Stock Market to the Moon?! Ilya Spivak Looks at How the Rally Stops if Just This One Thing Breaks

Key Concepts

• AI Infrastructure Capex: Massive capital expenditure on data centers and AI hardware driving current economic growth.
• Non-Residential Fixed Investment: Business spending that is currently outpacing household consumption in GDP contribution.
• Diminishing Volume: A technical market phenomenon where stock prices rise despite decreasing trading volume, signaling a lack of conviction.
• Frozen Conflict: A geopolitical state where active warfare (e.g., Iran-US) transitions into a long-term, low-intensity maritime enforcement standoff.
• Inflation Persistence: The failure of goods and service-sector inflation to rebase, leading to the removal of expected interest rate cuts by the Fed and other central banks.
• Risk-Defined Verticals: An options trading strategy using defined-risk spreads to limit potential losses during high-volatility market conditions.

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1. Market Dynamics and Geopolitical Context

The stock market is currently hitting record highs, driven by a narrative of AI-fueled growth. However, the speaker notes a disconnect between this price action and underlying market health.

• Geopolitical Shift: The conflict between the US and Iran has shifted from "Operation Epic Fury" to "Operation Freedom," a maritime enforcement mission. This transition, coupled with a potential one-page memorandum deal reported by Axios, has caused a slight pullback in crude oil prices.
• Bond and Currency Reaction: The "war trade"—which previously saw rising yields and a stronger dollar—is undergoing a reassessment. As oil prices soften, bond yields have pulled back, and the Japanese Yen has seen intervention efforts by authorities to curb depreciation.

2. The AI-Driven Economic Narrative

The speaker highlights that US GDP growth (2% in Q1) is being disproportionately powered by non-residential fixed investment rather than consumer spending.

• Capex vs. Consumption: While household consumption accounts for 68% of GDP, it grew at only 1.6%. Conversely, non-residential fixed investment (14% of GDP) grew at 10.4%.
• Sector Concentration: The S&P 500’s rally is highly concentrated. While the equal-weighted S&P 500 remains below its yearly highs, the technology sector—specifically semiconductors (up 47% YTD)—is driving the index. Software, conversely, is down 14.5% due to AI disruption fears.
• Infrastructure Bottlenecks: Demand for AI compute is so high that companies like OpenAI and Anthropic are throttling usage. However, construction of data centers is facing significant delays, with many projects pushed to 2027 or 2028.

3. Technical Analysis and Market Conviction

• Volume Divergence: A critical observation is that the rally is occurring on "diminishing volumes." This suggests that the current price surge is not supported by broad-based institutional conviction.
• Momentum: While negative divergence in momentum indicators has technically broken, the speaker argues that the current rally lacks the structural support seen in previous market cycles.

4. Inflation and Central Bank Policy

The "disinflation" narrative that previously supported the case for Fed rate cuts has stalled.

• CPI Data: Core inflation (excluding food and energy) is rising, and service-sector inflation is at its highest since mid-last year. Housing inflation has also shown a concerning uptick.
• Policy Outlook: The market has priced out rate cuts for the Fed and the Bank of England. The Bank of England is now expected to hike rates by 50 basis points, and the Bank of Canada is also leaning toward hikes.

5. Trading Strategy and Outlook

The speaker maintains a cautious, risk-managed approach:

• Strategy: The speaker is not adding new short positions to fight the momentum of the "runaway train" but is holding existing risk-defined vertical spreads.
• Portfolio Positioning:
  • Short: Gold, major currencies against the dollar, and long-end bonds (TLT put verticals).
  • Long: Bitcoin (via call verticals) and Brazil-related exposure.
• Rationale: The speaker expects oil to remain "sticky," keeping inflation high and borrowing costs elevated, which will eventually pressure the consumer and challenge the sustainability of the AI-capex-driven growth model.

Synthesis

The market is currently in a state of "pie in the sky" optimism, where astronomical AI-related capital expenditure is masking a decelerating consumer and persistent inflation. While the AI buildout is a legitimate economic driver, the lack of trading volume and the reality of delayed infrastructure projects suggest the market may be overextended. The speaker concludes that while the momentum is currently bullish, the fundamental headwinds—higher interest rates, inflation, and supply chain fragility—create a precarious environment that does not justify aggressive new long positions.