An Opportunity Like This Won't Come Again.

[00:00:00] Speaker 1: For the first time in more than a decade, we are seeing these two lines diverge from each other, and it's revealing what's truly happening beneath the surface of the stock market. This line shows us the S&P 500's price. At a first glance, everything looks perfectly healthy. Since the 2025 Liberation Day sell-off, the market has rallied by almost 50% and climbed back towards record highs. This line, on the other hand, shows us the magnificent seven's performance relative to the broader market. And over just the past few months, these companies have quietly lost nearly 20% of their value. And that's a bit strange if you think about it. These are the exact stocks that are supposed to be powering the entire market. Companies like Nvidia, Microsoft, Alphabet, Amazon, and Meta have been at the very center of the AI boom and have powered much of the stock market's gains over the past decade. But something has shifted since late last year. They've actually been experiencing a significant correction. And that's already prompted a wave of analysts to warn that it could be the catalyst that finally pops the AI bubble. After all, what drives the market up should also be strong enough to drag it back down. And we've seen this happen before. During the dot-com bubble, a small group of companies known as the Four Horsemen, Cisco, Microsoft, Intel, and Dell, became the dominant driving force behind the entire market. For years, they seemed unstoppable. But then something quite interesting started to happen as the bubble approached its peak. A few months before the broader market eventually rolled over, these leaders were actually quietly underperforming. And eventually, their weakness spread to the rest of the market. Back then, those technology companies made up roughly 30% of the entire S&P 500. And so when nearly a third of the index started falling at the same time, it naturally had an impact on the broader market. Even sectors that had little to do with technology were eventually dragged lower as investors' sentiment deteriorated. We actually saw something quite similar in the late 1980s when the energy sector also accounted for roughly one-third of the index. And we can see that when this concentration finally unwinded, the broader market followed. Now, today, we're in an even more extreme position. The technology giants that have already begun rolling over now account for almost 40% of the entire U.S. stock market. Which means that if this concentration does start unwinding like in these previous instances, the potential downside could actually be even larger. But there is a reason for why this concentration is happening in the first place. And we need to look at that first before we understand how this could actually unwind. And this reason is earnings. Strong earnings attract investors. As more capital flows to the companies that are generating strong earnings, well, they end up making a larger and larger share of the index. We saw this during the late 1990s. Between 1995 and 2000, technology earnings roughly doubled. And so their share of the S&P 500 index climbed from around 15% to nearly 30%. But the very opposite is also true. When earnings begin rolling over and stop meeting expectations, that capital that once flooded in starts rushing back out. And that's when concentration begins to unwind. That's exactly what happened in 2000 and again in 2008. But today's situation looks quite a bit different. Despite the recent correction in the actual stocks, the earnings of these companies have actually been melting up. This is happening as a result of both record profit margins and record revenue growth. In other words, yes, the stock prices have weakened, but profits have not. So unless we start to see earnings rolling over from here and begin to weaken in the coming months, like they did in 2000, for example, then the recent weakness in tech stocks could actually be a buying opportunity. Now, historically, there has been one major catalyst capable of changing the earnings trajectory of even the strongest companies, an economic recession. No matter how revolutionary a technology is or how dominant a company actually becomes, its earnings ultimately depend on customers who are willing and able to spend. During a recession, consumers cut back, businesses reduce investments, and corporate budgets get slashed. So when demand weakens like this across the economy, even the best companies in the world are not immune. That's exactly what we saw during the dot-com bubble and again during the global financial crisis. Companies that had been delivering years of exceptional earnings growth suddenly saw profits stall or even contract. And when that happens, investor expectations begin to shift. Capital that had been pouring into the market leaders begins to flow back out, which is when market concentration starts to unwind, often pulling the broader market down with it, as we saw earlier. One of the single best ways to monitor the probability of a recession is through something called the tightness of credit. This chart right here shows the percentage of banks that are tightening their lending standards. When this line is falling and dips below zero, it means that credit is becoming easier to obtain. Essentially, businesses can borrow more easily to invest, expand, hire, and innovate. Consumers also have easier access to financing, which supports spending across the economy. This combination tends to support corporate earnings and so attracts capital to the market. In fact, these loose credit conditions is what has fueled some of the biggest bubbles in history. We saw it during the late 1990s when loose credit helped fuel the dot-com boom, and we saw it again in the mid-2000s when easy lending fueled the housing bubble. But on the flip side, when banks begin tightening their lending standards, that's typically when conditions become more dangerous. Businesses face higher costs, investment slows, hiring weakens, and layoffs often follow. This is why this has historically been one of the most reliable leading indicators of an economic recession. When we overlay it with the stock market, the relationship becomes even more clear. Major market drawdowns have often been preceded by a sharp tightening in credit. That's especially true when more than 40% of banks report that they're tightening their lending standards as we saw before the dot-com crash, the global financial crisis, and again in 2022 when the market dropped by 25%. Today, however, the picture does look different. The share of banks tightening their lending standards has actually fallen quite dramatically from around 40% in 2023 to just 8% today. This improvement in credit conditions has helped support the current bull market, it sustains strong corporate earnings, and it actually reinforces heavy market concentration in the Magnificent Seven stocks. So although this setup right here is exactly what the peak of the market could eventually look like when earnings do roll over heading into a recession, we do not think that is the case right now. We believe this actually reflects a temporary rotation in market leadership which could actually be quite healthy and could actually prove to be a big buying opportunity for stocks like Amazon, Meta, and Nvidia. As long as businesses continue to have access to capital, investments keep flowing, and the broader economy avoids a recession, there's a good chance that corporate earnings remain resilient. But of course, this picture can change very quickly. The moment that banks begin to tighten their lending standards and that credit becomes harder to obtain, there's a big risk that earnings begin rolling over, and that's when history suggests that today's record concentration becomes a huge liability for the stock market. But regardless of which scenario actually plays out and when, there is one thing that is just not up for debate. Market concentration is now at an extreme, which means that when you buy the S&P 500 today, you're not really buying 500 companies. You're making a highly concentrated bet on one theme. Right now, nothing in the credit data tells us that an unwind is imminent. But the setup is already in place and it's not going away. And when it does eventually unwind, what looks like a healthy, passive, diversified index fund will actually prove to be the riskiest place to be. That's exactly why we've built a systematic macro investment strategy to help investors navigate these kinds of conditions. It's designed for people who have full-time jobs but still want to grow their capital at a faster pace, taking advantage of macro. You can click the link below to book a call with us if you'd like to learn more. We'll walk you through the actual strategy and determine whether it's the right fit for you. We only open a limited number of spots at a time, so if you are interested, we encourage you to apply early.