US stocks: rally or overcorrection?

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0:33Morning from the Financial Times. Today is Monday, July 7th, and this is your FT News Briefing. Israel's prime minister is in Washington, D.C. today to talk about Gaza. And not everyone agrees about what's fueling the current surge in U.S. stocks. Plus, venture capital is borrowing a business model from private equity. I think the promise that VCs are making is that they can bring tech into the business and really make it sing. I'm Jess Smith, and here's the news you need to start your day.

1:15Israeli Prime Minister Benjamin Netanyahu will visit the White House today. It's his third trip to Washington since Donald Trump returned to office as U.S. president in January. The two leaders are expected to discuss a new ceasefire proposal that would pause the fighting in Gaza for 60 days. During that time, Hamas would release some Israeli hostages and Israel would release Palestinian prisoners. Negotiators from Hamas and Israel will be in Qatar this week to discuss the proposal further.

1:50U.S. stocks are on fire after a rough start to the year. The S &P 500 is up more than 20 % since mid-April and keeps hitting new highs. But here's the question. Is this a real rally or is it just an overcorrection? We asked Aiden Ryder what he thinks is going on. He's co-host of the FT's Unhedged podcast. So we started this year with the market riding high. Investors were very excited about what the Trump administration could mean for economic growth. And we kind of started the year going really strong. We had a bit of a scare in the middle of January when DeepSeek, a Chinese AI model, really surprised AI analysts by showing that you can make an AI model for much cheaper.

2:32That disrupted this big tech leadership that was pulling up the market. There was a kind of a panic for a day or two, but that was quickly reversed, and the market hit its record high in February. Of course, that all came to a very public end when Trump announced his very, very intense reciprocal tariff regime and then kind of walked things back and forth on tariffs on China and other places. But since then, the market has kind of picked up scheme and it's now above where it was in February. So the market's roaring back to new highs. Aidan, give me the bullish view of what's going on. Yeah, well, the optimistic take is that this is still a strong economy.

3:07Jobs numbers keep coming in above expectation. Inflation is hot but still sort of coming down. It looks like this economy is as resilient as one could hope in the face of so much uncertainty from the Trump administration and from the potential reordering of global markets after Liberation Day. And what is the pessimist's view? The pessimistic reading is this is an overcorrection. After the huge dip in April and as Trump has sort of pulled back a bunch of these policies, investors might be thinking that, you know what, I don't think these things are going to last or I actually was on the wrong side of the trade when the market went down last time.

3:43I'm not going to be caught on the wrong side this time. And when you look at this market, it looks like a risk on market, meaning that people are going for potentially more risky strategies, which is what we had seen in kind of all the previous good runs of the past two years. Big tech is leading this recovery. You have high volatility strategies like speculative tech investments that you don't really know how they're going to pay out, also doing particularly well. At the same time, you have really tight credit spreads, which means that corporate debt is viewed as fairly safe compared to treasuries and other assets.

4:13Okay. So if I have it clear, the pessimists basically say all the enthusiasm we're seeing is over-exaggerated. Yeah, that's the pessimistic take, that people are just trying to over-correct after the big skid in April. So these are two really different interpretations of what's going on in the stock market, and they have very different consequences for investors, I mean, depending on what camp they're in. I mean, it is absolutely true that economic growth and a lot of the economic indicators we look for in stress have been surprising to the upside. So, you know, if it's the optimistic scenario, there's reason to believe that this will continue and that the underlying things in the economy are good.

4:47The difference of the pessimistic and optimistic scenario, however, is once you have something to the downside, whether that's economic growth surprise or an inflation surprise, you could see on the overcorrecting side a huge pullback as people try to reproportion their portfolio to properly account for the real risks in the economy. We should note that there's still a ton of uncertainty about what tariffs will mean, about what global reordering of trade and finance will mean for this market, and we don't have enough information to know how things will land. Okay, big picture. What does all this tell us about investing during Donald Trump's second term?

