There is only one trade

0:00Rob Armstrong: Stocks right now are not really what they seem. You look at the big indices, especially in the US, and the first thing that strikes you is how upbeat and stable they are. It's quite a sight, actually, given the long war in Iran and the endless horror show that is the government bond market. The thing is, all that stability comes from a tiny number of companies. The top 20 stocks in the US are making up for a pretty poor performance in the other 480 in the benchmark S &P 500 index. Three quarters of stocks in that index fell in September. We're all used to markets being a bit skinny, but it does feel like they're overdoing the fat jabs.

0:46Rob Armstrong: So, today on the show, do lopsided markets mean we have a lopsided economy? And is this whole thing a problem yet? This is Unhedged, the markets and finance podcast from the Financial Times. I'm Katie Martin, a markets columnist at FT Towers in London, where, inexplicably, it is still summer. Joining me down the line from the Big Apple is the big fella, Mr Robert Armstrong. Rob, are you feeling lopsided?

1:16Katie Martin: I'm not feeling thin, I'll tell you that. Although your joke about the fat jabs makes me regret. I should have named my column about this, the GLP-1 market. That would have been a good gag, and I missed an opportunity there.

1:30Rob Armstrong: You missed an opportunity. I was expecting to get more lols for my rock me I'm a day joke in the newsletter today. It fell a bit flat, I've got to tell you. We'll keep trying, Katie.

1:41Katie Martin: Failure is no barrier here at Unpatched.

1:45Rob Armstrong: If a gag's worth making, it's worth making repeatedly. So look, market concentration, not new. It's been like a big theme in markets, I'm going to say, for a couple of years now. We all know that there's this thing where tech stocks are really big. But people worry about it, and then they don't, and they're worrying about it now. Why are we worrying about it now?

2:06Katie Martin: Well, I would make your point even more strongly. We know that historically markets at all times and everywhere tend to be driven by a relatively small number of their constituents. But it's relatively rare to see the change happen so quickly from a relatively broad market to a relatively narrow one. So when market nerds like us talk about breadth, what we're talking about is how many of the constituents of a market or an index are rising versus falling. So on the 14th of August, 70 % of the stocks in the S &P 500 were at or above their 50-day moving average, which is a kind of proxy. So they're doing pretty well.

2:54Katie Martin: They're doing pretty well. Right now it's at 28. and that all happened in the intervening month or two and it's like the chart falls down and it's especially weird that this kind of collapse should happen when the market as a whole is just going sideways like nothing at all is going on so and i feel like we are right now playing our favorite game charts on the radio radio but i'm looking at this chart here and we had a similar collapse in breadth back in the spring when the war on Iran started. But then the market went down. I mean, of course, most stocks fall when the market falls, right? That's normal.

3:36Rob Armstrong: But this is the

3:37Katie Martin: case where the market is chugging along and breadth is just falling away precipitously. Yeah.

3:43Rob Armstrong: So if you take the median stock in the S &P 500, it's having a shocker, right? It's doing really badly. But like the index is still, like you say, chugging higher. NASDAQ, is it the NASDAQ 100 that's up at a record high? I think it's at a record high.

4:00Katie Martin: And this is easy to understand. I'm looking at, you know, by value, which stocks are keeping the market as a whole up. And it's, you know, in order of value contribution, Apple, Meta, NVIDIA, Microsoft, advanced micro devices, Tesla, Micron, Intel, right? That's since the middle of August. So it's just this slice of the market that is keeping the whole circus going.

4:30Rob Armstrong: Yeah.

4:30Katie Martin: There was this, there was an email in my inbox this morning from a large broker who shall remain anonymous that contained the following comment about the situation. We retain strong conviction in the AI growth story and believe AI-related investment remains a powerful tailwind for the broader equity market. Goes on in that theme for a little bit. Then it says, but the increasing concentration of market gains reinforces the importance of managing risk through a broadly diversified equity portfolio. So that message is basically go. I repeat, stop. Right? Yeah.

