Prof G Markets - This Market Is Directionless (And That Should Scare You)

Episode Date: June 29, 2026

Robert Armstrong, U.S. financial commentator for the Financial Times, fills in for Scott to assess the state of the markets at the halfway point of the year. He and Ed look back at the biggest stories of the past six months and explain why they believe investors may be approaching a nervous top. They discuss why the Magnificent Seven have begun to lose their grip on the market and which sectors are emerging as the new leaders. Finally, they look ahead to the second half of the year, making predictions on inflation, interest rates, and whether or not the bubble will burst. Subscribe to the Prof G Markets Youtube Channel  Subscribe to the Prof G Markets newsletter  Order "Notes on Being a Man," out now Note: We may earn revenue from some of the links we provide. Follow the podcast across socials @profgmarkets Follow Scott on Instagram Follow Ed on Instagram, X and Substack Send us your questions or comments by emailing [e-mail] Learn more about your ad choices. Visit podcastchoices.com/adchoices

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fast, and it's easy for key contacts, follow-ups, and action items to slip through the cracks once the meeting ends. Plod is an AI-powered note-taking system built around dedicated recording hardware. It captures conversations, transcribes them, and turns them into searchable transcripts summaries and action items so you can focus on the discussion instead of worrying about capturing every detail yourself. Is it plod.a.i slash markets to learn more and use the markets code to get up to 15% off. Welcome to Profi Markets. Scott is wrapping up his week in Cannes. So joining me today is our very good friend, the one the only Robert Armstrong, US financial commentator for the Financial Times. Rob, thank you for joining me. It's been a

while since we've had you on. Yeah, and it's been wild times in markets, so it's good where we're back and able to talk. My only question for you is, how do I get Scott's job? How do I get the job where you get sent to Cannes? You know what I mean? That's my question, too. Not that I don't like hanging out with you, but like starlets and negronies or whatever they drink in can. That sounds all right. I agree. Yeah, he's potting it up at the Spotify party and the Snap party after he, made fun at Evan Spiegel on our previous podcast and somehow didn't get the invitation rescinded, but that's how it goes. Yeah, he's parting it up with the influences.

Next year, you and I will make our own trip to Can and we'll pay out of pocket, and that's okay. I know. We'll stay in a youth hostel. I can't wait. Well, I'm very glad to have you on the show, and this is very timely because we are exactly at the halfway mark. this is our official half-time report. So without further ado, I'm going to launch us into our H-1 review. Now has the time to fly.

I hope you have plenty of the world of all. A volatile first half of 2026 is coming to a close. It's been a six-month stretch defined by the AI boom, the war in the Middle East, and an ongoing obsession with one big question. where are interest rates headed next? Still, markets have largely moved higher. The S&P 500 is up 8% year-to-date. The MSCI World Index minus the US, which tracks international stocks, has gained 13%, so it's actually above the US markets, but there are plenty of unanswered questions hanging over the market, and the next six months could end up being even more consequential than the

first. So we're going to tackle some of the biggest debates facing investors right now and see if we can come to any reasonable conclusions about where things might go from here. So, Rob, first off, I want to just quickly review what's happened in 2026 so far, what have been the big moments that either moved markets or surprisingly didn't. I think the first big moment that we saw was the invasion of Venezuela and the threatening of invading Greenland,

which didn't end up happening. but we had that and that was, I think, less consequential than people might have thought, but that sort of set the tone for the year. I can't really believe that it was this year, but it was. We then saw an acceleration in the AI buildout. We saw a memory chip shortage, which was seeing play out in real time, a massive surge in memory stocks. We saw Sasspocalypse, which was triggered by a big influx of new AI products from Anthropic,

which got everyone very scared about. names like Adobe and Salesforce and ServiceNow and all of these sort of legacy software companies. We also started a war with Iran, which led to significantly higher inflation. We apparently came to a deal with Iran, but we'll see. SpaceX went public. We learned that Anthropic and Open AI might go public. Those were sort of the big market events and S&P performance has been pretty good, although we've now hit something of a wall

because for the past month or so, we're flat. But year-to-date, we're up around 7.5% but in the past month, we've been stuck there. So lots to unpack. Let's just get your reflections on what we've seen so far. Well, first of all, I feel like I lived an entire lifetime just in your summary of the first six months of the year. There's so much there.

I mean, I'm just looking right now at the chart of the S&P 500, and there's kind of, I would say, one, two, three, four, five phases. So the year through March, it's like Venezuela, AI worries, or whatever. The S&P, which had been rising vigorously, is kind of flat. So first three months a year, we're kind of going sideways. All the noise you just referred to is maybe stopping the market from going higher, but it's not falling. March through April, war. We don't know what it means.

It seems bad. Energy crisis. How is this going to resolve itself? And then that's phase two, is the scared section of the war. April through May, it's like, actually, it's going to be fine. And I don't know how the market foresaw that it would be fine. But the market, as of right now, was right. It said these two sides are going to figure out a way to get the straight of Hormuz open.

It may not be an everlasting piece, but we're just going to kick the ball into the high grass and have a temporary piece that allows business to do business. And the market just rockets up to a level higher than it was before. And that coincides with a return of animal spirits around AI. That's phase three. It's like, yippie! The war's going to end. Either Trump's going to chicken out

or the Iranians are going to chicken out or everyone involved is going to chicken out. And then you get to May. And since then we're flat. And I think that period, this last phase, kind of like first, second week of May through now, we're on a volatile path sideways

that I frankly don't really understand very well. Obviously, the AI story and in particular the microchip story is very prominent part of it, cause a lot of volatility. We've seen that in the last few days. There are some mild questions about the U.S. consumer. Maybe those are resolved now that the oil price is coming down,

but there's worries about that. And also, the market is just expensive. The SpaceX IPO has not exploded upward. It did it first, but then it's sort of weakened. There's questions about the further IPOs going. So we're like at a nervous top right now, kind of hitting sideways. That is exactly how I would characterize it to. Nervous top sounds right to me. And we will get into what we think will happen next, because that is obviously the question that everyone wants to answer. But let's just linger for a moment on the history of 26, because it is a thing.

fascinating one. And let's just go through how some of these different sectors have performed. I'm going to go back to my predictions that I laid out at the beginning of the year and sort of check in on how they're all going so far. And then we can sort of get into it. And by the way, we had you on the show as well, and you also made some predictions. So we're going to go back to those. Oh, God, this is horrible. I can tell you're a young journalist because you actually keep track of your own predictions. Very unwise thing to do. The good news is you mostly did well. Most predictions, they make good copy, but then they're wisely forgotten. Well, that's what this show is all about. So just going back to my prediction. So my big prediction was that returns in 2026 would

be meh. And my number for meh is low single-digit growth returns. My view was that we had an AI bubble that was forming, but that it wouldn't be as spectacular of a collapse as most people would think. My view is valuations were expensive. We were kind of due, but also we had this big deficit spending that was coming in. I also thought interest rates would come down. That is no longer true. So that changes the whole story.

