We came into last week hedged and we’re still hanging onto most of those positions. Our VIX playbook is telling us to stay cautious, so we’re listening — and so far, that’s been the right call, all things considered.
As we more or less expected, Powell and the FOMC didn’t sound dovish at all in last week’s meeting. What stood out to us was their continued reluctance to look through tariff-induced price increases, even as the economic data keeps softening.
That’s of course a hawkish stance in itself, especially since these kinds of price pressures aren’t something rate policy can really fix.
That has big implications for how the Fed responds to its other mandate — the labor market — which is already showing signs of trouble. Put simply, it still looks like the Fed is sticking to its usual playbook — showing up late.
At this point, the only thing that could shake things up is if Trump steps in and installs a shadow Fed chair to push for cuts — which is exactly why we’re keeping a close eye on Waller’s comments.
Here’s our updated chart on where the market sees the Fed Funds Rate heading.
To our surprise, the market held up better than we expected — especially given that tensions in the Middle East had picked up the week before.
But looking ahead, with the buyback blackout period starting and running through the end of July, one of the biggest sources of equity demand — about $6 billion a day from corporate buybacks — is fading. And that probably means less support on pullbacks and more hesitation from dip buyers.
That said, we’re not throwing in the towel on risk. In fact, we think it still makes sense to keep solid exposure over the next 6–12 months.
Hedge funds remain significantly underweight equities, sentiment is more bearish than bullish, and we’ve just entered a fresh bullish Breadth Thrust Regime. Even when we look at our own risk-on/risk-off indicator, it seems to be reflecting this optimism.
To be honest, we can’t remember another time when there has been this much pessimism so close to all-time highs — and that’s pretty telling. If anything, the bigger risk might be missing out on the upside, not getting caught on the downside.
One thing that’s been fueling our optimism lately is the strength we’ve seen in the Tech sector — which we first pointed out about three weeks ago.
Even though Tech is still underperforming the S&P 500 over the past 12 months (something that’s only happened 24% of the time over the last 20 years), the breakout from its year-long downtrend looks pretty promising.
That said, a lot of investors might be missing this shift, probably because the market as a whole hasn’t gone anywhere. The S&P 500 hasn’t moved much since May 20, but under the surface, we’re seeing a clear risk-on rotation.
Defensive sectors like Health Care, Staples, and Utilities have lagged. Meanwhile, risk-friendly sectors — especially Tech and Communication Services — continue to lead.
Aside from Energy, this is the same playbook we’ve seen since the bull market began back in October 2022: all the alpha has come from just two sectors — Technology and Communication Services.
But since the early April lows, Tech has been the standout — leading the way in this rebound. It went from worst-performing sector at the lows to positive on the year — now the sixth-best performer year-to-date and even outpacing the S&P 500.
Now, with Technology making up a hefty 32.6% of the S&P 500, we took a closer look at how its three main sub-sectors are holding up: Software & Services (12.6%), Semiconductors (12.2%), and Hardware (7.8%).
Two things really stand out:
Software & Services and Semiconductors are both crushing it — in fact, if they were their own sectors, they’d be the best performers in the S&P 500 this year. They’re also each bigger than 9 of the 11 other sectors.
Hardware, on the other hand, is the total opposite — it’s down 15% year-to-date, which would make it the worst-performing sector on its own.
That’s a pretty dramatic split within one sector, so we pulled up our S&P 500 Sector Dashboard to dig deeper.
What we found: Hardware looks a lot worse on a cap-weighted basis compared to the average or median stock in the group — meaning a few big names are dragging down the whole sub-sector.
Our dashboard also breaks down sector weightings, offering a clear look at concentration risk. And as expected, performance is heavily influenced by a few dominant names — most notably in Hardware, where Apple accounts for nearly 75% of the sub-sector’s weight.
So here’s the deal: Hardware looks like it’s having a rough year — but that’s mostly an Apple problem. The stock is still down 20% year-to-date.
Why? Well, if anything goes south between the US and China, Apple’s the first one to feel it. The company builds basically everything in China and pulls in 16–17% of its revenue from there. That’s a lot of exposure, and the market hasn’t forgotten it.
Now here’s where it gets interesting: Take Apple out of the Hardware group, and suddenly the whole sub-sector flips into positive territory. Turns out, the rest of Hardware is doing just fine.
But more importantly — and contrary to popular belief — it shows that the market hasn’t shrugged off US-China trade risks. Companies that depend heavily on China — both for manufacturing and sales — are still carrying a heavy discount.
In Apple’s case, the stock’s entire year-to-date decline has come from multiple compression (from 33x down to 27x forward earnings). Earnings estimates haven’t changed. So the market isn’t expecting less profit — it’s just assigning a lower valuation.
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