This Market Is Directionless (And That Should Scare You)

Prof G Markets - Vox Media Podcast Network

Markets showed strong gains in H1 2026 despite geopolitical tensions and AI-driven volatility. The shift from mega-cap tech dominance to AI infrastructure leaders like chipmakers marks a pivotal market transformation. The episode explores valuation concerns, leadership rotation, and political uncertainty ahead of midterms. Concluding with cautious optimism, experts highlight the market’s crossroad

Key takeaways

• AI infrastructure stocks surged 104% YTD
• Chip and memory stocks outperformed mega-cap tech
• Market leadership shifted from Magnificent Seven to AI infrastructure

Transcript preview

Support for the show comes from Odo. Running a business takes everything you've got and a lot of the tools out there that are supposed to make your life easier just aren't great at talking to each other. And that means you end up having to toggle between a dozen different apps and services just to keep the lights on. Enough of that. Now there is Odo, the all in one fully integrated platform that might actually help you get it all done. Thousands of businesses have made the switch, so why not you try Odo try Odo for free. Odo.com. That's O-D-O-O-O-com. Support for the show comes from Plodd. If you're an executive, small business owner, project manager, journalist, or anyone responsible for important decisions, details matter. Conversations move fast and it's easy for key context, follow-ups and action items to slip through the cracks once the meeting ends. Plodd is an AI-powered note-taking system built around dedicated recording hardware. It captured. as 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. Visit plod. AI slash markets to learn more and use that markets code to get up to 15% off. Welcome to Profity Markets. Scott is wrapping up his week in Can. 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? to can, you know what I mean? That's my question too. Not that I'm like hanging out with you, but like starlets and nachronies or whatever they drink in can. That sounds all right. I agree, yeah, he's partying it up at the Spotify party and the Snap party after he made fun of Evan Spiegel on our previous podcast and somehow didn't get the invitation rescinded. But that's how it goes. Yeah, he's partying 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 hospital. 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 halftime report. So without further ado, I'm going to launch us into our H1 review. I hope you have plenty of the wearable. 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% 13% so you know. 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 in real time. I can't of Surgeon Memory stocks. We saw Saspoculips, 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 Service Now 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 are 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 in 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 Strait of Hormuz open. It may not be an everlasting piece, but we're just going to kick the ball into the highgrass 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 yippee! The war's gonna end. Either Trump's gonna chicken out or the Iranians are gonna chicken out or everyone involved is gonna 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 in a, 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 US 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. SpaceX IPO has not exploded upward. It did at first, but then it's sort of weakened. There's questions about the further IPO's going. So we're like at a nervous top right now, kind of hitting sideways. That is exactly how I would characterize it too. 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 2026 because it is a fascinating one and let's just go through how some of these different sectors have performed I'm gonna 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 gonna go back to those. Oh God this is horrible I can tell you 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 forgot. 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 me. And my number for me is low single-digit growth returns. My big prediction was that returns in 2026 would be me. And my number for me 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 other collapses most people would think. My view was 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 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 is happening. 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 8.5% this year. It's outperformed. The regular S&P, dominated by some of the big names, the big tech names, like Meta, like Google, and video, 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, yeah. 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 leadership. 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 we're going to require a lot of memory chips and a lot of networking chips and a lot of networking chips and a lot of networking 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 7, 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 you know I would hate to make any predictions about that. that 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 there spending a lot of money they used to be free cash flow machines are not free cash loan 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 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 if you saw this chart that went viral 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 a 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 I think the way 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% to that year-to-date and memory stocks so companies like microns 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 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 market and the bigger losses? So the top ten dollar contributors is not percent change, but dollar contributors to the market. Micron, number one. chips applied materials number two in the chip industry del technologies supply servers to data centers then somebody from the outside jepi morgue and 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 sandes chips again number nine marvel technology sand disk again chips 11 KLA list goes on like this now let's go to the opposite end of that list who are who's contributing losses dollar losses since May 15th here the bottom five the biggest dollar loss contributor interestingly also a chip company invidia set up lousy month this is kind of the exception that proves the rule but it's total chip leadership here but after them alphabet Amazon Microsoft these companies are going backwards right now. It's fascinating to see it and a total reversal of the trend that we've 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 end 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 had 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 by the picks and shovels it's a cliche just do it and you're sitting there like being all smart I'm looking at all these different charts or whatever like sometimes it's like just do the obvious thing you idiot you know. You know? Looking at 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 week where those names, SK Hynix, Micron, Sanders, they just got obliterated. Then of course Micron comes out with these incredible earnings and suddenly the optimism is back. But it certainly is a question. How will these chip stocks keep informing? I mean I was talking about this with my partner in crime, Katie on our podcast. Yes, big fan of hers. 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 is like we know that coming down the pike we're gonna get earnings out of this thing and it's probably gonna be really good news but if it's only just good news the market's gonna freak out and it was like that line was all over the place you could see the vasclations 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 that equal weight one, boom, I'm right, great. We'll see what happens at the end of the year because that was what the predictions about, but 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 Consumer Stapels was true. We saw this huge bump at the beginning of the year. So it immediately proved right at which point I actually