The S&P and the Economy Became the Same Bet

The market isn’t nearly as diversified as most investors think.

Neither is the economy.

In fact…

They’ve quietly become the exact same trade.

That’s why I think volatility could look very different over the next few months.

Seasonality suggests the VIX could soon wake up and rise through October of this year, backed by a very strong fundamental theory that makes this a repeatable event.

By the second half of a fiscal year, GDP figures are pretty easy to forecast on an annualized basis.

Recall that the S&P 500, and any country’s stock market, is essentially the consensus agreement on how much GDP growth a nation will deliver for the next 12-18 months.

Therefore, we must pay attention to what is being reported.

And if the VIX seasonality starts to hit - as is usually the case - it’s because markets will shift their opinion around future GDP.

I have reason to believe this year will be no exception, and if anything, it will be more pronounced than previous cases.

Here’s why:

Naturally,

The S&P has become a reflection of this fact in the broader GDP.

Roughly 40% of the index is concentrated in the top 10 positions (peaks usually happen around 40% by the way.)

The rest of the AI trade, like chips, memory, and infrastructure now represent an additional ~20%.

That closely matches the numbers being reported in the GDP:

This confirms one of my biggest concerns for the future return profile of the market.

The United States is not, and cannot become, a manufacturing nation at this point in time.

Yet over 50% of GDP is now in manufacturing.

Ironically, and dangerously…

The S&P and the economy have become the same bet.

A dangerous reflexive loop is forming inside the U.S. economy.

It looks like this:

Here’s the problem.

If AI capex were to slow, the excess valuations across ~60% of the S&P will reprice much lower.

This wipes out 50% of this year’s GDP growth.

It also swings the top 10% of households into a “negative wealth effect” to wipe the other ~40% of GDP growth.

That’s why I believe - as proven by data - the stock market and the economy have quietly become the same bet.

To drive home the point,

Infrastructure spending (as a % of GDP) is now more than double the 2015-2022 averages, going from:

We just received the latest numbers out of a few hyperscalers, and they seem to keep spending all around.

However,

Data center, infrastructure, and component investments have slowed down dramatically as shown through earnings like Caterpillar and GE Vernova.

Because a large share of these thematic bets reported increased supply, competition, and slower spending…

Economists were hit with a downward miss on their GDP forecasts for the quarter:

A slower quarter serves as more than enough evidence to prove the above trends are already at play.

These revisions to GDP will have a direct effect on the S&P valuation for the second half of the year.

Which directly coincides with the VIX seasonality that begins at the end of the summer.

If we get even more specific around the AI spending contribution to GDP, things become a whole lot clearer as well.

I suspect this is the single most important factor responsible for the cooler GDP print:

Compared to last quarter, non-defense investment slowed by 10%.

Notice the second quarter was a disaster for most of the AI trade (ex. Hyperscalers.)

Which is awfully similar to the fourth quarter of 2025, where the same price action took over the market.

Now the question becomes:

I don’t think so…

There are still two issues we need to take care of going forward:

The first of which is the concentration seen in GDP and the S&P.

Which surpasses all previous infrastructure investment booms like:

Simply put,

We need to see a deflating share of both equity concentration and infrastructure concentration in the second half if we want to avoid a large crash.

I am on the camp of an orderly rotation rather than a broader crash.

But it will all depend on how this all goes down.

Now issue #2:

We need to fix the spending problem at the consumer level.

Once the top 20% of spenders slow down as the capex boom hits their wealth effect…

The average consumer, from the bottom 20%, need to step up and contribute to our long mid-caps thesis.

Right now, they are spending below the inflation threshold, meaning they are actually taking from their share of GDP contribution.

Only held by the top 20% spending over twice above the inflation threshold.

This directly places the Fed in a tough spot…

In order to support the bottom 80%, rates need to be cut.

But,

If the bottom 80% is supported, then the top 20% will see the current wealth effect be amplified with even more leverage.

Which kind of defeats the purpose.

This makes me think rates won’t be cut until the excess in GDP and the S&P is normalized again through a proper rotation.

Until then,

The only thing that makes sense is to hike, even if it means sacrificing the bottom 80% (which aren’t contributing much right now anyway.)

Long-end bond yields (like the 30-year) already confirm this view, as they have spiked beyond what is sustainable for the system at this point.

For those who don’t subscribe to this analysis, I invite you to look into our current portfolio performance.

All of the above is proven right so far through price action.

As I called for a month ago, the divergence/convergence tug-of-war will continue between the hyperscalers and the semiconductor/memory trade.

Which begins to lead will show you where the risk is shifting in the market and the economy.

Let’s see how the trade has evolved:

Ever since June 2026,

The hyperscalers have begun to see a shift in market perspective, all for the benefit of a risk-off rotation in the broader market.

As the action is amplified this month, I believe we will begin to see an accelerated rotation back to the real economy names of the market.

Moreover, I believe this is a needed shift as bond yields push the plumbing behind all this financing to break.

As you see most semi/memory names go down into a bear market, most of our stock picks are up 25%+ since pitched inside our portfolio.

Click here to access our live positioning updates, premium research, and more.

Meanwhile, here’s the latest from Jordi Visser, the leading voice for most AI retail investors right now.

He seems to have a blind bullish bias on the AI trade, which likely spills over onto how retailers think about the space, good to see where their blind spots may be:

Until next time,

OFFSIDE RESEARCH

Against the Tape, Ahead of the Curve.