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Hey everyone, Hedgie here. Let's get into it!

The Rotation Everyone's Talking About

Software stocks are down almost 25% over the past three months. The S&P 500 gave up its gains for the year. But the Dow hit new records, and old economy sectors are leading. Oil and gas, chemicals, transportation, consumer staples, regional banks. All outperforming since tech started losing momentum late last year.

The institutional read is that this is healthy. Investors diversifying away from crowded mega cap growth, valuations normalizing, money flowing into sectors with better earnings growth. Economists are revising GDP estimates higher.

I'm not buying the optimism.

The Capex Reckoning Continues

Last week I wrote about Microsoft dropping 12% despite beating earnings. This week the repricing spread. The market is done rewarding AI spending on faith.

Alphabet said 2026 capital expenditures could nearly double to around $180 billion. Amazon is planning $200 billion, up 50% from last year. The four big hyperscalers are now expected to spend a combined $645 billion in 2026. That's up 56% year over year.

The tech sector still has the fastest profit growth of any S&P 500 sector, around 30% year over year. But the forward PE ratio has fallen from 32 to 24. This is pure valuation compression. Investors are reassessing what they're willing to pay for growth that depends on AI demand materializing at scale.

Two forces are driving the repricing. First, AI disruption fears. The same tools these companies are building may be eating their own business models. New AI agents are automating tasks in legal, marketing, and finance that software companies used to own. You can't sell AI as the future while pretending it won't come for your own revenue streams.

Second, the spending itself. These companies are transitioning from capital-light business models to infrastructure-heavy ones. They're starting to rely on debt to fund the buildout. The market used to reward this spending. Now it's punishing it.

Speculative Assets Getting Hit

Bitcoin has fallen nearly 50% over the past four months. Speculative assets are unwinding across the board.

The Fed's messaging that rate cuts may stay on pause for an extended period isn't helping. Momentum trades are reversing. The institutional view is that this is healthy cooling of speculative excess. Maybe. But combined with the tech repricing and stress building in private credit, it looks less like rotation and more like reassessment.

The Macro Data Looks Fine. The People Don't.

The ISM Purchasing Managers Index showed the strongest expansion in manufacturing since 2022. GDP grew over 4% last quarter. Unemployment is 4.4%.

By the headlines, everything is great. But consumer confidence is at a 12-year low. That's not a data point you wave away.

Job openings fell to 6.5 million in December, the lowest since September 2020. ADP reported just 22,000 jobs added in January. Challenger says companies cut 108,000 jobs last month, the worst January since 2009. 81% of recruiters admit their employers post ghost jobs. 20% of job seekers have been searching for a year or longer.

The K-shaped economy isn't going away. The averages look fine because gains at the top offset losses everywhere else. But averages don't capture what's happening to most people.

My Take

Wall Street sees healthy rotation. I see stress building in places the headline numbers don't capture.

The capex boom is built on demand that hasn't materialized. Business AI adoption fell from 14% to 12% last year. Microsoft cut Copilot targets by 50%. The infrastructure keeps getting built. The returns keep getting pushed back.

The job market is weaker than the unemployment rate suggests. The people actually looking for work are competing for fewer positions, many of which don't exist. Consumer confidence is at levels we haven't seen since 2014. The lived experience doesn't match the GDP prints.

I'm not calling for a crash or a recession. The broadening in earnings growth is real. Manufacturing is expanding. The consumer at the top is still spending. But the foundation isn't as solid as the institutional takes suggest.

The rotation might be healthy. Or it might be the first sign that the market is starting to price in what I've been writing about for months. The circular dependencies, the spending without returns, the gap between macro data and reality.

Stay skeptical of narratives that only look at the top line.

Hedgie 🦔

Week Ahead

Retail sales, unemployment claims, and inflation data. We'll see if the gap keeps widening.

Weekly Market Stats

_{Source: FactSet, Morningstar Direct, Bloomberg.}

_{Disclaimer: I'm a hedgehog on the internet, not a financial advisor. Nothing in this newsletter is financial advice. I share what I'm seeing and thinking, but you should always do your own research and consult with a qualified professional before making any investment decisions.}