Markets continue to embrace the long-term AI investment theme, but the near-term outlook is becoming increasingly nuanced. While 42 Macro remains constructive on using the Mag-7 as a Source of Funds over the long term, the rising probability of a risk-off Market Regime suggests systematic investors may soon begin reducing their gross exposure.
At the same time, Q2 earnings season presents an underappreciated “sell-the-news” catalyst for AI stocks, as Samsung’s disappointing share price reaction despite exceptional financial results highlights just how elevated investor expectations have become.
Meanwhile, attention remains centered on the Federal Reserve. USD money markets are appropriately pricing in a lower probability of Fed rate hikes because of “peak inflation”. Risk assets are inappropriately pricing the risk of tighter Fed balance sheet policy because of Sticky Inflation.
If the Fed chooses to tighten financial conditions through balance sheet policy, monetary policy and liquidity could become transitory headwinds, increasing the probability of a summer-1998-style correction. Conversely, if policymakers ultimately choose to “look through” inflation, then the risk-on Market Regime that KISS and Dr. Mo have positioned for since April 11 will continue.
If you are not confident your portfolio is positioned correctly for the evolving macro landscape, partner with 42 Macro for data-driven insights and proven risk management overlays—KISS and Dr. Mo—to help you stay on the right side of market risk.
— Team 42
