Rivian CEO on the freedom in-house AI chips will give the EV company, bond market outlook for 2026

Key Concepts

• Market Performance: Dow, NASDAQ, S&P 500, Russell 2000 performance, sector rotation (Tech, Staples, Consumer Discretionary, Materials, Energy).
• Economic Indicators: Bond yields (10-year, 30-year), US Dollar Index, inflation, employment, GDP.
• Artificial Intelligence (AI): AI concept, data centers, LLMs, productivity, AI chips, autonomous driving.
• Company-Specific News: Oracle, Broadcom, Carvana, Robin Hood, Coinbase, Seagate Technology, Live Nation, Rivian, Tesla, Costco, Wealthfront.
• Federal Reserve (Fed): FOMC, interest rate cuts, dual mandate (inflation and employment), Fed speak, monetary policy.
• Investment Strategies: Covered calls, options trading, dollar-cost averaging, active management, security selection.
• Market Dynamics: End-of-year trading, volatility, market sentiment, retail investor behavior, K-shaped economy, credit dispersion.

Market Overview and Sector Rotation

The market is experiencing a pullback from record highs reached on Thursday, with the Dow down 204 points and the NASDAQ down 1.5% today, erasing its weekly gains. The S&P 500 is down 0.5%. The Russell 2000, however, is still showing strength, up 1.5% for the week after hitting record highs yesterday.

Sector Performance:

• Gainers: Staples (defensive trade), Materials (limited gain of 1 basis point).
• Underperformers: Technology (XLK down 2.7%), Energy.

This pullback is attributed to a rotation out of tech stocks, with Broadcom being a significant drag on the NASDAQ, down 11.8% after earnings.

AI and Data Center Bottlenecks

The broader market sentiment is influenced by the ongoing AI narrative and its associated infrastructure needs. Thomas Martin, Global Investment Senior Portfolio Manager, notes that December is often a "crazy month" with increased uncertainty due to Fed actions and the AI concept. The market is trying to understand the "second derivative" of AI developments.

Key Points on AI and Infrastructure:

• Uncertainty: The market is grappling with the implications of AI, data centers, energy consumption, chips, LLMs, and productivity.
• Early Stages: Martin believes we are in the "beginning stages" of AI development, which will take "a decade or more" to fully mature.
• Technological Leaps: Software advancements in AI are rapid, with new models like ChatGPT, Gemini, and Deepseek emerging.
• Physical Bottlenecks: The physical infrastructure for AI, such as data centers, faces significant delays. Orders for critical equipment can have lead times of "five years or more," compounded by permitting challenges. This makes it difficult for the market to establish stable positioning.

S&P 500 Additions and Turnaround Stories

The S&P 500 has seen new additions, including three companies that were significant market losers in 2022: Coinbase, Robin Hood, and Carvana. These companies have experienced dramatic turnarounds.

Company Turnarounds:

• Carvana: Stock was below $4 per share in late 2022. It has since seen an 11,000% increase from its low. The CEO highlighted the company's resilience under pressure.
• Robin Hood: Stock was around $7 per share at its lows in late 2022. It is on pace to be the fourth-best performer in the S&P 500 this year, with a 1,400% increase from its low, attributed to cost-cutting and layoffs.
• Coinbase: Navigated the "crypto winter" and faced scrutiny from the SEC. The current administration's more crypto-friendly stance and the "Genius Act" in Congress have been beneficial. Coinbase is expanding into prediction markets and tokenized assets, and is described as the "AWS of blockchain" by analysts, serving both retail and institutional spaces.

Federal Reserve Policy and Economic Outlook

The Federal Open Market Committee (FOMC) cut rates by 25 basis points as expected. However, the market is uncertain about future rate cuts, with odds fluctuating daily.

Fed's Dual Mandate Challenges:

• Thomas Martin points out the Fed's difficulty in balancing inflation and employment. Different governors have varying priorities, leading to divergence in opinions.
• The economy is performing "fairly well," with employment weakening but still "okay," and inflation showing little movement.
• The Fed's rate cut is seen as "insurance," but the market is debating whether this will sustain economic strength or incite inflation.

Fed Speak Insights:

• Austin Goulsby (Chicago Fed): Prefers waiting for more inflation data before further rate cuts. He is "optimistic" about significant rate reductions over the next year but uneasy about "too heavily front-loading" cuts. He believes waiting until the new year would not entail significant additional risk.
• Jeff Schmid (Kansas City Fed): Dissented for the second consecutive meeting, believing inflation is "too hot" and the economy shows momentum with a balanced job market. He states, "Right now, I see an economy that is showing momentum and inflation that is too hot, suggesting that policy is not overly restrictive."
• Beth Hammock (Cleveland Fed): Considers current rates to be "around neutral" and would prefer policy to be "slightly more restrictive." She believes inflation remains above the Fed's 2% target.
• Anna Pollson (Philadelphia Fed): More concerned about the employment side of the dual mandate. She anticipates tariffs and housing inflation to decrease, leading to lower overall inflation next year.

