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CREDIT BUST?
10y-2y Yield Curve, FRED
After Jackson Hole, the Fed gave the bond markets the ultimate opening to show us its true colors.
Take a look at the 10-2y yield curve above, and how the short-end bonds behave against the long-end bonds when tightening periods occur (red-shaded.)
Each time, right before a bear market comes about in the S&P 500, the two-year yields rise aggressively to meet - or cross - the ten-year yields.
That’s exactly what’s happening right now through a flattening yield curve in blue.
Simply put,
Bond markets are increasingly betting that the Fed will end up tightening policy, slowing down whatever financial excess is keeping both inflation and asset valuations above sustainable levels.
If and when this happens, know that our long/short put spread on memory will be the biggest payoff since the collapse of South Korea’s KOSPI when I pitched it out to you.
Now let’s get an update on what the market likes and dislikes:
Every single factor this week closed lower, except for the DXY dollar index.
Still, the S&P 500 managed to close ~0.7% higher for the week.
How can the market close higher while every single driving factor behind it lost ground on the week?
Simple,
NVIDIA alone, representing close to 8% of the entire index, and a little over 25% when you consider all the equity stakes it holds across the economy, single-handedly carried the S&P higher.
My job is to interpret the information and deliver conviction so you can make better decisions.
Without sugarcoating things:
This is a malfunctioning market
Inside the Offside Portfolio, I hold a mix of long/short AI names to serve as a control gauge on where things may be headed in the sector.
All the longs are down on the month, despite them being direct beneficiaries of hyperscaler capex and NVIDIA commitment expansions with data centers.
That’s a very strong piece of evidence for a case against the AI trade.
Then there’s the tug-of-war between hyperscalers and semis/memory names.
As these two corners of the AI trade begin to go in opposite ways, you can quickly conclude that the market is becoming uncertain on whether spending money on AI is truly going to benefit valuations or not.
CHART OF THE DAY
Corporate profit margins just crossed a new high, not seen since 2021.
This is 100% great news for the outlook on future S&P earnings and valuation targets.
But,
Just like 2021, most of these profit margins are coming from highly manipulated and inflated EPS figures.
Back then, when companies held stakes in SPACs and reported those paper gains as income, the net margin level overall hit a new ceiling.
ARE YOU COVERED? —>
Today, most large and mega-cap names hold equity stakes in OpenAI, Anthropic, and several AI-related companies.
They have chosen to report these unrealized gains as income, inflating the broader net margin and level of net earnings for the entire S&P 500.
IMPORTANT GAUGES
Commitment of Traders Report, Offside Capital
For the first time since June, managers and leveraged money have bought exposure to the S&P 500 index.
Now I should explain what each of these commitments means:
Managers (pensions, mutual funds, CTAs: They buy on direction and fundamental views, though right now it is only the CTAs who are buying, as their momentum systems require them to buy when the index goes up.
Leveraged Money (hedge funds, individual investors): These participants usually buy in order to hedge their bets when they have too little long exposure or too much short exposure.
Because only momentum managers are buying - not fundamentals - and leveraged money is buying here, I can come to one conclusion from the commitments report:
Outside of momentum strategies, all participants expect the market to go down
Check out what this spread did during the weeks running up to the Iran War breakout in February 2026.
Or every time running up to a sudden S&P drawdown for that matter. Not saying history will repeat itself…
But if bond markets are right to tighten the curve, then I think odds are we’ll get some sort of VIX event soon.
Now let’s cover some items for this coming week:
New Earnings:
Another big week for AI, we’ll get a new round of insights from several angles in this trade through:
Dell (DELL) Tuesday after the bell showing us just how much of a shift they’ve made from American memory to Chinese memory
Broadcom (AVGO) Wednesday after the bell as an update on data center commitments and how strong/weak the chip market is outside of NVIDIA’s guidance
We also have some software names reporting, though I think at this point the software trade has more than recovered from the previous “AI will kill software” narrative.
Instead, I’d focus on Lululemon (LULU) reporting Thursday after the bell as it is part of the Offside Portfolio’s consumer sleeve.
Tuesday - Manufacturing PMI:
Trailing Manufacturing PMI - Offside Capital
After an entire quarter of accelerating expansion, we are about to see where most of this growth is coming from on Tuesday.
I will deliver my usual PMI breakdown for you to spot the industries that are most likely to deliver an EPS upswing as we ramp up to next earnings season.
As you know, ~80% of my trade ideas come from the PMIs, and right now we are in desperate need of clarity as to whether we’ll continue to see the AI expansion or rotation back into some of my real economy HALO ideas.
We’ll connect it all to what GDP did last quarter to justify some of these areas of interest as well.
Thursday - Services PMI:
Trailing Services PMI - Offside Capital
After the manufacturing themes, we’ll gain some further insights into the services side of the economy.
This will provide us with the whole picture regarding future EPS growth and business activity to supplement our watchlist of trade ideas.
I suspect some rotations will take place as the data center construction names in the Offside Portfolio have lost momentum this month.
Whether we see these rotations, attached to manufacturing spikes, will cement the handful of industries where I’d like to keep digging for ideas.
This is where alpha is made.
Friday - NFP:
Trailing NFP, BLS
The labor market has been struggling to create new jobs since April 2026.
We even lost a few thousand jobs in last month’s print, as the real economy continues to show signs of recession in anything ex-AI related.
With this print, along with fresh PMI data, I’ll be able to connect the dots for you and see what the chances are of a rebound in some of the trucking, transportation, and consumer cyclical areas of the market.
Which, by the way, is what participants are now assigning a premium forward P/E for in hopes of better growth down the line.
A Final Note
COMING UP NEXT (Reminder for This Week)
Crack spreads are widening so as to warn of an energy crisis now, coming with new Iran escalations as the US goes the economic isolation route. This could very well create an opportunity within the sector.
Inflation uncertainty has sent the yield curve into a tightening path for monetary policy, challenging the Fed to act sooner rather than later.
We’ve now received enough macro data to update our sector view, which will be delivered in a proper report for Offside Premium members.
Elon Musk is one of the main beneficiaries of AI, as Tesla and SpaceX both have close ties to the success of these models at the core of their products and services.
Specifically, NVIDIA has been selling chips to SpaceX and signing multi-billion-dollar commitments as well.
Which is exactly why I found it interesting when Musk called for the AI bubble to burst soon, whatever his reasoning, it is worth a listen:
Until next time,
OFFSIDE RESEARCH
Against the Tape, Ahead of the Curve.