Data Centers Are the New Fracking | TCAF 231

Key Concepts

• Market Rotation: A significant shift is underway, moving away from the dominance of the “Magnificent Seven” tech stocks towards broader market participation, particularly in industrial, energy, and smaller-cap stocks.
• Political & Policy Influence: The US election cycle, potential policy changes (tariffs, capex incentives, AI regulation), and lobbying efforts are increasingly important drivers of market performance.
• End of Quantitative Easing: The era of easy money and Federal Reserve balance sheet expansion is over, impacting market dynamics and investor behavior.
• AI & Energy Demand: The AI boom is driving demand for energy, creating opportunities in the energy sector but also potential infrastructure challenges.
• Dollar Dynamics: The US dollar is reverting to a historical range, impacting international markets and potentially benefiting from Trump’s policies.

Mexico Travel & Initial Market Observations (Part 1)

The conversation began with a personal anecdote regarding a recent trip to Mexico, specifically to the Maroma resort near Cancun. A lockdown occurred due to cartel activity in southwest Mexico, resulting in a four-day difficulty in leaving the country and raising security concerns. This prompted a cautionary note about travel to Mexico, suggesting focusing on the east coast. The discussion then transitioned to the broader market landscape. The State of the Union address was analyzed, highlighting President Trump’s strategic use of tariffs and immigration as political tools, aiming for a referendum on immigration in the midterm elections while avoiding direct confrontation with the Supreme Court.

Market Breadth & Sector Rotation (Part 1 & 2)

A core theme is a significant market rotation. Market breadth is increasing, evidenced by the NASDAQ equal-weight index outperforming the traditional NASDAQ, with four days in 2026 seeing more advancers than decliners – a rare occurrence in 2025. The Russell 2000 (RSP) is outperforming the S&P 500 (SPY), indicating a shift towards smaller-cap stocks. A rotation is occurring between semiconductors (parabolic moves) and software (headwinds). Increased capital expenditure (capex), fueled by 100% expensing of capex and R&D, is benefiting industrial sectors, particularly energy infrastructure and manufacturing. Consumer discretionary stocks are underperforming. A surprising correlation exists between Palantir (PLTR) and Robinhood (HOOD) stock performance, attributed to speculative retail trading.

AI, Energy, and the Fracking Parallel (Part 1 & 2)

The surge in AI development is driving energy demand. This situation is likened to the early days of the fracking revolution, where initial benefits were met with local opposition (NIMBYism) and regulatory hurdles. The energy industry successfully navigated these challenges by highlighting economic benefits. The AI industry may need to self-fund infrastructure or rely on a favorable political shift. A potential Democratic regulatory backlash against AI is discussed, referencing a “Harris basket” of stocks (renewable energy, healthcare) that outperform under Democratic administrations, contrasted with a “Trump basket.” Tech sector performance has underperformed as Democratic odds of taking Congress have increased.

The Dollar, International Markets & Policy (Part 2)

The US dollar’s decline has fueled rallies in international markets like Japan and Europe, reverting to its 2015-2019 range. Trump’s policies (tariffs, capex incentives) are contributing to this shift, with potential for a dollar bounce as tariffs decrease. The importance of policy and political factors in investment decisions is emphasized. The speakers noted that in 2008, 25% of S&P 500 companies cited the government as their greatest risk; by 2018, this rose to over 52%.

Investor Behavior & Market Positioning (Part 2)

The speakers observed a significant overlap in shareholder base between Palantir and Robinhood, attributing this to the prolonged period of quantitative easing (QE) by the Federal Reserve – 10% of Robinhood’s revenue comes from Palantir options trading. They believe the market is signaling the end of this era. While the S&P 500 is near highs, fewer stocks are trading above their 50-day moving averages, a historically bearish signal, though a significant percentage of energy stocks are above their 200-day moving average. The “Robin Hood crowd” was described as lacking fundamental knowledge ("does not know the difference between Caterpillar and Deer").

Strategus ETFs & Final Observations (Part 2)

Strategus’s ETFs were introduced: SAMT (Macro Thematic Opportunities), SAGP (Global Policy Opportunities), and SAMM (Macro Momentum). SAMT rotates between macro themes, SAGP focuses on companies with strong lobbying efforts (quantifying lobbying intensity relative to company size), and SAMM is a trend-following ETF that can go to 100% cash. Historical election cycle data was presented: year one of a presidential cycle averages a 17% return, year three also averages 17%, year four averages 5%, and year two averages less than 2%. The S&P 500 has not declined in the 12 months following a midterm election since 1938. US market cap as a percentage of global market cap peaked in November 2023.

Conclusion

The discussion paints a picture of a shifting market landscape driven by a confluence of factors: the end of quantitative easing, a rotation towards broader market participation, the increasing influence of political and policy decisions, and the disruptive forces of AI and energy demand. The panel emphasizes the importance of recognizing this regime shift, focusing on price action, and understanding the interplay between macro trends and investor behavior. The current market rally, while broad, is viewed with skepticism, suggesting investors may not be fully prepared for the ongoing changes.