Should the Stock Market Be Much Higher if the US-Iran Oil Shock is Really Over? Ilya Spivak Says...

Key Concepts

• Macroeconomic Divergence: The disconnect between strong business investment (driven by the AI boom) and weak consumer spending.
• GDP Composition: The structural reliance on business investment (14% of GDP) to offset the stagnation of the consumer sector (68% of GDP).
• Inflationary Impetus: The theory that "overclocking" a narrow sector of the economy (manufacturing/AI) creates localized inflation that outstrips wage growth.
• Negative Divergence: A technical analysis signal where price action (e.g., S&P 500 or crude oil) fails to confirm momentum indicators, suggesting a potential trend reversal.
• Cyclical Risk: The danger that the current growth mix leads to a "vicious cycle" where inflation squeezes consumers, eventually forcing an economic contraction.

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1. Market Sentiment and Price Action

The S&P 500 is currently trading in a range established in early May, showing little directional conviction. Despite positive news regarding the US-Iran situation—specifically the stabilization of crude oil prices and the continued flow of traffic through the Strait of Hormuz—stocks have failed to break out.

• Technical Indicators: Momentum studies, specifically the Relative Strength Index (RSI), show negative divergence. Even as prices hit lower lows, the oscillators suggest the downward momentum is losing steam.
• Asset Class Behavior: Bonds are trending higher (implying lower yields), and the US Dollar remains in a long-term uptrend, though it is showing signs of cooling. Gold is also exhibiting signs of a potential bottom.

2. The "AI Boom" vs. Economic Reality

A central paradox discussed is why stocks are not surging despite massive capital expenditure announcements from major chipmakers like Samsung and SK Hynix (approx. $500 billion) and strong earnings from Micron.

• The Growth Mix: US GDP growth (final reading of 2.1%) is being driven almost exclusively by business investment, which is growing in the double digits.
• The Consumer Problem: Consumption, which accounts for 68% of GDP, is effectively stagnant. Average hourly earnings have fallen below the rate of inflation (approaching 4%), creating a "dicey" environment where the cost of living is punishing the consumer.

3. Macroeconomic Calendar and Event Risk

The week is shortened due to the Independence Day holiday, but contains significant data points:

• China PMI: Expected to show manufacturing and services at a standstill (near the 50-neutral mark).
• US Job Openings (JOLTS): Expected to tick down from 7.6 million to 7.3 million.
• Eurozone Inflation: Headline inflation expected to ease from 3.2% to 3.0%, while core remains sticky at 2.6%.
• Central Bank Forum (Sintra, Portugal): Key speeches from the Fed, ECB, BOC, and BOE heads will focus on the intersection of the AI boom, war-related inflation, and slowing growth.
• US Payrolls: Expectations are for 114k new jobs, a significant step down from the previous three-month average (172k–214k).

4. Framework: The "Vicious Cycle" of Growth

Elias Bivak presents a framework where the current economic structure is inherently inflationary:

1. Narrow Engine: Growth is powered by a small, high-intensity sector (manufacturing/AI investment).
2. Resource Competition: Money changes hands rapidly in this narrow sector, creating localized inflation.
3. Consumer Squeeze: This inflation outpaces wage growth, suppressing the service sector (the largest part of the economy).
4. Contraction: As seen in the Eurozone and Australia, when the service sector enters contraction, the entire economy follows, regardless of how well the manufacturing sector performs.

5. Fed Policy Expectations

Market expectations have shifted from a "war-trade" hawkishness to a more cautious stance.

• The Shift: Markets have moved away from pricing in multiple rate cuts or aggressive hikes. The current consensus is anchoring to one final rate hike by October, followed by a "standstill" period.
• Global Context: Other central banks (BOC, BOE, ECB) are already seeing the probability of further hikes fade as their service sectors struggle, suggesting the US may eventually face the same cyclical "punch in the gut."

6. Strategic Positioning

The speaker maintains the following positions based on this macro outlook:

• Stocks: Short call verticals (betting against significant upside).
• Bonds: Long position in TLT (long-end) and outright calls in IEF (7-10 year Treasury ETF).
• Commodities: Monitoring gold for a "tradeable bottom" and watching crude oil for any signs of a bounce that could reignite inflationary pressures.

Synthesis

The primary takeaway is that the US economy is currently "overclocking" its business investment sector to compensate for a weak consumer. This creates a fragile growth environment where inflation is a byproduct of the growth itself. Investors should be wary of the "war trade" narrative fading and instead focus on the potential for a cyclical downturn as the service sector nears a standstill. The upcoming payrolls and ISM manufacturing data will be the ultimate test of whether this growth model is sustainable or heading toward a contractionary cycle.