A New Week 07/12

There is a new way to look at inflation now.

On the one side, you have a binary bet on where the latter stages of the Iran war may end up, with ceasefires and strikes being announced every other week now.

Whichever way this affects the energy supply chain and oil prices will have a direct impact on future PCE inflation numbers.

Which are currently above 4%.

Yet, that’s not even the most important factor in future inflation.

It’s AI.

From rising electricity prices, materials bottlenecks, and token prices driving business margins lower, I would argue that AI is more inflationary than anything else happening in geopolitics.

In my latest post, I broke down all of the headwinds piling up for the AI trade. From slowing data center construction to jobs not being replaced or disrupted by AI whatsoever.

That leads me to think these inflation expectations have something to do with the AI trade slowdown, as expectations price an 81% probability of inflation to be below 4.5%.

Needless to say, this could be bullish for a treasury bond ETF like the TLT, we’ll get into it later this week.

Now let’s check up on what changed in markets this week:

Nothing much has changed other than a renewed rotation (which matters a whole lot.)

If you’ve read our morning digests, you understand that there’s a current tug-of-war going on between the concentrated technology AI trade and the real economy HALO names.

For two consecutive weeks, there has been a clear winner, and it’s not AI.

Momentum and growth factors, both of which are the blowing winds behind the AI trade speculation, have both underperformed during this period.

What’s beginning to take their place are the value and breadth factors.

With momentum losing steam, I think the reasoning lies behind changing assumptions.

There’s a huge force behind all this called the “Capital Cycle” which states that sectors who invest aggressively to grow their asset base will underperform areas that control their expenditures.

You and I can both agree that the growth and momentum names in the market have overspent in infrastructure and inventory to inflate their balance sheets.

Which may be why capital oversupply could be affecting future return expectations and valuations.

We’ll talk about this later in the week.

For now, know that real economy discounted names are beginning to win the market’s favor.

Which is exactly why the Offside Portfolio is up over 3% in a single month, driven by software investments.

Most exciting, recent calls like our Lululemon & On Holdings options sleeve bringing us over 6% returns in a day.

Managers have cut nearly 15% of their S&P 500 exposure this month.

Last time this happened was the channeling market action we got since October of 2025, resulting in a very aggressive selloff to start the year on the Iran War breakout.

Now even after this de-risking, data shows managers are still heavily positioned and nearly “tapped out” on their long exposure.

Which is one reason why net equity issuance has been up this year as opposed to the several years of net buybacks.

We cannot afford to unwind the markets, so we make new ones by issuing new stock and adding trillion-dollar names (like SpaceX, SK Hynix) into the mix.

That’s a topic I will cover this week as well, so stay tuned.

All this to say, the downside in the S&P is starting to look bigger than the upside at this point, and there is no shortage of catalysts to reveal why managers are choosing to cut down exposure.

Now let’s cover some items for this coming week:

Earnings Kickoff:

World Cup semifinals for some, earnings season for us.

With all the major banks reporting on Tuesday, there will be some overtime booked for the Offside team as I bring you my take on what these bank activities may mean for the US economy and the stock market as a whole.

After all, these are the “masters of the universe” financing all of the new equity and bond issuance for the hyperscalers, as well as pushing for these hot IPOs.

What they do with their balance sheets and client accounts will show us more than anyone cares to study.

CPI on Tuesday:

Not as important as PCE for the Fed, but still important.

Last month, CPI rose by over 4% on an annualized basis, which is highlighted as a second standard deviation move historically.

In other words, inflation is now both above the Fed’s 2% target and the historical normal ranges.

So this latest read will be as important as ever, especially if inflation is concentrated outside fuel and energy, suggesting my take for AI being inflationary playing out.

There could be lots of new trades showing up if the inflation image shifts, whether it be for the Dollar Index’s path, bonds, or extended commodities like gold.

All of which will be structured and pitched for Offside Premium members.

Click here to be a part of something bigger.

In the meantime, here’s an interview with Citadel’s Ken Griffin touching up on all the hottest topics of today. From AI to China, this guy is pretty well connected in all scenes, worth a watch to start the week:

Until next time,

OFFSIDE RESEARCH

Against the Tape, Ahead of the Curve.