5:11Rob Armstrong: Yeah. This is fine, but be careful. Yeah. Yeah. Like, so as we were saying, like, concentration is not new. We've all been looking at the sort of rise and rise of tech stocks and how they occupy an ever bigger slice of the big indices. And the bigger they get, the more the index goes up because the more passive flows you have coming into the market and yada, yada. There's a million different explanations why people think this is going on. But you look at, for example, stock market in Korea. that's basically three stocks. You look at the stock market in Switzerland, that's extremely concentrated.

5:46Rob Armstrong: So quite often you have either one company or a cluster of companies that accounts for an unusually large chunk of an overall national stock market. But I guess it kind of matters more for the US because it's such a globally dominant market and because it drives the bus for the rest of the global stocks complex, if you like.

6:08Katie Martin: Yes, I think that's exactly right.

6:10Rob Armstrong: So part of it is like a winner-takes-all thing where you've got a small number of tech companies that are just making money like it's going out of fashion. But so your theory is that something else is going on here and that it's not a coincidence that this pulling away of the big guys from the rest of the pack coincides with this horror show in bond markets.

6:32Katie Martin: I think it's pretty clear that that is what is happening. In other words, the market is absorbing a rates shock and acting like one would expect a market to act during a rates shock, except for those AI names, which are invulnerable to it. So if you look at the sectors within the S &P 500, two sectors that are telling you something are real estate and utilities. These are both what investors often call bond substitutes because real estate companies' utilities tend to pay a high yield, and so you can kind of own them instead of a bond allocation. Well, number of real estate companies in the S &P 500 that are up since the middle of August, zero.

7:22Katie Martin: Number of utilities companies in the S &P 500 that are up since the middle of August, one. So these two sectors are absolutely getting whacked by the increase in the 10-year yield.

7:36Rob Armstrong: Well done to that one, though. Loving your work.

7:42Katie Martin: So basically, the market is looking at these bond substitutes and saying, you know, I'll just take the bond. I can get 5 plus percent on a 10-year bond, almost that much on a 5 or a 2. And like, what do I want a real estate stock for? And real rates are high, too. It's not just a matter of inflation. Real interest rates are almost 3 % now. So that explains why those ones are down. And for every stock in a stock market, the interest rate, the base rate, call it the 10-year, that's the discount rate for future cash flows, which means you would think valuations would go down when rates increase rapidly, all else being equal, growth figures and everything like that.

8:27Katie Martin: And that's what we see happening. And if you look when breadth collapsed in the market, it was right around the time the 10-year yield really started to go bananas. It really started to burst higher in late August. And I think the markets anticipated that by a week or two. And that's what we're seeing.

8:47Rob Armstrong: Oh, so you think stocks came first?

8:49Katie Martin: They often do. Clever, those stocks.

8:53Rob Armstrong: So I guess the question is, again, you know, charts on the radio, people. If you look at like the nice chart that I've got in front of me now from Goldman Sachs, you see the S &P 500 kind of going up, up, up, up, up. And then at a certain point in the middle of August or late August, you can see the portion of the market that's not if you strip out AI stocks going down, down, down, down, down. So I guess the question is, does the rest of the market catch up with the AI stocks or do the AI stocks sink back down to where the rest of the market is? Or do we carry on with effectively like a two speed stock market, like indefinitely?

9:33Well, in theory, when interest rates stabilize, the damage being done to the valuations of most stocks will stop. Right.

9:44Katie Martin: It's a one time adjustment. a new rates regime, which you would expect. And so if the 10-year yield and the 30-year yield find their level, maybe we can have stocks do the same thing. I think the harder half of your question is, can the fund continue with the AI stocks that are supporting the whole show? And that is, as we've discussed on this show before, that's an immensely difficult question to answer. But enthusiasm for these names seems undimmed. You don't see much pressure around the edges here. I mean, you wrote about this. No one seems to be hedging this trade.