But ultimately, my view was we would see kind of met returns. So far, we've seen pretty good returns. So I would say that that prediction so far isn't correct, though I will hold to it at the end of the episode. Some of the more specific predictions I made, I thought that the equal weight S&P would outperform, that you basically have outperformance from the rest of the S&P aside from the top 10. And so far that is true. That has happened. Yes, it certainly is. And I have stuff to say about why that's happening, actually. I think that's a particularly interesting one. Please, let's hear it. Let's hear it. Equal weight is up eight and a half percent this year.

It's outperformed. The regular S&P, which, of course, for our listeners, that is more dominated by some of the big names, the big tech names, like Meta, like Google, Nvidia, Microsoft, etc. And those companies, those stocks have not been doing very well in comparison to the rest of the market. Let's hear your views. Something really big happened back in the first or second week of May, which was that the companies that have been leading the market for five years or more, whenever the market has gone up, it's been led up by the Magnificent Seven. Apple, Alphabet, Tesla, Microsoft, Amazon.

You'll remind me the ones I'm forgetting. Meta. That has been the consistent pattern. When the market is strong, those stocks are strong. When the market is weak, those stocks are weak. That changed in May. And the leadership of those stocks just completely fell away. And we can talk about them individually,

but none of them are doing especially well since then. And they have been replaced in market leader. by silicon stocks. And if you think about where our heads are at about AI, this makes perfect sense, right? This is actually quite a rational change in leadership because we know for a fact that the next two years is going to be all about building artificial intelligence infrastructure. And we know for a fact that's going to acquire a lot of memory chips and a lot of networking chips and GPUs and everything else. Those companies are making out like bandits and there's no

reason to expect they will stop making out like bandits anytime soon. Whereas the implications of AI for the business models of the Magnificent Seven, in particular Microsoft Alphabet, Amazon and meta, far from clear. Could be great for them. Could not be so great. Right? And so like, I would hate to make any predictions about that. And I think the market in general, after having made a bundle of money in those names for years, it's like, what's the next step in them? They're spending a lot of money. They used to be free cash flow machines.

They're not free cash flow machines anymore. Right? And so, like, part of the nervous top here is about that change in leadership, which I think is super interesting. It's super interesting. And I like the point that you make that it actually is rational because they're basing it off of free cash flows, which I don't know if you saw this chart that went viral.

I forget who put it out, but basically just shows what's going to happen to free cash flows and what has been happening in the last year or so and what will happen next year or maybe two is the free cash flow for the big tech names just falls off of the cliff. Meanwhile, the rest of the S&P it continues, not because they're not making lots of money,

but because they're spending ridiculous amounts of money on these data centers specifically, and those names have been falling. So just going through, like, how has the AI trade gone so far? I think the way we would say it, we would put it, is it's gone quite badly for some names and incredibly for others. And just to put some numbers to the narrative you're describing here, AI infrastructure stocks have risen 27% year-to-date, AI chip stocks have risen 104% year-to-date, and memory stocks,

so companies like Micron, Sandisk, Samsung, those memory chip manufacturers, Those stocks have risen collectively 270% year-to-date. The hyperscalers, big tech, they're down 8%. So it's a total, total switch. So let me tell that same story in a slightly different way. Yeah. I have a list from me. This is since May the 14th, right?

So about a month ago, and I'm looking at the S&P 500 stocks. Who are the biggest contributors to the gains in the market and the bigger losses? So the top 10 dollar contributors is not percentage. change, but dollar contributors to the market. Micron, number one, chips, applied materials, number two, in the chip industry, Dell Technologies, supply servers to data centers. Then, somebody from the outside, J.P. Morgan Chase, maybe you could argue they're financing this whole thing, who knows. Number six, Lamb Research. Number seven, supplying drugs to the president of the United States, Eli Lillian Company. Number eight, Sandusk, chips again.

Number nine, Marvel Technology, Sandisk again. Number 10, Intel Corporation chips. 11, KLA. List goes on like this. Now, let's go to the opposite end of that list. Who's contributing losses, dollar losses since May 15th? Here are the bottom five. The biggest dollar loss contributor, interestingly, also a chip company.

Invita set up lousy month. Wow. This is kind of the exception that proves the rule that it's total chip leadership here. But after them, Alphabet, Amazon, Microsoft, right? You know, these companies are going backwards right now. It's fascinating to see it. And a total reversal of the trend that we thought was going to happen. But, I mean, in a funny way, many of us kind of expected this,

because these valuations had gotten very high and we were kind of expecting some level of pullback. I don't think we were expecting to see that all of that would be made up for and then some by different companies in the AI trade. I certainly did not say anything in my predictions episode at the beginning of the year about how you should buy chip stocks and memory stocks. But if I have, then everyone would be very rich. Oh, boy. I mean, this is the horrible thing about, you know, massive successful trades is they always look so obvious in retrospect. it's like it's a gold rush

buy the picks and shovels. It's a cliche. Just do it. And you're sitting there like being all smart, like, oh, I'm looking at all these different charts or whatever. Like sometimes it's like, just do the obvious thing, you idiot. You know? Looking at our charts, nerding out, talking about free cash flow.