Bond Market Outlook (Vishel Kanduja, Morgan Stanley):

• The Fed's guidance was more balanced than the market expected, with continued focus on the labor market downside and optimism about GDP into 2026. The Fed still projects two rate cuts for 2026.
• The makeup of the Fed is shifting, potentially becoming more dovish.
• 2025/2026 Bond Market: The long end of the bond market (20- and 30-year bonds) will be crucial. The 5-30 year yield curve, currently around 110 basis points, could rise to 150 basis points in 2026, indicating a deficit situation.
• Fixed Income Outlook for 2026: Fixed income allocations are expected to deliver on income, total return, and negative correlation to risky assets during economic volatility. Starting yields are projected to be around 7-9%. Avoiding the 20- and 30-year segments is advised for negative correlation.
• Corporate Credit: Dispersion is starting in the credit market. While some sectors (consumer, banks, tech-related spending) are doing well, the "bottom end of the K-shaped" economy (subprime consumer, parts of real estate, cyclical economy) will show different credit outcomes in 2026. Avoiding the "wrong bond" and active management with security selection will be critical.

Stock Picks and Investment Themes

Thomas Martin's Stock Picks:

• Carvana: Praised for its operational improvements, balance sheet, sourcing, product reliability, and pricing. The online used car market is growing significantly.
• Seagate Technology: Despite underperforming on days when the AI trade is off, memory is a crucial component of AI, and there are shortages. Seagate has a technological advantage with its hammer technology, a 2-year lead over competitors, and is expected to grow revenues and margins.
• Live Nation: Not an AI stock, but benefits from the "experience economy" and social media age. It has a global reach across artists, ticketing, venues, and sponsorships, creating a synergistic effect.

Rivian's Autonomous Driving and Custom Chip Strategy

Rivian is making a significant push into AI and autonomous driving with the unveiling of its custom self-driving chip.

Key Points on Rivian's Strategy:

• Vertical Integration: Rivian decided years ago to build its entire vertical software platform and computers in-house, not relying on tier-one suppliers. This approach has involved significant investment in teams and R&D.
• Autonomous Driving Vision: The company views autonomy as the "most important technical shift in transportation" since the beginning of the car.
• Custom Silicon: The decision to bring chip design in-house was driven by the need to control the perception platform, build a robust data flywheel, and achieve high levels of inference (a "very very smart brain") within a cost-effective package. The inference compute is a major cost driver.
• Investment: Developing custom chips requires hundreds of millions of dollars, a large and capable silicon development team, and partnerships with foundries like TSMC.
• Benefits of Custom Chips: Better performance, specifically for vision-based robotics (vehicles), and potential applications in other business areas.
• Data Flywheel and Training: Significant investment in offline training using GPUs is a major R&D category.
• Autonomy Roadmap:
  • Phase 1: Universal hands-free driving, similar to GM's Super Cruise, working across 3.5 million miles in the US.
  • Phase 2: Evolving to "eyes-free and hands-free" self-driving.
  • Ultimate Goal: Level 4 autonomy, enabling the vehicle to function as a robo-taxi and perform errands like picking up children.
• Comparison to Tesla: Both companies believe in a neural net-based approach and a data flywheel for training. However, Rivian differentiates itself with a "diverse set of perception modalities," including radar and LiDAR, in addition to cameras. This allows their entire fleet to act as a "ground truth fleet" for model training and helps cover "extreme corner cases" (e.g., radar for low visibility, LiDAR for 3D perception).
• Timeline for Level 4: Rivian believes Level 4 autonomy for personally owned vehicles is achievable in the "fairly short horizon" of the next few years, not 10-15 years out.
• EV Industry Outlook: Rivian's CEO believes that manufacturers pulling back from electrification is "unfortunate" and leads to less choice for consumers. He sees this as creating a "less competitive environment" for pure-play EV makers. Rivian aims to offer compelling choices, particularly in the segment under $50,000, where Tesla currently dominates. The R2 midsize vehicle is expected to be a significant offering. Rivian is also partnering with Volkswagen to apply its technology in other vehicles.

Options Trading and Retail Investor Sophistication

Covered Calls:

• A strategy where an investor sells a call option while owning the underlying stock.
• Mechanism: Collect a premium (income) upfront. If the stock price is above the strike price at expiration, the shares are sold at that price.
• Benefits: Generates income, reduces cost basis.
• Risks: Upside is capped if the stock price rises significantly.
• Example (Tesla): Selling a $480 strike call option with a January 16th expiration, while owning 100 shares at $445. Collecting a premium of $16.43 per share ($1643 total). This effectively lowers the cost basis to $428. Maximum profit is $5,143 if Tesla reaches $480 or above by expiration, representing a roughly 12% return in 5 weeks on the amount at risk.

Evolving Retail Trader:

• Retail investors are becoming more sophisticated, moving beyond simple "meme stock" trading.
• Tools and Analytics: Platforms offer better visualizations, AI tools, and option strategy builders that help retail traders understand risk-return profiles and investment horizons.
• Long-Term Perspective: Retail investors are often investing for the long term, buying dips and dollar-cost averaging, as seen with Nvidia.
• Volatility Trading: Retail traders are demonstrating fortitude and are less prone to trading "noise" compared to some professional traders.

Conclusion

The market is navigating a complex landscape of economic uncertainty, technological advancements in AI, and evolving investor strategies. While tech stocks are experiencing a rotation, companies with strong fundamentals and innovative approaches, like Rivian with its custom chip strategy, are poised for growth. The Federal Reserve's monetary policy remains a key driver, with ongoing debate about the pace and timing of future rate cuts. For investors, a focus on active management, security selection, and understanding sophisticated strategies like covered calls will be crucial in the coming year. The increasing sophistication of retail investors suggests a maturing market where informed decision-making is paramount.