profitable growth' era. Is that a fair characterization? Lucas: Fair, but with a caveat. It’s not just profitability; it’s predictability. In a world where the FOMC is flat and GDP is slowing, predictability is the ultimate luxury good. Investors will pay a premium for a company that tells them exactly what they’ll earn next quarter. Luna: Predictability over potential. That’s a hard pill for many venture-backed startups to swallow. Lucas: It is. And that’s why public market momentum is so distinct from private market valuations. Public markets are forcing discipline. Private markets are still living in the past decade’s low-rate dream. The gap is closing, though. Luna: Closing how? Do you see IPOs returning soon? Lucas: Not immediately. The valuation reset is still happening. But look at Arktik, ARKK. Down nearly two percent. It’s struggling to find traction. The market wants boring, profitable growth. It doesn’t want narrative-driven speculation right now. Luna: So the 'magic' is out of the bag. You have to show your work, every single quarter. Lucas: Every single quarter. And if you can’t, you get sold off regardless of your long-term vision. It’s brutal, but it’s healthy. It forces capital allocation to be efficient. Luna: Efficient capital allocation in a stagnant economy. That’s the only way out. You don’t grow the pie; you just make sure you’re eating the best slice. Lucas: Exactly. And right now, the best slices are the ones with sticky subscriptions and global reach. Like the ones driving the S&P 500 higher today. Luna: Do you think this momentum will spill over into industrials, or will tech remain the sole beneficiary of this liquidity? Lucas: I think we’ll see a trickle. Once tech stabilizes, capital will rotate into areas that benefit from reshoring and infrastructure spending. But that’s a slower burn. For now, tech is the only place offering the combination of scale and margin expansion. Luna: So patience is key. Don’t chase the dip in industrials yet. Wait for the tech leadership to broaden. Lucas: Patience and selectivity. Those are the two words of October 2026. The market is rewarding those who dig deep rather than those who cast wide nets. Luna: A final thought on that: if you’re listening and feeling frustrated by the slow grind, remember that momentum builds quietly before it explodes. Are you ready to wait for that explosion? Lucas: That’s the question. Because once it happens, the noise will be deafening. But right now, it’s just the quiet accumulation of value in the strongest hands.