10:25Rob Armstrong: No, no one is hedging. Certainly no one is hedging out the dollar portion of that trade. And let's just park that for a second. But I'm not sure I totally agree with you that the enthusiasm is undimmed. So, you know, talking to markets people, there's this sort of suspicion that's creeping in that's like, yeah, OpenAI and Anthropic, are they really going to list on the stock market? Is this really going to happen? Certainly a lot of doubts that it's going to happen this year. And then you also look at there's quite a lot of legal risk that is suddenly swirling around. OpenAI, for example, so OpenAI has been saying, oh, no, poor us, our agents have gone rogue and hacked into loads of websites, and now all the lawyers are saying, no, but they're your agents, so you're responsible.

11:12Katie Martin: The lawyers.

11:13Rob Armstrong: So you're responsible. Bloody lawyers, insurance companies, dark and found them. They're spoiling everybody's fun. But yeah, no, they are the kind of common sense police here. And so there is more of a cloud over the AI trade than there previously was, I think. But yeah, on the hedging point, so if you're like a non-US investor and you want to buy US stocks, you can do that two ways. You can buy the stocks and take a chance that the stock is going to go up, but also that maybe the dollar is going to go up at the same time and then you're going to win twice. Or at least the dollar is not going to go down and wipe out all of your gains.

11:50Katie Martin: And I should note there's been a lot of winning twice lately on that trade.

11:54Rob Armstrong: Well, there's been a lot of winning twice. That was horrible in 2025. If you did that, you got carted out. This year, it's actually working out pretty well. So the second way is to hedge out your dollar risk, which means that you still buy the US stocks, but that you sell some dollars to try and smooth out any risk on the currency side. And so people aren't really hedging out the dollar risk when they buy US dollar denominated stocks now. And that's like fine. the problem is that it means that if there were to be any sort of serious setback in the US stock market i.e. in the AI trade then that is immediately a problem for the US dollar right because all these investors in the rest of the world when they sell those stocks because they don't like them anymore that means they're selling dollars and so again it brings us to this kind of idea where like the drain that everything is circling around in global markets is everything is contingent on the AI trade continuing to work out okay.

12:57Rob Armstrong: Like the value of the dollar is contingent on it. And the entire global stock market is contingent on this thing working out. Like we were talking about in the last podcast, the whole corporate bond market is like basically a play on AI now to some degree or other. So I don't know, everything is computer and I don't like it.

13:17Katie Martin: I agree with you. This is spooky. Let me try to say a few words of at least short-term reassurance.

13:25Rob Armstrong: I don't think we're going to get a shock to this trade during earnings season because I think money is still flooding into the AI trade and that will support the chip makers.

13:39Katie Martin: I think the economy is robust enough that the hyperscalers core businesses, internet advertising, social media, etc., those businesses are going to do fine. So I don't think third quarter earnings is going to bring a terrible shock. I think the risk that those two big IPOs that you mentioned somehow go off the rails and that shakes confidence, that's a somewhat bigger risk. That's one that I would worry about.

14:07Rob Armstrong: Yeah.

14:07Katie Martin: But I think the broader U.S. economy is broader than the stock market, right? So, you know, like retail sales are OK. All this consumer stuff seems, you know, in a lot of areas fine. And the real GDP reading is pretty good. So I don't think a shock is going to really come from the economy either. Of course, we will have a lot more facts about this in a couple of weeks when we're in the heart of third quarter reporting season.

14:37Rob Armstrong: Yeah, yeah. God, is that coming around already? Why is it always earnings season?

14:40Katie Martin: It is always earnings season, that's right.

14:45Rob Armstrong: But yeah, the moral of the story is if you look at the stock market and you think everything is doing super great, then it is unfortunately a little bit more complicated than that. You don't even have to scratch much below the surface and you can find bad juju, bad stuff going on in stocks. It's weird. I think that's the only conclusion that everyone I've spoken to about this has come to is like, I don't know what it is exactly, but it's weird.