Yeah, exactly. Just like they need a lot of chips. Why not buy the chip companies, you know? But that does beg the question of, will it lost? And I would argue probably not. I think we saw that in the level of volatility that we saw basically in the past week where those names, S.K. Heinex, Micron, Sanders, they just got obliterated. Then, of course, Micron comes out with these incredible earnings and suddenly the optimism's back. But it certainly is a question. How will these chip stocks keep in

former? I mean, I was talking about this with my partner in crime, on our podcast. Yes, big fan of us. Watching micron stock going into earnings was like a real-time look into the emotions of the market. 100%. Do you know, it was like it was down. It was up. It was in between.

It was like we know that coming down the pike, we're going to get earnings out of this thing. And it's probably going to be really good news. But if it's only just good news, the market's going to freak out. And it was like, that line was all over the place. could see the vacillations between greed and fear happening in real time. Exactly, which seems like that will be the characterization of the market going forward over the next few months. That's May, as you said, that's the final stage of H1. If I could just keep us moving through some of my other predictions here and evaluate them. So I said the equal weight one, boom, I'm right, great.

We'll see what happens at the end of the year, because that was what the prediction is about, we'll say. Moving on, I had two sector picks that I thought would outperform because I thought you'd see a rotation out of tech. My picks were consumer staples and healthcare. Consumer staples was true. We saw this huge bump at the beginning of the year. So it immediately proved right, at which point I actually decided to rotate out of it a little bit, but it's still strong up around 9%. Health care, wrong, down less than 1%. So it's roughly flat, but given the fact that the rest of the market has grown, that wasn't right, or at least that hasn't proven to be right so far. I like that as a long-term call, though. I feel like the sector of the economy that can,

has the most to gain from efficient improvements from AI is healthcare. It's a third of the economy. It's an inefficient mess. Like, we've been waiting. waiting for AI and healthcare our whole lives in some way, you know? So I like the healthcare call. I mean, everything from hospitals to insurers to drug companies to the rest. Like, you know, this could make a difference. And one of the only sectors in the markets right now, which is cheap, which is actually trading as a sector below its five-year price to earnings average.

If you're going to make a big bet on health care, you have to think about populism and health care, right? And like, both parties are quite populist right now. And one thing populists like to do is beat up on companies in that industry, whether it's insurance company, drug company, or other. Trump is the same way. You know, we, I was at the FT weekend festival last weekend, and I was watching Ram Emanuel talk. he's running, you know, and, you know, he took out the stick and had a couple of wax at the insurance industry, you know, because why wouldn't you? So anyway, that's one to think about as you invest in health care in years to come. 100%. That's incredibly tied to policy, and that's what

we saw last year. I would argue that's kind of what's been priced in. Is that overhang from political pressure? But it's 100%. I mean, that's what you have to. focus on if you're investing in that sector. Just going through again, by the prediction, small caps outperform. So far, it's true. Russell 2000 is up 19% year to date. That's been a great call. And it makes you think, and if the Russell 2000 is doing well and the other small cap index is doing well, that makes you feel a bit good about the U.S. economy, actually, because those earning streams are very much tied to the U.S. economy. The Russell index has a lot of wild speculative stuff on it. S&P 600 is less speculative.

but it's up too, you know. And something we have to talk about when we talk about 2026 is that earnings have been good. And that shows up in your small cap bet. We'll be right back after the break. And if you're enjoying the show so far, send it to a friend. And please follow us on YouTube, Spotify, or wherever you get your podcasts. I'm stand-up comedian John Marcos Sarasi. And I'm actor-penis model, Russell Daniel.

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Try O-Doo for free at Odu.com. That's ODO.com. We're back with Profty Markets. Final prediction here, I thought that non-U-S equities would continue to outperform. So far, that has been true. the MSCI World Index is up 13%, so international stocks are outperforming. But, as Michael Sembless pointed out in his recent research note, the reason that international stocks are outperforming is basically because of three stocks,

TSM, Samsung, S.K. Hynix, all chip stocks. So that's another story of the chips are the ones that are pulling up the rest of it. And if those didn't exist, you would not. see that level of outperformance. So correct, but not necessarily for the right reasons there. Yeah, but they all count in investing, you know, right is right and wrong is wrong. So good for you. I think you accounted yourself pretty well there. I think I did not bad. Now, I'm going to go to a couple of yours. Oh, God, I'm like dreading, even hearing what these are. Don't worry. Don't worry. You're good. You only got one wrong. Okay, good. You see. You

said, we are in an AI bubble, but it won't pop this year. So far, that's been true. But I'm feeling a little queasy about the second half. We will see. God. You said U.S. stocks will not underperform non-U.S. stocks. So far, that has not been true. But it's that special phenomenon. Yeah, yeah, yeah. Exactly. You said the Fed funds rate will not end the year below 3%. So far, that is definitely true. And you also said, and this is probably your biggest win, that the biggest risk in 26 will be inflation. And so far, that has been very true and more true than a lot of people would have predicted, because it has risen kind of spectacularly after Iran. Now there's a question of, will this last? Will it continue? But so far, that's very true. And it's especially reflected

in the interest rate conversation, which, of course, has been the biggest. shift. Everyone thought interest rates were coming down into 2026. Now everyone believes they're either going to stay where they are or they might go up because of inflation. Energy inflation is a special case. And it's, of course, the price people pay. You can't just put it aside. It affects the economy. You know, if energy inflation is high, that eats into real incomes and drags on growth. But in terms of things like rate policy, sustained inflation, et cetera, et cetera. It's core inflation that we're worried about, taking energy out, and that thing will not go away, right? It's sort of like some, you have a hopeful month, you have a bad month, but it just, service inflation in particular,

we're above target, and we're not moving in the right direction. We're moving sideways at best, maybe worse than sideways, depending on which month you're talking about. So this gets us to, some of the recent data we've seen, obviously, CPI hit 4.2% in May. The PCE, which is the Fed's preferred inflation measure, just bolstered the point. It just came in at 4.1%. And then I think what's really,

I mean, a big question has been, say inflation goes up or that it sticks around, and that was your prediction, and it appears to be playing out. What does that mean for people? Why does that affect? I mean, we know what it means for consumers. We know that it means that your life is more expensive, especially if it outpaces wage growth, which it is right now. But the question that investors are asking is, what does this mean for stocks? Is this a bad thing for stocks? And I'd be curious to hear your views on, because this was one of your predictions, is, you know, one of the biggest risks to the markets, not to just American people, but to investors is inflation. And we also seeing that kind of play out. So how do you view it at this point? Huge amount of different stuff to unpack. But let's just start with the history. The history is that of the last, going back 25 years,

whatever it is, when you have a rate hiking cycle, which if you have inflation, you will eventually get a rate hiking cycle. The Fed probably is not going to put up with this forever. that has coincided or correlated with ugly market corrections. If you look at the last three or four corrections and the last three or four rate hiking cycles, they do, I'm not saying anything about, I'm being very careful not to talk about causation here, just talking about correlation. That's an important point to make.