5:22Uncertainty is the main word. We don't know the direction of policy. We don't know what the actual outcomes of tariffs and other measures will be. So investors just have to take bets, right? Are we going to really believe in a buoyant economy and that's going to continue? Or are we just praying and hoping the right side of the next trade? Aidan Ryder is a financial reporter at the FT. He also co-hosts the Unhedged podcast. Thanks, Aidan. Thank you.

5:53The stock market in Hong Kong is booming and lots of companies want in on the action. In fact, a record number of companies applied to list on the Chinese Territory Stock Exchange in the first half of this year. One of the big draws is that Hong Kong's currency is pegged to the U.S. dollar. And that's a big plus for Chinese companies that want to expand overseas and avoid Beijing's capital controls. The Hong Kong Stock Exchange has also taken steps to encourage more IPOs. It even established separate listing routes for some technology and biotech companies.

6:34Venture capitalists are trying something new. VCs are known for investing in upstarts, and now they've started pumping money into similar companies with the goal of creating mini conglomerates. This new strategy actually takes a page right out of the private equity playbook, but with a high-tech twist. We've got the FT's George Hammond here to talk more about this. Hey, George. Hey. Hey. So, George, can you tell us more about this strategy? So this has been a really successful strategy for private equity firms for quite a while now, and it's called a roll-up strategy. In very simple terms, a private equity sponsor will buy up a company in one sector and then provide it with the money to go and merge with or acquire a whole load of similar businesses in the same sector.

7:19So you create this conglomerate, and this works very well in fragmented industries, take waste management, building services, healthcare, accounting, and has been put to use by PE firms for a long time. Why exactly are venture capitalists so eager to borrow this roll-up idea from private equity? So let's maybe talk about what's made this effective for private equity firms, and then we can come on to what VCs are doing differently in this space. But for PE firms, one of the main benefits has been by consolidating these businesses, you get a whole lot of operational efficiencies. You can combine the back end of all these businesses and save money that way.

7:56You also get, when you sell the consolidated business on, you get a much better multiple on earnings, typically, if it's a larger business. So that's how it's worked for PE firms. For venture firms, some of the same logic applies, but they are taking a very different approach. So rather than buying up these businesses, cutting costs and layering on debt, which is typically the private equity playbook, VCs will be buying up the business, using money to go and acquire rivals, but then embedding technology into the underlying business. So it's tech enabled rather than cost cutting. Interesting. But why have VCs only started to do this recently?

8:35So this is an interesting moment for venture capital firms. There is enormous heat in one part of the market around artificial intelligence. But elsewhere, startup valuations have been pretty depressed for the last few years. There was a peak in 2021 and early 22 of huge amounts of money coming into the sector. And a lot of the startups that receive money then have failed to grow into those valuations. So VCs have got a bit more creative about where to look for liquidity. There's been a slowdown in initial public offerings and in company sales. and in growth outside of those AI companies. So they're looking for new avenues through which they might find ways of generating liquidity through an exit or a sale to another company.

9:19So this could be one of those new options. George, are there any risks for VCs as they continue to use this roll-up strategy? This is quite uncharted territory for VCs. As I mentioned, it's been a long-time private equity strategy and a very effective one. And I think the promise that VCs are making is that they can do this even better than private equity firms because of this tech angle. They can bring tech into the business and really make it sing. I think there is some skepticism around that because they are often investing in companies which are, you know, in long established sectors, very fragmented, quite complex to bring technology into.

9:57And we spoke to one investor in various venture funds who said there was a classic case of the innovators dilemma here and the bringing AI into these companies would be the corporate equivalent of a brain transplant. So I think that's one of the risks that they face here. George Hammond is the FT's venture capital correspondent. Thanks, George. Thank you. You can read more on all these stories for free when you click the links in our show notes. This has been your daily FT News briefing. Check back tomorrow for the latest business news.

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