15:12Katie Martin: I don't think it's that opaque, actually. It is weird that the AI stocks don't care. Like the honey badger AI stock don't care. Right. That's a bit weird. But what is happening in the rest of a market is the kind of adjustment one would expect in this environment. A strong economy, but much higher rates, very rapid rise in rates. You would generally expect this kind of response. It should be a one-time transition as long as rates don't just keep barreling higher.

15:47Rob Armstrong: Listeners, choose your fighter, AI stocks or everything else. We are going to come back in just one second with Longshot.

16:00Rob Armstrong: Hi, listeners. Katie here. Countless voices compete to break the news, the who, what, where and when. But for a true understanding, you need the why. With over 700 of the best journalists in the world, the FT goes deeper to help you see the whole story, why it happened and why it matters. Subscribe to the Financial Times today and save money on a standard annual digital subscription until the 28th of October. For more information, check out the show notes. Okie dokie, it is time for Long Short, that part of the show where we go long a thing we love or short a thing we hate. Rob, what are you saying?

16:41Katie Martin: Katie, I'm long tips. And that's not a kind of T here in America, Katie. That is Treasury Inflation Protected Securities or inflation-linked Treasury bonds. The 10-year tip now yields 2.92%, Katie. And that's starting to be enough of a yield where I kind of want to own that. I remember – this is now 20 years ago or something. There was a good interview, and maybe it was the Wall Street Journal of Barron's, with a bunch of very successful investors. And the interviewer asked the following intelligent question, for what inflation adjusted rate of return guaranteed forever by God, would you sell your entire portfolio and just take that return?

17:33Katie Martin: And the consensus in that meeting was like, 3 % might do it, right? Right. Yeah, with no risk, no rate risk, no default risk, no anything. 3 % is okay. hey, if you said to me, take all your savings and I can lock you in at three forever, I'm thinking about it.

17:51Rob Armstrong: You know what I mean? You're going to get some phone calls tomorrow from wealth managers.

17:56Katie Martin: Oh, boy. Is that Mr.

17:58Rob Armstrong: Rob's drug?

18:00Katie Martin: Let me just say, this is not investing advice.

18:04Rob Armstrong: No. No. If we've said it out loud, it's probably a terrible idea.

18:08Katie Martin: This is just a reflection of my own very low risk tolerance and the fact that these yields are looking juicy.

18:14Rob Armstrong: OK, then. I am short acronyms. So, like... Tips. Markets, people love acronyms, which, you know, I don't need to tell you, Mr. Robert Taco Trade Armstrong. But you know how, like, in the last iteration of the Eurozone debt crisis, it was all about what people unkindly called the pigs. Portugal, Ireland, Italy, Greece, Spain. Well, Bloomberg, for it is they, are now reporting that it's now frogs. French Oversized Government and Social Security. Now, I call bullshit. It's not the frogs trade, it's the France trade. People are calling it the France trade. The Oversized Government and Social Security bit is just being French.

19:01So I reject the idea that this is the frogs trade.

19:07Rob Armstrong: And I think we should stop trying to make acronyms a thing unless either Rob or I has thought of it. In that case, it's fine.

19:14Katie Martin: Katie, do you eat frog legs? I do. I really like frog legs.

19:18Rob Armstrong: I have done.

19:19Katie Martin: It's a good way to eat garlic, basically.

19:22Rob Armstrong: A lot of French food is just like a way to scoop garlic and butter into your mouth. Listeners, do you like the frogs trade? I say no. It's just the France trade. Let us know on hedged.ft.com. We will be back in your ears on Thursday. So listen up then.

19:51Rob Armstrong: And I think we can probably do a couple of charts on the radio.

20:00Rob Armstrong: Everybody loves charts on the radio.

20:05Katie Martin: We do need a charts on the radio theme song, like a little bit of music that plays when we say that phrase.

20:12Rob Armstrong: on the radio

20:14Katie Martin: I mean this is what AI is for is chats on the radio

20:19Rob Armstrong: radio