You know, the last big correction we had was a trickier case, though, right? Because it was the COVID correction. And we'd been, the rates had been coming up, and then COVID hit. And there was a collapse. So there's a question, would that rate hiking have sunk the market anyway, virus or no virus? Open question. But if you just look at a chart of the federal funds rate superimposed on the S&P 500, you start to worry about this stuff, whatever the correlation is. Right. So big question, the massive question is, here we are bumbling along above target, above the 2% target of the Fed, but not, you know, it's like on a good market.

you strip out energy and you're like you do trim mean or whatever statistical package you want and you get kind of inflation is like 2.7 and in a bad month it's like 3.5 and we're kind of going along sideways in this clearly above target by call it roughly on average a percentage point right and you know the markets can probably live like that you know what I mean the difference between two and three. You know, there's these discussions like, when the Fed says two is the target, did they mean two is the first number of the target? You know, what I mean? Or do they mean two with two point zero? Anyway, the question is, if it goes up again, I think that's a disaster. I think markets can live with core inflation that's a percentage point above target.

It has been living with it. It's not ideal or whatever. But if it gets loose from there, I just can't see how, given what we know about the historical relationship, given the instability that brings, I just can't see how markets can stay at this high level if inflation is above target and rising again. And I don't know. You know, if I could predict inflation, I wouldn't be sitting here talking to you. That's for sure. But like that's, but like, so it's bad.

If it stays the level of bad, it is now okay. We can live with that. If it gets to another level of bad, I'm scared. And I think this ultimately does, this is where Iran comes back into the mix, because, yes, we can strip out energy as much as we'd like. But supposedly the straight is open. The question of how long it will remain open, I think is an open question because I think, is an open question. because I think we're dealing with a president who is irrational and has a tendency to exaggerate to the point of basically nearly lying,

especially when it comes to how done his deals actually are. We have the fact that this isn't really a deal. It's a pause that they violated within like a day. And so how, you know, strong is this? And then there's also Israel, which is another giant question mark, was not involved. in this deal. And if Israel strikes Lebanon or continues to strike Lebanon, then does that mean that America violated the deal? Does that mean that Iran will then get angry again and say, no, we're going to use our leverage, which we just realized in the past year, which is that we

can either close the straight or just charge everyone who comes through it, which they could easily do, which would also increase oil prices? And all of those questions go back to your big point, which is that could increase inflation, and if it does, it could mean that inflation remains above 4%. And if that happens, interest rate hikes, which, as you say, are kind of go hand in hand with bare market. I think the reason the market was so confident all along that there would be some kind of resolution in the straight

was recognition that, look, the... Both sides needed the hot war to turn into a cold war for a while. And so, you know, I think the market is probably right that the central hypothesis is that an uneasy piece continues for a while. I might, if I was Iran, I might want the, I don't know. What do I know about Iran? But, you know, I might want the uneasy piece to last until there's a different president, maybe. And the president might want the uneasy piece to last. until there's another president, by the way.

So, like, I agree with you. It seems like a fake piece. But for the market's purposes, fake piece might be enough, right? Do you know what I mean? We're refilling oil inventories, whatever. But I agree with you. It's unstable and it's a question mark. And I would say your point is generalizable that, you know, if you start saying, well,

if you don't count on, count this shock, oh, we had the COVID shock, we have the oil shock, we have the AI shock, we have this shock. Well, we seem to live in an age of shocks. And they, you know, they seem to be, you know, supply shocks of one sort or another, sometimes demand shocks, and they keep happening. And of course, if you specify at the outset that you're not counting every unexpected thing that happens into the economy, into your inflation calculation, you're probably going to end up with a view that inflation is pretty low. But shocks happen.

Right. So anyway, I think, you know, I think, you know, inflation followed by higher interest rates is the big risk. But I'm not predicting it, but it's the easiest way to see things coming off the rails. And to your point, I mean, just looking at the price of Brent crude right now, it's down to around $74 a barrel. It's higher than it was before the war, but barely higher. It's basically where it was. And yet, we are living in a time where, to your point, the uncertainty around that straight is inarguably higher. There is certainly higher, confusion, higher uncertainty, which could lead to a problem. But what we're counting on is the optimism of traders to keep that price low. And that's how they feel. And it actually works in preventing inflation from getting worse.

Yeah, I think we did learn some things during the crisis about the flexibility of the world energy system, and those things are mostly encouraging. You know, I mean, it would have looked a lot different if the straight state closed for another couple of months and we really hit the end of oil inventories. But we were able to burn inventories, supply chains moved around. There was some demand destruction. So, you know, you have to say that the world energy economy performed pretty well under strain. And so I think that's a little good news coming out of a rather dreary period in our history. I'm going to move us on to our thoughts on what might happen in the second half, and it's certainly related. I have a list here of the biggest question marks for H2, 2026.

And the first one on my list is what we're talking about. It's Iran, specifically when and how. the Iran conflict will be resolved, or if it won't. When we look at the probabilities on Kalshi, the chances of a, quote, real deal are very low. It's 23% happening before September, 46% happening before 2027. So that's people betting on, will we come to an actual resolution

where we sign and the war is over? But that might be a different question from will the straight remain open? I mean, my prediction on this is, you know, I wouldn't bet my house on it, but we're going to keep faking it. Right? We fumble through. We kick the ball in the high grass. We grope our way along. It's never resolved, but it doesn't heat up again.

