Is This The Start Of A Summer Market Sell-Off?

0:00Hello, everyone. Today, we've got a very special treat. We have Mike Zaccardi. He's a financial writer and one of my favorite follows on Twitter. In this conversation, we talk about Kevin Warsh taking over the Federal Reserve, what's happening with inflation expectations and interest rate cuts or hikes. Then we dig into the AI trade and if the CapEx ROI is going to be there, how should we think about stock market valuations, what's going on with the MAG7, and we finish up with commodities, the VIX, and recession odds. All of that and much more in this conversation with Mike Zaccardi.

0:38Mike, let's talk about Kevin Warsh. He's now taken over as the Fed chairman. I think after the first press conference, people are trying to figure out, you know, what's his posture going to be? How's he going to look at data? It does seem like there's a little bit of a regime shift happening inside the Federal Reserve. What is your take in terms of the implications for investors now that Warsh has taken the help? Yeah, I think Kevin got a lot done in a short FOMC statement and a pretty brief press conference. So the mission that was accomplished was that he was able to anchor long-run treasury rates.

1:11We have the 30-year now hanging below 5%. There was what we call a bear flattener on a curve. So we saw short-term rates pop up. And it seems like that's kind of bearish, right? because that means the selling of bonds. And you would think if there's big time selling pressure across fixed income, that would kind of bleed over into the stock market. But we really didn't see that during Fed week. And why that's important is because there's been a much better anchoring now of inflation expectations. So I've been kind of pounding the table recently on Twitter about how So the forward inflation swap rates have come down.

1:51Inflation break-evens have come down, which is super healthy. So just by the rhetoric from Warsh and the short and sweet statement in press conference, he was able to really bring down those inflation expectations. And there's a lot that goes into that too. Oil is a big deal when it comes to those things as well. And oil's drop into the low mid-70s certainly helps. But to me, to be able to accomplish that without a ton of stock market volatility was pretty impressive. And, you know, just my take. But I think that as the summer progresses, that hawkish rhetoric, that could keep up. But if we really see signs of peak inflation occurring in April, May, we could eventually see those Fed funds futures start to price out some of the hikes right now.

2:47So right now, the market's pricing in one to two hikes by the end of the year with actually just looking this week and September, October, we have the first hike fully priced in. that's based on the CME Fed Funds futures. If you look at prediction markets, which are a little different because those are more probabilistic, whereas the CME Fed Funds futures are more deterministic. There's really only about a 6 in 10 chance that we see just one hike this year, according to CalShe. So it's not set in stone despite what we see in those markets. So So to put a button on it, I think the Fed and Warsh tried to hammer home the point that they're focused on inflation and that Fed speak in itself kind of rejiggered markets in a good way, I think.

3:43So I don't think Fed rate cuts are a done deal this year. I wouldn't be surprised if they're on hold just kind of indefinitely. Now, when we go and we look at these inflation expectations, one of the things I think we learned in 2025 is everyone thought tariffs were going to be highly inflationary. Eventually, the Fed came out and said, you know, they weren't what we thought they were going to be. And so we didn't end up seeing that high level of inflation. I think when the Iran war kicked off and, you know, we saw energy prices spike, everyone freaked out again and thought there was going to be high inflation.

4:09As these expectations come down, how much impact does that have on actual inflation? And, you know, one of the things I'm always interested in is like, if people think inflation is coming, they start to act as if inflation is coming. And when they start to act, sometimes they can actually create inflation or they can change the way that asset prices are actually looking. And so if expectations are falling, not only does it have an impact on the Fed, but what is the impact on the market itself? Do people invest more? Do they pull back? What do you expect the kind of follow on from that to be? Yeah, the textbook would definitely say if there's high inflation expectations, folks are going to go out there and hoard purchases, do them now before prices tick even higher.

4:48You know, I don't think there's a whole lot of relevance to that right now because the consumer has just been so consistently resilient in the past few years. You know, regardless of what the UMID sentiment survey shows, you know, the worst sentiment on record back in May, it didn't really matter because they're still spending. We're still seeing travel purchases through the roof. And of course, that's driven by the upper half of the income cohort. But I don't see much in the data to suggest that folks are going out there and essentially hoarding goods to where if we do see a drop in inflation expectations, that'll mean a whole lot of difference in spending.

5:32I think what's maybe more important is the overall wealth effect in the stock market. We've seen as global equities have done well, the upper income half tends to spend more, it appears. So maybe the biggest risk on the spending front is actually, you know, if we see a meaningful drop in the stock market, that could then compound on itself with a give back in spending. But, you know, it seems like come hell or high water, most people are going to prioritize spending travel, which is such a big part of it. And, you know, for that trend to be disrupted, it would take a pretty large macro event. So So to me, it's, you know, most cylinders are firing on the consumer spending fronts.

