S&P 500 Turmoil Marks the End of Passive Investing
Investors might blame erratic Trump policies for the state of the market, but it's their own complacency that should change.
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Since Trump took office, markets have been range bound, violently whipping between the top and bottom end of the range, frustrating both bulls and bears.
The S&P 500 is now down 2% for the year, after being up 4%. It may not seem like much on the surface, but underneath the hood some sectors are up 15% and some down 10%.
There has been a massive reshuffling of positions that have been held for the past three years. Since ChatGPT was released onto the world in October 2022, the broader indices have been on a one-way tear, up nearly 70% since then. Of course, the index benefitted from the Magnificent Seven, which dragged the index higher and higher as they saw EPS upgrades from 30% to 50% year over year. The U.S. index dominated the world but even within the index, the rest of the 493 members had been lagging, given the slowdown in manufacturing.
China and Europe were the two of the main country indices that underperformed massively, with the former the worst due to the extreme capital exodus post-COVID and the property market burst. Valuations were cheap for obvious reasons.
Lo and behold, year to date, China is up 20% with Europe up 11%. Sometimes, positioning is more important than the fundamentals themselves.
As the news on DeepSeek was released, portfolio managers started scrambling to lock in their massive gains as concerns on ROI grew. These large-cap names have spent about $50 billion to $80 billion on AI, compared to DeepSeek and other alternatives, which are being released at fractions of the price and with much more efficiency. Sod's law — we saw the massive overweight unwind in just a few weeks.
AI is here to stay, whether we like it or not. Data centers are growing and factories are seeing production lines reserved through 2027. The computational demand from faster processing will need more power and more servers, and this is before the world moves into singularity. These companies will do well, though they may not be able to grow their earnings by 25% year over year and may be plateauing. Investors are just used to 50% price returns, hence the panic.
Over the last few years, most investors have been investing blindly into the U.S. index, the so-called S&P 500, as it has been the easiest place to just park funds given its growth without understanding what is moving the index. But the U.S. has an exceptional debt and spending problem. That is what Trump and Scott Bessent are trying to resolve, as the Fed says it is on an unsustainable path. Trump knows that to spend more to boost the economy they need to contain the excess. This is a step change from the Biden administration, which kept printing $1 trillion every 100 days with no regard whatsoever for the average American nor to their cost of living.
Cycles are changing. This is causing volatility as we enter the new world order. A very successful strategy, called “passive investing,” will now struggle as the easy money has been made by just buying and holding. Investors will need to do actual work and study fundamentals, investing in select companies and sectors that will benefit in Trump 2.0, as opposed to Biden 1.0. The new generation of investors only looked at charts and followed momentum blindly. Because stocks only go up, right? Well, that momentum is broken, or at least it won’t move in a straight line now.
Investors are blaming erratic Trump policies as opposed to their complacency and ignorance. As the old adage goes, "Even your grandma can make money being long volatility, but making money being short volatility, that is what separates you from the masses."
It is time to be selective as the rising tide will not lift all boats. Choose wisely.