That would be my guess. But it's no better than a guess. I don't want to even call that a prediction. Yeah. Yeah, I think that's right. I also have here, will inflation get worse? And this is, of course, related. I refuse to predict. You make a prediction, and I'm going to watch. I'm not going to predict. Well, I kind of will predict. My prediction at the beginning of the year was that inflation would hit four and a half percent, or not beginning of the year. It was just as we were getting started with Iran. My view is that this was going to last a lot longer. I thought it would hit four and a half percent by the year end. We're at 4.2. I think I hold. to that prediction. But I mean, you know, I was listening to Mark Zandi, who we have on the show. I think

you've appeared on the show with him. And he believes that we're close to a top with inflation, that it probably won't get worse. I don't buy that personally, but that is kind of the big question. It sounds like you believe that it might get a little bit worse as well. I'll tell you one thing, if you're planning on buying a MacBook, you're going to get more than 4% inflation. I mean, we got that news from Apple today. And I'm going to now say something that is an idea that I'm outright stealing and let me credit the person I stole it from was a guy I had a cup of coffee this morning, former Reuters journalist called Rob Cox. And he pointed out that it's not just, you know, Apple comes out and says, you know, the memory chips are very expensive. We have to

increase the prices on the phones and the laptops and the tablets and so forth. Fine. the price of Apple goods are a very important price in our economy, right? That is a very salient price in people's minds. Is, you know, a lot of us use iPhones, a lot of us have iPads. A lot of us are Mac people. And that is there, that like, that's a price that everybody can see and knows going up. So I wonder if that is like a signaling one. It's not just computers when Apple does it because Apple's Apple.

You know what I'm saying? Anyway, I'm just throwing that idea out there because I thought it was a good idea from Rob, and I wanted to repeat it. I think it's important and also important in the context of how the American public views AI, specifically how much they dislike it. Because what we know and what Tim Cook has said outright is the reason that we're increasing the price of our computers and our phones and our chips, or excuse me, our Mac minis, is because the price of memory chips has exploded to a degree that I've never seen. before. And the reason that's happened is because everyone's trying to build a data center. And so that is another link. Every word of that is true, by the way. All of it's true. And if you don't like AI, this is another reason to not like AI even more, because the reason your iPhone, if you wanted to upgrade, has gotten more expensive is literally

because of AI. It's because of data centers. So the machines that are coming to get you fired and make electricity more expensive are also making your iPhone more expensive. Now, I wonder why people wouldn't like that technology. What a mystery. What poor misinformed people. That's exactly right. The you're fired machine that makes everything expensive. That's exactly right.

I don't know if any of that's true, but that's the perception very clearly, you know. We know that it's true in terms of making things more expensive. That much has been proved. We'll see about the you're fired thing, exactly. So, and that, by the way, and we can get to AI in a moment, but that could be a huge obstacle in AI's way. In fact, it seems it already is. But I'm just going to keep moving through my list of question marks. I think this is the biggest question mark. And no one is able to agree on this is what will happen to interest rates. We've seen different predictions made by

different banks. J.P. Morgan, global research, said that they believe that the Fed will hold rates for the rest of the year. Goldman Sachs also said they're not expecting any cuts they think that they will hold or that they don't think it'll rise either. Bank of America said they expect three interest rate increases this year. So there's dispersion in the predictions. That's what makes our job fun, right? Not everybody is on the same, is seeing the same stuff here. And part of that is simply because got a new guy in charge of the Fed. And we don't know, we don't really know who he is. And we're going to find out over the next few months. I'd be interested to hear your views on this. Like, I think that is a big piece of what's going

to happen to interest rates, which, as we said, as you pointed out, that basically could determine what happens to the stock market in the second half of the year. If history is any guide, it will be. I mean, I think Kevin Warsh, who's the new head of the, uh, Okay, how I describe him, and I don't mean this to be as critical as it sounds, but I call him the dog who caught the car. And what I mean by that is he's literally spent most of the last 15 years criticizing the Federal Reserve. He was on the Federal Reserve back in the financial crisis. He parted ways with the Federal Reserve, partly because of disagreements about balance sheet policy or whatever, back in like 2010-11 or something like that. he left the Fed. And since then, he's been suing a fair percentage of his time giving

speeches about how the Fed is screwing everything up. And now it's like, oh, thanks a lot, wise guy. Here's the keys. You know what I mean? So as a journalist, I'm very sympathetic to people who sit outside of the game criticizing the players. That is basically my job. So I don't want to criticize such people out of court. But this is a case where he's going from thinking he knows the right way to do it from the outside to being on the inside and being under all the pressures that go with actually running the thing. Point number two is, of course, there is a question about whether he will be bullied by Trump. As I've been saying all along, I think I've said it on the show here before. I don't think that's an issue. Two reasons.

One, Donald Trump tried to bully Jerome Powell, and it really, really didn't work. You know what I mean? It was a completely. complete failure, right? His bullying efforts probably made things worse from his point of view, right? So that didn't work. And two, the chairman of the Federal Reserve is not going to be, it doesn't matter whether the president likes them or not. What matters to someone who has that job is who am I in the eyes of history.

And if you are the chair of the Federal Reserve under whom inflation got out of control, you, your grandchildren will be hearing jokes about what a crap Fed share you are. You will be remembering, this is Arthur Burns, is the Fed chair who famously let inflation get out of control in the 70s. You don't want to be that guy. So I think he's going to have his eye on the ball in terms of inflation. Does that mean he manages it perfectly or anything like that? I don't know. But I don't think the president is going to intimidate this guy into doing anything.

We'll be right back. And by the way, Scott is going live with his predictions mid-year check-in tomorrow, June 30th at 3pm. Become a Profji plus subscriber on Substack to tune in. If you want to do that, visit Profgmedia.com slash subscribe. Support for the show comes from Cohere. As AI advances, one thing matters more than ever, staying in control.