6:17I expect some pretty nice retail sales prints this summer. And, you know, we're already getting into now the back to school shopping season in July, which surprises people. That's actually the second biggest spending season of the year. So we'll see how that goes. It'll be interesting to see how things like PCs and laptop computers sell, given the jump in some of the memory pricing. So that'll be a key narrative to watch over the summer. Now, let's talk about stock market valuations in general. I think what has been really interesting is the MAG7 has lagged to start the year. The other 493 stocks are pretty much carrying the S &P index.

6:57We still have plus 9 % or so on the year. And there's a lot of questions around the AI trade and is the CapEx ROI going to be there? What's your evaluation in terms of what's actually true and kind of the signal among the noise right now? Yeah, we definitely see some pretty solid drawdowns across the Mag7. And just recently, we've seen a big drop in Google shares. is they were seen as kind of this diversified leader being able to scale and create pretty good leverage across their businesses, across their AI footprint. So I think it's just part of the broadening trade. We've seen now over the past couple of years, small caps actually now outperforming the MAG-7.

7:42And, you know, just an overall, you know, it hasn't been a steady broadening trade, but the bouts of broadening that we've seen into the S &P 493, the Russell 2000, even international stocks, that's been, those bouts have been strong enough to give this kind of longer lasting alpha stretch for the non-Mag 7 names. Um, at the same time though, you know, they can turn the cashflow spigot right back on if they cool off on the CapEx theme. And, you know, one thing on that, that I think it's overlooked is the changes in the tax structure this year with the one big beautiful bill that allowed for bonus depreciation and the immediate, immediate expensing of CapEx.

8:32You know, if we didn't have that, I suspect we wouldn't have, uh, nearly as much AI investments So that's just adding fuel to this. So, you know, if we're sitting here a year from now, I wouldn't be surprised to see the current AI CapEx forecast start to come down. And that would turn them a little more free cash flow positive. And, you know, that could be a net positive. So they'll have to balance that with – they'll have to pull off a little bit of a rabbit out of the hat with that to not disrupt the market because the first inkling that we get of seeing AI CapEx dip, definitely some volatility in the NASDAQ could come about.

9:10But overall, the valuations of the MAG-7, they're pretty good now. I mean, if you look at charts of MAG7 PEs versus the S &P and then the 400 and the small cap 600, the compression in the multiple for the MAG7 is down sharply from 2021 and early 2022. So the valuations are starting to, once again, get pretty compelling. I mean, whenever you get NVIDIA starting to trade with a mid-teens, out-year PE, that's pretty darn cheap for what that company has been able to show on the earnings front over the past few years. Yeah, what I find interesting is I think Google now is cheaper than Apple, but it's growing two times faster than Apple.

9:53And so you go and you look at it, and it's all free cash flow related, right? Everyone is so worried about this. And maybe there's some good reason. Like the open source Chinese models, it seems like every day there's some new model getting announced and everyone's like, well, wait a second. Maybe we don't need all this stuff that we thought we needed. But I think to your point, the CapEx projection could be pulled back like it is a projection and it has the ability to be changed. What's the downside if all of a sudden they say, hey, we're not going to spend as much we thought we were going to spend.

10:21Do these stocks just rip right back to all time highs and kind of continue? Or when you mentioned volatility in the Nasdaq, could there be some negative side effects? I mean, certainly. You know, it's hard to see an elegant handoff from this AI CapEx driven bull market and some of the AI enablers to focus back on free cash flow among, you know, the Mag7 names like an Apple, like a Google. Certainly that would have negative implications on the big chip names like NVIDIA, Taiwan Semi, you know, things like that. So that's why, you know, we could that could very well be the reason for some kind of mid-year sell off, which we typically see in a midterm election year.

11:03That would certainly be not surprising at all. But whenever you it's it's like anything, it's almost like in life, whenever you're going through some big change or some volatility and drama, you know, whether it's like a relationship or work change. The same psychology happens in markets. If we're going to go from a big change from AI CapEx back to free cash flow positive among the largest companies, something is going to happen in there that's going to be rocky. So we'll see how that goes. I mean, the good news there is that we're starting with fairly tepid valuations now for those names. But then you also have to look at the downstream effects.

11:44As the AI trade has blossomed, it has really bled into other areas like industrials, like a Caterpillar, a GE, the two GE companies, GE, Vernova, and General Electric itself, Aerospace. So and then that's also into small caps. Now you look at the Russell 2000 before the June reconstitution, the two of the biggest companies are just like total AI on steroids named with Bloom Energy and Credo. So there's going to be implications for those kind of areas too. Ultimately, if we do see something like that, a transition from AI back to free cash flow, So you may see a pretty good alpha stretch among the high quality factor, which has really underperformed in the last year or so.

