Brian G
Engineer & CFA, Trend-Based Market Analysis
Rate-sensitive stocks look set to outperform as the market looks ahead to rates nearing a peak. After four years to price in inflation, these sectors have been severely punished, are excessively cheap and nobody owns them, and their divergence from bonds reflects that anticipation. Biotech showed a confluence of bullish factors earlier this year, airlines and real estate followed, and fintech now looks primed, despite lingering skepticism over rate and oil pressures. x.com x.com
Rate-sensitive stocks, including real estate, airlines, homebuilders, genomics, Carnival, Expedia and Booking, should move higher if rates and oil plateau here, alongside a bearish view on the dollar. Oil and rates continue to move with a risk-off dollar rather than with risk-on stocks, and the monthly charts for these names look nice. x.com x.com
Far less inflated valuations and significant AI earnings make US equities unlike the dot-com market top. AI/SI spending may still be overexuberant. Rates and yields have returned to historical averages; more oil through the Strait of Hormuz and from OPEC and Russia should lower oil and inflation. The market may not have bottomed yet, but falling yields, steady rates and the midterms passing should let it climb the wall of worry. x.com x.com x.com
US stocks face a potentially bigger selloff as rising inflation compounds concerns about AI spending. PCE inflation reached a four-month high of 3.6%, increasing pressure on the Fed to raise rates; Alphabet shares fell after disappointing earnings, slowing ad growth and more than $51 billion of quarterly capital investment. x.com
Biotech looks vulnerable relative to pharma if higher oil keeps rates higher for longer. United Airlines' CEO plans around $175 oil by the end of next year, Qatar expects five years to restore lost gas capacity, and one-year forward oil near $76 versus $98 spot may underprice the long recovery. Biotech is highly rate-sensitive and pharma much less so, yet pharma fell twice as much this month; that could reverse, with biotech hit as a risk asset while pharma falls less or even rises. x.com
Biotech stocks can keep breaking out because AI is set to create a biotech boom and rate cuts look likely. Fears of higher rates came when oil was $112; with oil now under $70, rates should come down. x.com
As the AI infrastructure crash takes form, its recessionary effect suppresses bond issuance and powerfully caps yields, giving battered housing, mortgage and related stocks a lift. Starwood Property Trust, Rocket Companies and Builders FirstSource should get a powerful boost as yields fall, with huge short covering and fundamental improvement; many in the group trade well below book value. x.com x.com x.com
Rate-hike fears are dragging down the whole lending sector, making Figure Technology look like a bargain around $25. That sector selloff could offer an opportunity over the next few months. x.com
US stocks face a tougher stretch ahead, warranting patience. A hawkish Warsh caused a bear flattening of the yield curve, and the 30-year yield recently hit its highest since 2007. A Fed hike on September 16 looks likely because the October meeting falls just before the midterms. September has the worst seasonality, midterm years are worse than normal, and bipartisan pushback on data-center expansion pressures AI infrastructure. A Venezuelan oil deal may lower oil prices near term. x.com x.com … Show more
The US large-cap correction isn't over until interest rates top and bonds bottom, which hasn't happened yet. The summer 2023 S&P 500 correction ended right when bonds bottomed in October, with TLT trading massive upside volume, and there is no sign of that now. Higher rates keep pressuring real estate, where lots of money has been trapped since 2022, a possible source of downside dislocation, and an aggressive further rise in rates could bring a panic bottom. x.com x.com x.com x.com x.com x.com
Tech stock valuations are likely to compress before inflation cools, because valuations reprice instantly while inflation data lags. With oil high and the 10-year Treasury yield near or above 5%, high-multiple tech P/Es may shrink first; core CPI is down to 2.4%, but energy holds headline CPI at 3.4%. If earnings keep growing, prices should stabilize after oil peaks. A rapid oil decline could avoid the derating. Watch whether the 10-year stays below 5% and monthly CPI falls to about 0.2%. x.com
Small caps, housing stocks and unprofitable tech that ran on rate-cut hopes face a sharp repricing, as odds of a rate hike at the Fed's July 29 meeting tripled in a week. Oil surged near $100 after Houthi attacks on Saudi tankers, new global tariffs lifted inflation expectations and the 10-year yield hit 4.71%. A Wells Fargo strategist said the Fed may need to hike more and faster than expected. With consumers already fragile, a hike would reprice small caps overnight. x.com