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including objectives, risk, charges, and expenses. This and other information can be found in the fund's prospectus at getbcx.com. This is a paid sponsorship. We're back with Profty Markets. So if you're watching on YouTube, Robert was just kicked out of his office at the FT. I guess they don't respect you enough over there. So that's why he's got a bit of different background. But I was asking you wrong about Kevin Warsh's anti-fettishness and also the fact that he is

signal that he does not want the Federal Reserve to be communicating as much to the public about what they're actually doing, which has been a large point of controversy. I personally can't figure out why any of that actually matters on the big decision, which is basically interest rates. Possibly interest rates in the balance sheet. Call it those two together. Yeah. What are your views on his, I guess, anti-Fed philosophy? The communications thing is a bit weird. And let me give you first, the case against his approach. His thing is we don't want to give the market's guidance on what we're going to do. We want to say what we have done, but we don't want to talk about the future. We're going to take what they call forward guidance out of the statement, which is the kind of slightly coded language in the press release that comes with every interest rate decision that sort of gives you a way to predict which way they're leaning the next time. He doesn't want to explain what they call the Fed's reaction function, which is a set.

He doesn't want people to have the thought, if the employment report does this, the Fed will do that. You know what I mean? He wants you to know less about what we're doing. And he said this thing in his first press conference about this, which was complete nonsense and not true, which is he said, we want the market, we want to know what's going on by looking at the market. And we can't do that if the market is filtering all the incoming information through their idea of what we're going to do.

So it's this idea that like the signals the Fed is getting about the economy will be distorted by the fact that we give forward guidance. To me, this makes no sense whatsoever because you can be damn sure the markets are, no matter what the Fed does, how the markets respond to the economy is going to be conditioned by who they think the Fed is and what they think the Fed's going to do. It's always going to be a muddled signal. So I think that is just a silly story that he's telling you just by himself. This is what I think is really going on. He is a person who thinks the market counts on the Fed as a backstop, and he wants less of that to be happening. He wants the market to be more. He wants the market to be more more volatile and more scared because he thinks the market is too dependent on the Fed put and Fed put

like stuff. If we get in trouble, if we leverage ourselves too far, if we whatever, the Fed will always bail us out. And he wants to take that anesthetic out of the system. And I think the communications policy is part of that. Like you guys figure it out for yourselves. And if you find that scary, if you find it scary to operate without us telling you what we're going to do, good. I want you more scared. That's how I like it. You know, that would be my interpretation of that. And we will see how that goes. So there is a kind of, there are no atheists in foxholes aspect to all this. Like, it's all very well and good to say you want more volatility in the markets until the shit really starts to fly.

And then we'll see how you feel about volatility. In other words, when there's a crisis and institutions are falling over and they're begging for lines of credit from the Fed, what's the Fed going to do? When you start shrinking the balance sheet, which is something that he wants to do, you know, he's very keen on shrinking the balance sheet, I should say more, shrinking the balance sheet more. And there's a crisis in the money markets. How much of a tough guy are you going to be then?

You know what I mean? So we, you don't really find out what kind of Fed chair you have and what kind of Fed boards you have until they're in a difficult situation. And then you take the measure of what they're prepared to do and not do. Which is all makes it scarier for Wall Street in the scenario where there is some sort of shock or crisis or extreme bear market. because what we had in previous crashes was what was, of course, the Greenspan put, Alan Greenspan, who recently died, who this was kind of his doing,

is this idea that the Federal Reserve can come in and prop up asset prices such that prices don't go down. And it became a theme. We saw it from Ben Bernanke. We saw it from Jerome Powell. And to your point, if you've got this guy coming in saying, we're not doing that anymore,

so if you guys want to go have your AI bubble, and things crash, I'm not saving you. Now, he's not saying this explicitly, but I think this is the subtext. That's my interpretation of the subtext of what he's saying. New Sheriff in town, we want to let markets be markets. Yes, which is a really interesting interpretation, which brings us to the next big question mark on my list here,

which is, will the bubble burst if we believe that there is a bubble? And it does seem this was a conversation that was being, had in the fall of last year, and there were a lot of question marks around this. Our view was that a bubble was growing, but it wasn't about to burst or, and it wasn't quite like what we saw in the dot-com era because you didn't see these prices. But I have a new view, which is that actually prices are like what we saw in the dot-com bubble, and that is we can look at the Schiller-Pe ratio, which is the cyclically adjusted price earnings of the S&P.

It's currently at 41, and during the height of the dot-com bubble, it was 44. So it's in that territory, and the historical average is 17.4. Granted, it's been a lot higher in the last several decades, because stocks have just gotten more expensive. But the reality is, this is the second most expensive stock market of all time, is now. The only time it was more expensive was right before it crashed, from 99 into 2000. So this is now a real question to contend with.

What do you think? As I'm sure I've said on the show before, because I repeat it whenever I get a chance just to humiliate myself, the thing I have done that has cost me the most money with my personal investments and my savings is try to get out of the way of bubbles. Trying to anticipate a bubble

can turn into an extremely expensive hobby because you miss out on a lot of, lot of gains. And so I would never, if the price momentum was still headed up and to the right, I would say, Ed, you're crazy. There's no point predicting a bubble this year. It's not happening soon. What makes me slightly nervous is the determined sideways movement of markets over the last six weeks or so, that the market tries to rally and it kind of can't. And that now, that means we're between trends. We're not in an up trend and we're not in a downtrend. And let me give you a metaphor for this that actually has a nice resonance with a standard market metaphor. When I was a young

and very stupid man, I went to the running of the Bulls in Pamplona, which is a, a kind of classic thing for a dumb young American to do. That is stupid. I love it, but I love it. Yeah. It's first thing in the morning, and you're like, you know, had an hour of sleep, and they're about to release these bulls into this narrow road, and you run along with them, and you're starting to have second thoughts. And I remember asking the Spaniard I was with for advice. And he said, don't worry, this is all very safe, as long as the bull is just running down the road. A bull that's going one direction, you can just run along next to it, and you're fine.

If one of those things falls over, get out of the way as fast as you can because you don't know what direction it's going to go when it gets up, right? You know, as long as the bull is pointed one direction, you are good, right? But like literally, because one of them will wipe out, you know, going around the corner and it could start coming back the other direction. And it's the same thing with markets. A market with no trend is a bit unsettling, right? And I feel like right now we're in a market with no trend. You know, look, it's not going to change my approach. You know, I have a fixed allocation.

I stick to it. You know, I'm, you know, I'm only an ETFs. I'm diversified, et cetera. But as an observer of the market, a trendless market is a scary thing. And there's a good example of this just today. So we discussed how the markets were very nervous heading into the micron earnings. Micron earnings finally land and they're terrific. Micron is up, I don't know, 15% or something as we speak.

