Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / Why the Bull Market Is Ignoring a Slowing GDP
Transcript
- Lucas: So the latest GDP print came in at one point five percent annualized, down from two point one. And the S&P 500 is basically at an all time high. That's a pretty wild disconnect, and I think it's worth digging into. Luna: Yeah, I've been scratching my head over that too. Normally when growth slows that much, you'd expect some kind of pullback. But the market just keeps grinding higher. Lucas: Right, and it's not just the S&P. The Dow is above fifty three thousand, the NASDAQ is near twenty six thousand. So the market is looking past this slowdown. The question is, why? And is that the right call? Luna: Let's start with the GDP number itself. One point five percent is not terrible, but it's a meaningful step down. What's actually driving that slowdown? Lucas: When you peel back the layers, consumer spending is still holding up okay, but business investment has softened, and there's been some inventory drag. Government spending did add a bit, but it's not enough to offset. So the mix matters. Luna: And yet the market is shrugging. Is it because investors think this is a temporary blip, or are they looking further down the road? Lucas: I think it's the latter. The market tends to trade on expectations, not on the last data point. And what investors are pricing in is a Fed that's going to cut rates later this year. Fed funds is stuck at three point six three percent, and the market is betting that the softening growth gives the Fed cover to ease. Luna: So it's a 'bad news is good news' situation. Slower growth means the Fed is more likely to cut, and that's supportive for equities. Lucas: Exactly. And you can see that in how certain sectors are behaving. High-multiple, long-duration names — the kind that benefit most from lower rates — have been outperforming. But it's not uniform. Look at the last five days: CrowdStrike is down almost five percent, Cloudflare down nearly four, while Datadog is up two and a half. That's a wide dispersion. Luna: That's interesting. So even within the growth basket, there's a lot of divergence. What's driving that? Lucas: Some of it is earnings reactions, some is just profit-taking after big runs. But it also shows that the market is being selective. It's not a blanket risk-on rally. It's more like a 'we'll pay up for earnings visibility, but we're not going to overpay for promise.' Luna: So what does that mean for the broader bull market? Are we in a sustainable phase, or is this complacency? Lucas: That's the million-dollar question. On one hand, you have a market that's climbing a wall of worry — that's usually a sign of a healthy rally. On the other, when you have growth slowing and bond yields still elevated, there's a risk that the market is getting ahead of itself. Luna: And that's the key tension. The bond market is actually signaling some stress, with yields pressuring Main Street while Wall Street waits on the Fed. So you have this split personality. Lucas: Right. And that's the kind of thing that can lead to sharp, quick corrections — like we saw a few months back when the Dow dropped a thousand points in a day. The market recovered, but it's a reminder that these moments can happen when expectations are stretched. Luna: So is the market just pricing in a perfect scenario? Rate cuts, but no recession, and earnings keep growing? Lucas: Pretty much. The market is basically saying: 'We believe the Fed will be able to engineer a soft landing.' And that's a high bar. Historically, rate cutting cycles often come with economic pain. But this time could be different. Luna: Why do you say that? What's different about this cycle? Lucas: For one, the labor market has been resilient. JOLTS numbers and jobless claims haven't shown major cracks. And corporate profit margins are still near record highs. So the fundamental backdrop is not collapsing. It's just cooling off. Luna: That makes sense. So if we do get a rate cut, could that reignite the momentum trade, especially in the high-flying names that have pulled back? Lucas: Potentially. Actually, let's look at the five day moves again. Datadog is up two and a half percent, and that's after a strong earnings report. CrowdStrike and Cloudflare are down, but they've had huge runs. So it's not necessarily a bad sign. It's just a rotation within growth. Luna: So you're saying the market is still willing to pay up for growth, but it's being more picky about which growth. Lucas: Exactly. And that's a healthy sign, honestly. It means investors are doing their homework, not just buying the whole basket. That kind of selectivity tends to be more durable than a broad speculative frenzy. Luna: So does that mean we should be less worried about a crash? Lucas: Less worried, sure, but not complacent. The market can still get ahead of itself. And if the Fed doesn't deliver the cuts that are expected, that's when you could see a sharp repricing. Luna: That's a good point. The market is assuming a certain path for policy, and any deviation could cause turbulence. Lucas: Right. So we're in this delicate balance. The market is climbing, but it's a narrow path. And that's what makes this so fascinating to watch. Luna: Before we move on, I want to say something. If you're finding these conversations useful, the reason we can keep them ad-free is because of listeners like you. If you've gotten value from today's discussion, you can support us at buy me a coffee dot com slash fexingo. It's a simple way to keep the show going. Lucas: Yeah, thanks for that. It really does help us keep the lights on and the microphones hot. Luna: And it's not just for us, it's for you too, because it means we can keep doing the deep dives without any corporate sponsors. Lucas: Absolutely. So, back to the market. We talked about the divergence among growth names. Let's look at the broader indices. The Russell 2000 is down about half a percent over the last five days, while the S&P is down about the same. So small caps aren't leading this time. Luna: That's a shift from earlier this year, when small caps were the stars. What's changed? Lucas: Part of it is that small caps are more sensitive to the economic cycle, and with GDP slowing, investors are pulling back some of those bets. Also, they tend to have more floating-rate debt, so they're more exposed to the Fed holding rates higher for longer. Luna: So if the Fed does cut, small caps could rebound quickly. Lucas: Definitely. And that's the thing — the market is forward-looking, so if a cut seems imminent, we might see small caps start to rally before the actual announcement. But right now, the market is in a wait and see mode. Luna: So what should investors be watching for over the next few weeks? Lucas: The Fed communication is key. Any hints about the timing of a cut will move markets. Also, keep an eye on the economic data, especially anything that confirms or refutes the slowdown story. And of course, corporate earnings, since that's the ultimate driver. Luna: So it's a lot of moving parts. But the takeaway is that the bull market is still alive, but it's becoming more selective. Lucas: Exactly. And that's not a bad thing. It means the market is maturing, and investors are being more discerning. It's a different kind of bull run than the one we saw in the early days of the recovery. Luna: So what's your outlook for the rest of the year? Are we going to see new highs, or is a correction more likely? Lucas: I think the path of least resistance is still higher, but it's going to be bumpy. The market is going to be sensitive to any surprises, whether it's inflation, the Fed, or geopolitics. But if the fundamentals hold up, and the Fed delivers on rate cuts, we could see the S&P push toward eight thousand by year end. Luna: That's a bold call. But I can see the logic. It's going to be interesting to see how it plays out. Lucas: It always is. That's why we do this. Thanks for joining us on this ride, and we'll catch you next time.