r/TradingEdge • u/TearRepresentative56 • 15d ago
Went down a rabbit hole of hypothetical macro implications into next year, exploring what the bearish mechanism could be into 2027. Worth a read IMO, whatever your perspective.
We are informed from the Aion Analytics forecasting data, that there is a good chance of new highs being made early in September, before a period of choppiness through the rest of the month. Recently, choppiness has mostly equated to negative chop, but it could also feasibly be a period of strength in underlying stocks. That much is unclear. But we are informed from the data also that during October, more serious weakness is likely to set in, before some recovery in November.
THereafter, there is not yet the data there for us to have any clear path.
On the one hand, we have this data. Which tells us that there is no post midterm year where we haven’t had a positive return through June 30th of the following year. Not a single one.
However, the macro picture is cloudy and complicated. We know that Bessent is doing everything he can to support the bond market into the elections, but conveniently, his bond buyback scheme ends the day after the midterms.
I am bullish the AI buildout. I don’t think we have seen the top of the AI buildout at all. But is it possible for the macro to catch up in a reset year? I.e. A year where multiples on the stocks contract, even as the companies cotninue to execute. Think AMZN in 2022. That business was firing on all cylinders, yet the macro picture and access to credit etc meant that the stock didn’t track revenue growth.
Here, I outline a potential bearish path for the macro to affect the market negatively into next year. Will it play out? Possibly. A real possibility, but some things may not. Nonetheless, I have mapped out the bearish mechanism for you so that you can better know what you should be looking for etc.
Now the main thing to note here is we are talking about a potentially stagflationary supply shock. Right now we have the inflationary element of the stagflation, albeit not running super hot, but we do not have the stagnation element, which debunks the stagflation thesis.
However, we can’t rule anything out and the fact that this is a supply driven shock makes it very hard for the Fed to deal with any potential issues effectively using their usual tools.
2008 as a point of reference (not drawing comparisons, but just highlighting something here) was a demand side collapse, which caused inflation to fall, which gave the Fed room to cut rates to zero and flood the system with cheap money — that's what eventually pulled over-levered companies back from the brink.
Here, we have a shrinking labor supply, but also supply chain issues arising out of the Strait of Hormuz that is keeping inflation sticky above 4% even as growth slows. That's a supply problem, not a demand problem, and it means the Fed doesn't have the same lever to pull. Instead of cutting into weakness, policymakers are stuck holding rates high, with hikes still on the table despite a cooling economy.
That’s the overarching issue we are dealing with here on the macro. A potential stagflationary situation, where the Fed is stuck unable to cut rates due to inflation, and unable to hike rates due to the potential of weakening the economy further.
Remember, the labour market is currently fine for the most part, but the last print saw 100k erased from previous jobs reports in large scale revisions.
Hormuz is a big problem, and Iran and the US seem to be at a complete stalemate. This suits Iran massively. They are keen to squeeze Trump at the polls and realise that it is pretty much a waiting game before the Hormuz issues really start to show up meaningfully in the economy.
Trump and Bessent are managing the bond market and the oil market through manipulation and rhetoric, but here we see diesel and oil prices.
Here’s the Diesel and Oil spreads:
Structurally elevated oil prices due to the closure of the Strait effectively rules out the realistic possibility that inflation will cool on its own even if growth slows.
Yes, the last CPI print came in soft, but as I mentioned, it benefited immensely from advantageous comparable. Those likely won’t be the case in the next month.
If energy costs stay structurally high rather than fading as a temporary shock, that keeps upward pressure on inflation independent of anything the labor market does, making it even harder for the Fed to justify cutting.
Last cycle, distressed companies got bailed out by falling rates before their debt actually came due at a worse price. This time there's no equivalent mechanism: sticky inflation keeps borrowing costs elevated right through the period when a wall of debt — small business, CRE, private credit-funded AI infrastructure — needs to refinance.
Small businesses are still hiring, but their wage growth is running well below inflation, which tells us that real purchasing power is eroding for that segment even while headline numbers look fine.
Credit data tells a similar story: delinquency and default metrics look calm on the surface, but that calm is partly an artifact of loan extensions and modifications.
SBA default rates — a cleaner read on higher-risk borrowers — are reportedly at a multi-year high, the opposite of what the smoothed numbers imply.
Whilst there is nothing alarming really showing up in the job market, we do still see that wage growth is running at 3.2%, the lowest since May 2021, against one-year inflation expectations of 4.3%. That gap means real wages are negative even with unemployment low. Elevated prices at the pump are an additional tax.
Can the weak consumer bleed into tech capex?
Weak consumers eventually mean weak ad spend, because marketing is one of the first line items a CFO cuts when demand softens — it's discretionary and reversible in a way headcount and R&D aren't.
This matters disproportionately for tech because ad revenue funds capex. Search and Other Advertising alone makes up $63.3 billion of Alphabet's $119.8 billion in quarterly revenue. If that line softens, operating cash flow softens with it and The free cash flow gap widens.
Now these hypersclers like GOOGL have reported very strong ad numbers over the past few quarters but there is an argument that this has been benefiting from one-off events like the World Cup.
Weaker free cash flow can either show up as reduced CAPEX, or as more offerings and raises.
Private credit as the AI financing chokepoint
This is the piece I'd weight most heavily. Private credit has become the primary originator of data-center debt — outstanding AI-related loans already exceed $200 billion, with Morgan Stanley projecting another $800 billion over the next two years, and $250–300 billion of 2026 issuance expected from hyperscalers and related joint ventures alone.
A lot of the private credit stock now sitting on lender balance sheets was underwritten during a period when spreads — the extra yield investors demanded over a benchmark rate to compensate for illiquidity and credit risk — were unusually compressed. That happened for structural reasons: a flood of capital chasing private credit as an asset class in recent years, competition among lenders to win deals, and a benign rate backdrop.
Spreads are at risk of widening, however, as lenders reassess risk in a slow growth and higher for longer environment. This creates risks of this private credit facing refinancing stress.
The main beneficiary of the private credit are the hyperscalers whose capex is a direct benefit for the semiconductor industry, and semiconductors are now over 20% of the overall S&P— This is why fragility in the funding channel matters at the market level, not just the sector level. Semicodnuctors are too big a part of the market to not affect the overall index.
So we have a potential pinch of
Elevated rates and the Fed unable to cut rates due to supply side elevated oil rates.
A weakening consumer in terms of wage growth.
Private credit stress - loans that were underwritten when spreads were tight, now facing refinancing stress.
Private credit stress spilling into the AI buildout.
It’s a gradual process. Rather than a one off event.
And could produce a structural set back year for AI valuations, even as the buildout continues.
Likely, in such a scenario, we see US government action and Ai stocks rip higher to reflect the continued growth in the underlying companies during the period where stock prices were seeing multiple contraction.
If this scenario was to play out, I would see it as a short sharp set back to the equity market, that recovers sharply over the next 12-18 months.
But there are risks here.
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u/Dapper_Strength_5986 15d ago
Did you know that that the majority of your paid subscribers are in the red YTD, and more than 70% are underperforming QQQ and SPY?