I don't know. The NASDAQ today, still down. So we got the good piece of news that everybody was looking for. It was better news than even everybody expected. That stock, I'll just look at it now, is up 17%. NASDAQ is down slightly. What's a man got to do to get this market up? So that makes me think we don't have a trend and it could go either way.

I think it's a really important point, yeah. You know, what I mean? And this is a mathematical point, by the way, made about, you know, all markets everywhere by the famous Benoit Mandelbrot. And if I can recommend any book about markets to your readers, it's the misbehavior of markets. And, you know, his point is this is the pattern of markets. They have a trend. They have momentum. They don't move randomly.

You know, if they're going up, they're more likely to keep going up. If they're down, they're more likely to keep going down. And then the trend breaks, and there is a moment of chaos until the new trend forms. And that's true at the micro level, like on a given day, a given trading session, it's true over 10 years. It's kind of the fractal pattern of markets. And we're at one of those intermediate periods right now, I would argue. It's a really, really good point. And it reminds me of something that Barry Rettholt said when we had him on the pod a couple weeks ago,

where I laid out to him my views on this feels like it's where we actually are in dot-com territory at this point. And he said, sure, but SpaceX just went public and it absolutely exploded. And as long as people start

are feeling good and things are going up, to your point about the trend, then, you know, you can keep predicting the bubble as much as you want, but prices are going to keep going up and you're going to lose out on all of that. All you're doing is getting poorer. But what have we seen in the past

week, two weeks, SpaceX came crashing back down. And if we're thinking that the, I mean, at this point, I think we can all agree that asset prices are very pricey right now.

I don't, I don't think that's up for debate. I mean, you look at every sector. You look at tech, you look at energy, industrials, materials, consumer. Everything is expensive. Everything is trading on a multiple basis, a lot higher than they historically did. Yes, earnings are growing,

but those multiples are growing too. And so if we're waiting, we're waiting on something to break the momentum. And it does seem that we're in that moment where the momentum is wavering. And the momentum can resume. You know, if you told me, Micron is going to crush earnings and the market's going to take off flying again on Thursday morning, I would have believed you. But that's not what's happened here this morning. You know what I mean? So it could go either way. I am, you know, it is reassuring that the U.S. economy is okay, U.S. consumer is okay, and the profits are good. That is a more helpful background than you would otherwise have. Although there also seems to be a little bit of wavering on the consumer front. We did just see the revision for the consumer spending in the first quarter.

Consumption's a little softer. Yeah, yeah. And if that continues again, I think this goes back to Iran. I mean, then that's the real question. for corporate earnings. And it does remind me of 2022, where you had stocks were expensive, just going back to the Schiller, P.E. It hit 40 in January of 2022. Then you did see a drop-off in consumer spending,

and it was really triggered by the inflation shock that we felt coming out of COVID. And the Fed finally started, the hammer down on rates, it was like for the, for the 70-30 portfolio was the worst year anybody alive can still remember, basically, is because your bonds, because it was inflationary, your bonds were no good. And the stock market was going down. So you lost coming and going. It was a terrible year. You know, like if you said, you know, the market is going to lose a third of its value, you know, I mean, it wasn't a third, but 2022, we survived, you know, and we could

survive another crash here. I mean, this is maybe a question for another hour, but there's kind of crashes and crashes. You know, if the market goes down a third, let's just say from where it is now, which would bring it back into its normal valuation range historically or whatever, as long as there's not awful second order effects, that's kind of fine. It happens once in a while. A lot of those are paper profits. You know, some hedge funds will go out of business, but like that's a totally survivable event. You know, the question is, is it a third in the style of 2008, where there are massive second order consequences that affect the real economy?

You know, in that case, there was massive second order consequences because the locus was the housing market, which is the main asset of every American family. So it caught. But so like, you know, like, you know, for a young investor, and I think you probably, your young man yourself, you probably have listeners who are your age. The market falls by a third. As long as you have a little bit of savings in cash, you should be getting up and cheering. Exactly. Right. You know, that would be awesome. Right. You know what I mean? So, you know, as long as you're not 100% in stocks anyway, or you can access a little money to start some savings

at the end of the crash, it would be a great thing, right? So that's something to keep in mind. Old people like me have to worry. We need the money now. Yeah. Yes, yeah, that's right. But for you, it's different. I think this is a really important point. And I think that ultimately, and this is where I'm beginning to land on this, I think what we'll see, I think we will see a correction, I think it is as close to imminent as you can get. I think it will look a lot more like 2022 than it'll look like 2000.

Because to your point, I think that... Knocking on wood. But I think that a lot of, I mean, you. it's a lot less, I mean, it's hard to argue that this bubble isn't systemic. It is systemic. But at the very least, it's far less debt financed, at least the AI buildout, which has been highly dependent on equity. Even though they are issuing debt now, it's still mostly an equity story. Yes. And these big tech companies have the cash to pay for this stuff. They're starting to issue debt financing. and it's starting to look a little weird, but if you literally just look at their net debt, specifically, you know, meta, Google, Amazon,

those really big players, they have cash, and they can do this, they can take these risks, which makes me think that we'll see a correction more similar to 2022, which doesn't collapse the whole thing. I think it results in a year that's kind of shitty meh for investors. That would be my prediction going into second half. No, I'll join you in that prediction, and I certainly hope it's true. I think the argument you've made for it is very good.

The only caveat to this is you mentioned that this is not as leveraged a financial bubble as the bubbles we saw in 2008 or possibly 01. Now, the thing about leverage is you don't really know where it is until asset prices start to fall. And then you have these awful experiences like, who? What to? What are you talking? So it was like in 2008, you were like, European banks have a lot of leverage finance in American houses.

I remember finding that. I was like, what is happening right now? You know what I mean? German banks? You know? And so it's like, let's just hope there is not secret leveraged love affairs going on in financial markets that we don't know about. And, you know, every once in a while I write a column about how leverage. is the financial system.

