Why Stocks Could SELL OFF Even If The Economy BOOMS

0:00Hello, everyone. The economy is booming, but the stock market has been flat for a month. The market's starting to go long hardware and short software, and I'm going to break down why the U.S. dollar's weakening. We're live today from the desk of Anthony Pompliano.

0:22Before we get into today's episode, I need your help. Hit the subscribe button. We currently have 42 ,596 of you. I appreciate all of you, but our goal is to get to 1 million. Hit the button. Let's get into today's episode. All right, ladies and gentlemen, the U.S. economy is booming. GDP is growing up 5%. Real wages are accelerating and inflation has been tamed. It's a big W for the Federal Reserve. But what if this positive economic performance doesn't translate to higher stock market prices moving forward? Now, that may sound counterintuitive. So let me explain what I mean here. The U.S. stock market has done very well over the last couple of years.

0:56The S &P is up 14 % in the last year. It's up 77 % in the last five years. NASDAQ's up 17 and 86 % in the same timeframes. But during that timeframe, the US economy was on the rocks. Remember, we had over 9 % inflation. Real wages stopped growing for a period of time. And the Fed had to intervene in the market multiple times to manipulate monetary policy to control the economy. It's this last part, the Fed interventions, that started me thinking about the scenario where no one seems to be worried about this. But what if we got a booming economy with a lagging stock market? That's not what's supposed to happen.

1:29So before you laugh, we may be seeing the start of this situation. Thought it was worth going and investigating more. The S &P is flat for the last month and the NASDAQ is slightly down, but that performance has happened with the backdrop of falling inflation and strong GDP growth. So to go and research this idea further, I went digging deep, deep, deep into the archives. Ty Kim, the author of The NVIDIA Way, he helped surface the most interesting insight I could find. It was found in an old Stanley Druckenmiller interview from 1992. That's right, we're back decades. The following insight about a booming economy and a lagging stock market appeared in Jack Swager's book, The New Market Wizards.

2:07Jack asks, you're saying that a booming economy isn't good for the stock market? Druckenmiller says, the reason is really quite simple. Once an economy reaches a certain level of acceleration, not only is the Fed no longer with you, but the way we look at it, three very bad things start to happen. Jack says, which are what? And then Druckenmiller says, the Fed, instead of trying to get the economy moving, reverts to acting like the central bankers that they are and starts worrying about inflation and things getting too hot. So it tries to cool things off. This takes money out of the financial assets.

2:38It shrinks liquidity. So that's one. Then corporations start having to build inventory, which again takes money out of the financial assets and it shifts it into the real sector. And then finally, if things get really heated, companies start engaging in capital spending. Jack says, go on, Druck. And then Druckenmiller finishes up with all three of these things, which usually take place against a backdrop of great earnings in a roaring economy and great enthusiasm for the stock market, tend to shrink the overall money available for investing in stocks. And then stock prices go down. So in other words, they set up a very perverse situation.

3:11When things look bad and they're not so hot, usually events take place that move money from real assets into financial assets. And then when things start to look better, eventually you get to the point where the opposite happens. So it's a very interesting insight from Druck there. Now, if you were to ask a classically trained economist, how does an economy go from being so strong, but the stock market lagging behind? Here's what they would tell you. A booming economy characterized by strong GDP growth, low unemployment, and robust consumer spending can coincide with a lagging stock market when investor expectations diverge from the current reality.

3:46The stock market is forward-looking. It prices in anticipated future conditions rather than just present performance. So if the economy is overheating, that means that there would be inflation pressures or expected policy tightenings like interest rate hikes, stocks may stagnate or decline as investors shift to safer assets. Again, it's forward-looking. Now, these classically trained economists would say, if corporate profits aren't growing as fast as the broader economy due to rising costs or competition, then equity valuations can suffer even amid overall prosperity. So this decoupling, in their opinion, highlights that stocks represent a subset of economic activity.

4:19It's often influenced more by sentiment and speculation than raw output. So these classically trained economists wouldn't be wrong when you look in history through the rearview mirror. One historical example includes the early 2000s when GDP grew steadily, but the S &P 500 fell about 40 % because of all the tech-heavy stocks correcting from overvaluation. There was also the 1962 Kennedy slide when the Dow Jones dropped 27 % over seven months, and that was because of inflated prices and waning confidence. But the U.S. economy was still growing throughout the 1960s. But here's the thing. I don't think these historical examples are correct guiding lights for the current situation.

4:55And I actually don't think Stanley Druckenmiller's insight can be applied to the modern economy. The major differences I see are the fact that GDP is growing and inflation is falling, which is a narrative violation. And we are also watching productivity surge as the labor market experiences weakness. This means the Fed is cutting rather than raising rates while GDP is surging higher. That is not what you would normally expect the central bank to do. And that's why Druckenmiller's point used to be applicable, but it's not right now. You have to change your mind and change your mental models when you get new information.