12:35So you're looking at some pretty low valuations there on a normalized basis. Now, when we go and we look at what's going on in Korea, Taiwan, even here in the United States, it seems like this digital world is, one, much more connected to the speed of capital and information is basically at the speed of light. And so you're getting these like ripple effects across the entire global economy. And maybe we even see something like the memory ETF, DRAM, all of a sudden they take some stocks that aren't in the U.S., you know, kind of purview for U.S. investors and they bring those into the U.S. market.

13:08And obviously that's the fastest growing ETF in history. And so how much of your analysis is like US-centric versus now you have to be a full-on global investor understanding what's happening in some of these other markets given hardware chips, this kind of AI trait? Yeah, it's definitely turning into an EM, QQQ, high correlation environment. And that is risky. Like we've seen on days when the NASDAQ sells off, international stocks get hit pretty hard. focused obviously on Taiwan, South Korea. If you look at just those markets, you've got Taiwan Semi, SK Hynix, and Samsung making up a lion's share of the exposure.

13:51One area that could buffer potential volatility there are non-US small caps, which is a fairly niche area of the global stock market. But that could see a little bit less volatility if we do see money come out of those those mega caps. But yeah, you know, in the morning, you when you're firing up the terminal and looking at more early price action in the US, they're going to take their cue from what's happening over in the Far East and and the emerging market areas of Taiwan, South Korea. But, you know, we shouldn't overlook what's happening in like Japan. Like I've kind of had this running narrative on Twitter every time the Nikkei goes up a thousand points.

14:35I like to say the raging bull market in Japan continues. I just don't think that rally is enough respect. I mean, we've seen the Nikkei go from, you know, post-GFC lows around 10 ,000, and now it's about 70 ,000. And, you know, Japan is not exactly the bastion of AI development. I mean, over there, you've got, sure, a decent tech swath, but, you know, you've got major exporters there too, like, you know, industrial exporters like the automakers, Toyota and other blue chips, their trading houses, which, you know, Berkshire has been getting more into over the recent years. So, you know, it's not simply ultra high beta AI play when you're doing overseas.

15:23Japan's outperforming. You know, we've definitely seen some relative weakness in Europe. You know, they had a really nice run there in 2025 with the dollar sagging a bit and overall ex-US strength. And they've given some of that back. But now, you know, with oil much lower and European natural gas cooling off, they might be able to see a little bit more strength into the end of the year. So, yeah, there's a lot of different themes happening overseas that definitely shouldn't be ignored. But, you know, whenever you hear about folks talk about investing, it's always S &P 500 and that's it. But, you know, from a diversification point of view, you know, having a decent allocation overseas still makes sense, in my opinion, because, you know, ex-US stocks have actually outperformed now for the better part of 18 months.

16:15So we're definitely into year two of this, and we could see that continue of history as kind of any guidance on the overall trends and cyclicality of the U.S. versus ex-U.S. movement. What about things like gold, silver, copper? Many of these commodities or precious metals, they seem to be really catching kind of the volatility bug. They run up a lot. They're falling a lot. People are trying to figure out how involved they are in this AI trade. What's your take there? Yeah. I mean, we've got fresh year-to-date lows on gold and silver now. silver taking a haircut 50 % from its January peak. And, you know, I had thought that once the war on Iran looked like it was kind of coming to an end and we got a true steel and oil came down, I thought that would be pretty beneficial for the precious metals.

17:02But we, you know, we saw a little bit of a recovery, but, you know, they've been slammed recently just in the last several old days. So yeah, it's hard for them to get off the mat. I think the real problem there is those rising real interest rates that tended to be a major factor for the metals. And, you know, it's always difficult to pin down what are the true factors going on there. But that's usually among the better ones. Historically, if you get rising inflation adjusted interest rates, that put downward pressure on those, you know, non yielding metals plays. And that's been the theme so far.

17:39And to me, that's just indicative of improving expectations of the US economy. You know, people would rather own these growth assets at home versus, you know, play the gold and silver bug trade. So, you know, if we see a cooling off in those real rates, then that should be bullish for the metals. But I did put out a note right over at SoxTarx.com. And I said that we could definitely, we could see the precious metal equity plays still perform well, even if gold doesn't do so well, because those companies are still fairly reasonably valued. They're much more efficient than they were in past cycles, more capital disciplined, and they're still highly profitable with gold, you know, closer to 4 ,300 than 5 ,500.

18:28So I think those places can still work. But yeah, gold and silver, the bullions right now are kind of a show me story, I think right now. And I'll be watching the real rates markets. If we start to see some technical signals of a breakdown there, that could be game back on for gold and silver. What about the VIX or the odds of a recession? It feels like both of those are kind of moving around and people are trying to figure out, how do these two data points fit into my analysis as to what happens the rest of the year. Yeah, the VIX has been kind of stubbornly high. Every now and then it pokes back above 20, but doesn't seem to really have that oomph to get back into the 30s right now.

