Tech looks set to lead the way south on Thursday, with investors showing disappointment over less-than-perfect Broadcom results.
A surge in the Nasdaq-100’s aggregate market cap — to around $41 trillion currently from $30 trillion in March — sets up the market for “spectacular rotation,” according to our call of the day from former Lehman Bros. trader Larry McDonald.
A K-shaped U.S. economy is driving investors out of troubled retail-sensitive areas and into what’s perceived as the safe tech trade, the author of the Bear Traps Report, an investment newsletter, explained on the podcast “On The Tape” with “Big Short” investor Danny Moses.
“This is like a rubber band stretching, [and] it’s a lot like just before COVID. The market went up every single day in February of 2020, even though coming onshore was this really nasty storm, and everyone was hiding out in tech. It’s the same thing today,” McDonald said.
Some investors are now cutting exposure to other areas to make way for looming mega-scaled IPOs from SpaceX and OpenAI, he added.
McDonald, who wrote the bestseller, “A Colossal Failure of Common Sense,” said tech representation in the S&P 500 is so high that retail investors are being force-fed the sector.
“This is a disaster because, right now, SpaceX at the $2 trillion valuation would be almost 6% of U.S. GDP,” he said. That compares, he observed, with Facebook, Microsoft, Nvidia IPOs at valuations that were less than a half to a quarter of 1% of GDP at the time.
Recalling that during his time at Lehman Bros. financials were at one point in 2005 near 25% of the S&P 500 market cap, he sees the “worst setup” as he looks ahead.
McDonald sees an imminent inflation hit, with oil coming under strain as flights head toward World Cup match sites and the Strait of Hormuz remains all but shut.
The U.S. government “really dumped the SPR [the Strategic Petroleum Reserve] to hold down oil prices, but now we have this summer driving season and all this demand for energy that’s coming out of AI. So the probability that we have a real inflation bounce that’s going to drive money out of tech into hard assets I think is almost 90% to 100% certainty over the next two months,” he said.
The strategist sees a trap ahead for the Fed if inflation spikes again, because it won’t be able to hike interest rates given an “already wounded” consumer, creating stagflation. “That gives you a huge rotation into all kinds of hard assets, oil and gas companies, companies that control hard assets.”
McDonald called gold miners a “screaming buy” in 2016 and also discussed rotating into those stocks a year ago. He said the “tourists” who moved into gold from September to February when they saw a dovish Fed got out with the Iran war shock. Emerging-markets countries also had to sell gold in many cases.
“The bottom line is that it comes down to the inflation shock that’s coming at us, with the summer driving season, the World Cup, that creates a hawkish bias potentially at the Fed [and] that scares money out of gold and silver,” he said.
McDonald said this will be the time to buy miners at reduced prices, similar to what happened in 2022 and 2023. He’s starting to buy Agnico Eagle and other gold miners, saying gold itself looks like a buy at around $4,100 an ounce, as he sees prices hitting $6,500 to $7,000 an ounce in 2027 or 2028.
McDonald recalled how the regime of higher interest rates and global conflicts from 1968 to 1981 was a profitable period for uranium and precious metals. Household wealth at the time was upward of 3% to 4% of those assets, and it’s now less than 1%.
Coming out of a 10-year bear market, industrial buyers are starting to lock in longer-term contracts, he said. He added that there’s going to be a massive supply problem as early as 2027 due to the AI build-out and other countries coming back into nuclear power. Sprott Physical Uranium Trust has been his asset of choice over the miners due to a value disconnect between the two.
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