5:26Cutting rates into strong economic growth and all-time high stock prices is abnormal, but it is necessary given the deflationary effects of tariffs, AI, and robotics right now. I don't expect the economy to continue growing and the stock market to substantially lag behind. Instead, there could be certain industries that get overvalued from time to time, but I would anticipate that the major indexes will continue to outperform the historical averages for the next few years. Time will tell. It never feels good disagreeing with one of the greatest risk takers of all time. But I don't think it's fair to extrapolate Druckenmiller's comments from a 1992 interview and try to apply them in 2026, especially given the Federal Reserve has essentially transformed their role in the US economy and now they wanna play wannabe kingmaker.

6:11Long hardware, short software. That's something no one was talking about for the last couple of years. But James Thorne, the chief market strategist at Wellington Altus, he wrote something very interesting that I think is worth contemplating. He says it's remarkable how often a thesis initially dismissed as speculative or unfounded later on becomes conventional wisdom. Consider, for example, the potential link between Kevin Warsh, Scott Besson, and Stanley Druckenmiller, or the historical parallel that in the 1990s, as digital infrastructure was being built out, hardware actually outperforms software, which is a pattern that he thinks is likely to repeat in the AI era.

6:47Now, James goes on to say that when such claims first surface, the punding class routinely ignores them, only to embrace them once the evidence becomes undeniable, claiming it was obvious all along. But now, as we're seeing, Anthropics Rise is forcing Wall Street to confront an uncomfortable reality that AI may ultimately subsume some of what we are now calling software. He says to ignore the noise. Yes, software is at risk, And it always has been in a new AI world. Now, I think this is fascinating because people have always thought, oh, less capital intensive businesses like software are better investments.

7:19But this chart right here is showing long hardware, short software has been a great trait. And a huge reason for it is artificial intelligence is making everything abundant. One of the things that I keep thinking about, if it's easy to build everything, then it is always going to be harder to actually remain relevant in that abundant world. because usually it was, I raise some money. I build a piece of software. I then I go sell it to customers. There was an entire body of work around building, scaling, operating the business, et cetera. But if today somebody knocks on my door and says, hey, I'm a salesperson from X or Y software company.

7:55I'm willing to give you this piece of software, but you have to pay 50 or$100 ,000 a year. I can turn to someone on our team and just ask them, can you use the vibe coding tools to just build this exact same piece of software? Not every time do they say yes, but many times they do. And so all of a sudden, you have these software companies that don't have the moats they once thought that they had. And because of that, the software companies are under immense pressure. In a world of abundance, scarcity becomes very valuable. Hardware is doing really well. Software is under pressure. That used to be a narrative violation, the way people talked about software for the last 15 years.

8:29But if you just look at the 1990s, maybe that's actually what usually happens whenever you have these big innovation cycles and people are trying to build out a brand new technology. The hardware folks are killing it. The software folks, they're crying. The only question now is, will it continue? The U.S. dollar is weakening and there has been a massive decline in late January of this year. Now, the dollar is breaching key support levels and it has reached multi-year lows because people are trying to figure out what is going on with U.S. policy. Now, Binance Research did an entire breakdown that I thought was really good.

9:05They showed that on the announcement from Treasury Secretary Scott Besant, the U.S. dollar has actually rebounded a little bit. That was because the U.S. said that we are not going to intervene in the rising yen price and that contrasted reports from last week that the New York Federal Reserve had reviewed dollar to yen rates with dealers, a move that is generally viewed as a precursor to intervention. Now, this marks the DXY's weakest levels since February of 2022. The index is down 2.2 % this week and it is extending a broader 11 % retreat over the past year, which follows a significant 2025 pullback.

9:37So if you think about what are the catalysts for why the dollar is weakening, they include mixed policy signals from the Trump administration. President Trump has downplayed concerns over the dollar's weakness. He describes recent declines as great for US exporters and trade balances. And he says that it is fueling the sell America sentiment and accelerated bearish positioning. Now this contrasted with Treasury Secretary Scott Besson's reaffirmation of a strong dollar policy and explicit denial of US involvement and yen-supporting interventions, which prompted a modest rebound midweek. Additional pressure stemmed from Trump's ongoing tariff threats, reduced expectations for aggressive Fed easing with rates held steady last week, and also the shifting global capital flows toward non-U.S.

10:18assets amid persistent U.S. policy uncertainty. Now, at the end of the day, I think that the economic policies that are being put in place are doing exactly what they're intended to do. Deregulation, tax cuts, a weaker dollar, tariffs, and AI-driven innovation that leads to deflationary type pressures. All of those things are trying to drive GDP growth and get inflation down. It's usually not what you expect. But so far, these economic policies seem to be working. GDP is now at five plus percent and inflation is crashing. Anytime you can get that, it's the dream of every politician and central banker.

10:51People may not want to admit it yet, but I think in the coming months, the data is going to become quite clear. We're growing and we're not inflating. And anytime you get that, that is great for the long-term health of our economy. That's it for today's show. Thank you guys so much for watching. Please remember to subscribe on YouTube and I will see you all live tomorrow from the desk of Anthony Pompliano.