19:08At the same time, we haven't sniffed the low teens in a long time. If you recall back in definitely 2017 and that timeframe, we saw the VIX 11 to 13 routinely. And even now with the market scaling new heights, it's hard for it to get much below 16 or so, which is fine. You know, the 16 to 20 range is the long-term average. You want to be a buyer of stocks when you see spikes into the mid-30s. The dangerous range tends to be the mid to high 20s. The VIX doesn't hang out there for very long. Usually it means we're going to see a washout, moving stocks, and a commensurate jump up in the VIX. So, you know, Right now, as we stand heading into the middle of the year, upper teens are on 20, not a big red flag.

19:56What's interesting there is we're seeing near historical average VIX readings, but single stock volatility is extremely high, rivaling some correction periods from late 2018, coming out of the COVID crash. And that's where you're seeing this bifurcation within stocks, very low correlations, certain areas of the stock market, extremely high volatility, other ones not so much. But on net, the average stock volatility remains quite high. So at the moment, I don't think there's any real signal for investors on the current VIX level. But if we do venture into the mid-20s, be on the lookout there for kind of a correction watch in the stock market.

20:40But – and then – and what was the second part of – Odds of recession. Yeah. The recession odds, those have dropped down quite a bit. And I think we can pin that just to strong consumer spending. There are six areas that the National Bureau of Economic Research uses to determine recessions. And employment, industrial production, and things like that are important. But ultimately, as a consumer is strong, it's really hard to have a recession. So spending remains strong, like we've talked about. We've got the unemployment rate very steady between 4.2 and like 4.55. No signs of that really ticking up anytime soon.

21:23And the SOM rule is nowhere close to being triggered. Remember, that was talked about a few years ago when the SOM rule triggered, which is basically the three-month moving average of the unemployment rate compared to the range of the past year. So no worries there. We've seen a pickup in private employment data, which is a little more timely than what the BLS publishes. So, yeah, it looks like we're in, you know, I would say we're in more of a growth boom kind of scenario versus a recession chance. You know, the rule of thumb is two consecutive quarters of negative real GDP growth. And, yeah, it's predicting that you're just making a wild guess at this point because all the indicators point to sustained economic strength right now.

22:15So we recently saw Goldman Sachs bring down their U.S. recession forecast and market pricing pegs it at like a 15 percent chance, which is kind of the baseline number for any 12 month period looking out. So, yeah, you know, we've got an AI-fueled consumer spending-led economic growth situation right now. And, you know, the unfortunate thing is we don't see very strong job growth. But you've got to keep in mind that with the changes in immigration, the economy only needs to print maybe 30 ,000 or 40 ,000 jobs a month to keep the unemployment rate steady. And as of right now, it looks like we're running well above that.

22:55there could be some bump up there from the World Cup from temporary hiring. So I'll be watching as the World Cup finishes up how the high frequency data from the later market progresses. We've got ADP numbers, we've got Revelio data. And if we see those numbers come down a bit, that can be a little worrisome, but the knock-on effect of that is that could cause the Fed to kind of ease off on their hawkish bent. So that may not at all be a bearish outcome for the market. When you look through the rest of this year, maybe if we get some all this up, stock market's higher, you're worried, what's your expectation?

23:43Where are you investing capital? What's your take in terms of how investors should be thinking about the next six months? Yeah, I mean, we've seen these periods of congestion in the market. Like, we've got the S &P 500 as we approach, you know, the 4th of July, basically flat since mid-May. So we're not taking off there. And, you know, we had a huge rally there shortly after the war began from March 30th to mid-May. But then the period before that was a total wash since October. So I don't think we're by any means frothy in the market here. You know, that being said, we do tend to see volatility heading into the midterm election.

24:18So it could be a dicey Q3. But then you go beyond that. The market has never been negative from the end of October of a midterm year through Q2 or the post midterm year. So that is such a bullish sweet spot for the S &P 500. If we do get a mild sell off 5 % to 10 % now through, you know, October, I mean, that would be just perfect because that would set up that bullish seasonality post midterms. So that would be my scenario. I think we could see more digestion here in the next few months as the AI narrative shifts around and we kind of deal with this a little bit more hawkish fed. Definitely not a rip-growing rally now over the next few months, but if we do get that modest decline, that would be a very positive thing in my view.

25:09Now, where can we send people to find you online or find more of the work that you're putting out? Yeah, at Mike Sicardi on Twitter. And I write for StockShots.com, Seeking Alpha. But yeah, that's about it. I just love posting charts and some quick hits online and social media, not selling anything. So just enjoy the charts. And yeah, always love the interaction. You're one of my favorite follows on Twitter. So I appreciate all the hard work. And we'll definitely do this again in the future. All right. Thanks, Anthony. Good to be with you.