And every expert you talk to, they tell you the same thing. You can get a sense of it, but you can never know quite the extent of it. So this is the ultimate example of Warren Buffett's. You know, you see who's swimming naked when the tide goes out. To the extent that you can even know,

given what you just said, how leveraged would you say we are? My understanding is that on the AI side, for the ones that matter, not so leveraged, but maybe that's not including a lot of other stuff. So there's a famous data series you can look at from FINRA, which is the industry's kind of self-regulatory body,

which is the amount of debt in securities, margin debt in securities accounts. And that line is up into the right hard, right? So there is a lot of leverage speculation in markets. I think you can find similar proxies for the leverage being provided by trade, desks to hedge funds and so forth. So I think there is quite a bit of that.

That's not good. You know, I was looking the other day at leveraged ETFs. There's a couple of these. They're not huge. You know, we're talking in the tens and twenties and thirties and 40s of billions. But like your NASDAQ 3X leveraged ETF has grown its ATM. So I think we can conclude that there's appetite for speculative leverage out there. And, you know, in a crisis, what that happens with?

that? Is it the valence reverses and it goes backwards? And that's going to happen. So maybe I'll need to rethink that one. Yeah. Well, I don't know. I think I think you're right within the circle of the AI part. But it's a question is people outside of that circle of that circle speculating on what happens in that circle. Are they using borrowed money to do so? Yeah. The answer to that question is yes. And I wonder the next question becomes which one matters more or do they both matter equally? Yeah, yeah. I mean, like I said, you know, it wouldn't be finance if you could predict these things in advance. It's a dynamic system and it's really tough. My final question on my list of question marks and then we'll wrap it up is

what will happen at the midterms. It seems like Democrats are going to win, but who the fuck knows? Yeah, not me. Not me. And will the market care? I don't even, I'm not even sure it's a market event. Right. Do you know what I mean? Here's what I would say about the political side of things. And I was talking to this, if a very senior editor at the F.T. about this, that the, I don't know if this is even the right word, like, the amplitude of political madness seems to be going down. So, like, a year and a half ago, we were, like, arguing about global trade rules and, you know, take,

terrifying our allies. Six months after that, there was, like, masked government thugs arresting Americans and non-Americans alike in the streets. Yeah, that was crazy. I forgot about it. And now what we're doing is arguing about the reflecting pool. And like, so as a direction of change, I kind of like this. You know what I mean? Like, I think this is actually, it's funny, but it's actually quite a serious point. Like, yeah, let's freak out about the swimming pool. Great. Stick to that. Love it. It is very interesting. But part of me feels worse about that because I'm almost like, are we just sort of, are we gotten bored about the fact that we've launched a war in the Middle East again from the guy who said that we wouldn't launch any wars? I mean, I wonder if that's almost

worse. Like, with, I mean, by the way, it's not like the tariff thing is no longer a debate. That's still playing out in the global stage. Yes. But it died down. You know what I mean? it's whatever happens in the midterm Trump is a lame duck. So it's, you know, all of that stuff is kind of happening. And maybe what we're seeing is you're quite right to mention the war in this context. You know, that's that that that is true. But like I said, maybe things are calming down a little bit. It's, you know, if there's anything I hate to predict, it's the interplay between politics and markets, you know, because you have to be smart about both and nobody is. Well, I will just, to your point on will it even affect markets, I think my view is it won't,

and for one crucial reason, which is that the midterms are about what happens in Congress, and what we've learned about this new Trump presidency, is that he doesn't give a shit about Congress, and he'll basically just do whatever he wants. And here is our very interesting data to just support this point. Trump has issued more than twice as many executive orders, in this term than Congress has passed bills. And that never happens. You look at the Biden presidency. It was flipped. He passed four times fewer executive orders than Congress passed bills. In Trump one, also four times fewer. Obama, five times fewer, Bush, six times fewer. Suddenly, it's reversed.

Trump is just spraying executive orders. Doesn't matter what Congress does. He's still going to do whatever he wants to do. Now, I would guess that the next presidential election might be very consequential for markets because based on what we saw in my home state, it could be a race between extremes. You know, the recent congressional races here in New York, you know, if that's a race between the Trumpian right and the AOC left, markets are going to have no choice but to care because it's going to be wild, right? But that's, thank goodness, a few years away. So that's probably more important than midterms, but it's farther in the future. Well, at the very least, midterms might be sort of the canary and the coal mine on what the direction will actually be. Well, that's my list, Rob.

We've covered a lot of ground. Yeah, I think it's a good list. And I agree with your predictions. I think a significant correction, you know, whether it's, you know, this year or in the next couple of years, is perfectly likely for the reasons you laid out. I think it is perfectly reasonable to think it won't be catastrophic for the reasons that you laid out. And, you know, here's hoping that we're all, you know, okay on the other side. Let's take a look at the week ahead here. We will see earnings from Nike. We'll also see consumer confidence and the employment report for June.

Rob, this is usually where I ask Scott for a prediction, but we've made a lot of predictions. Yeah, I'm exhausted. But I guess let's just get your final reflections on first half of 2026. I mean, you've been writing about the markets for a long time. you're one of the most respected voices and commentators in this space. I mean, how is it shaped up for you? What are your final takeaways? For me, the most important thing is the transformation of a huge trend, which was the mag seven trend into something different. And so like, and that could switch back, right? We have, you know, it could be we're looking at a six months aberration and we're going to

get back. But like, we knew what third of the market was kind of in the driving seat. What eight or 10 companies. We're in the driving seat of markets and finance generally. We're in this interregnum period now where we don't know who's driving the bus. And so it's exciting because, like, oh, you know, we could talk in a month and the story could be very different. So where the, where the first six months have left us is like wondering. It's a terrible cliche for a journalist to say it, but we're standing at the crossroads here. It's a fun moment to be observing what's happening. Robert Armstrong is the U.S. financial commentator for the Financial Times. Rob, I've missed you. It was great. This is fun. Let's do it again. Let's do it again in six months.

We can be wrong in our predictions again. Exactly. This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our video editor is Jorge Carty. Our research team is Dan Shalon, Isabella Kinsul, Kristen O'Donohue, and Mia Silverio. Jake McPherson is our social producer Drew Burroughs is our technical director and Catherine Dylan is our executive producer. Thank you for listening to Profugee Markets from Profitie Media. If you liked what you heard, give us a follow and tune in tomorrow for a fresh take on the markets.