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BEHIND THE WHEEL
Even if the market doesn’t reflect the economy right now…
Make no mistake, the S&P 500 is essentially the consensus vote on where GDP will be 12-18 months from today.
As of the first quarter of 2026, over 50% of GDP growth came from direct AI infrastructure investments, shifting the mix of the market and the economy itself while at it.
This isn’t bullish - nor bearish - per se, as economies and markets evolve over time from manufacturing, to services, to a mix of both.
Because the share of US GDP is now increasingly made up of AI supply chain infrastructure and investments, we are going from a service-based economy to a hardware manufacturing one.
Which seems unsustainable, we are not China in the early 2000s…
So my guess is this 50% share will correct eventually back to services, where over 80% of value creation comes from software.
The question isn’t whether this reverts.
It’s who wins - and loses - when the wave of AI investment slows and reset GDP back to normality.
I have made two posts tackling both:
Now let’s get an update on what the market likes and dislikes:
Value keeps outperforming momentum.
I have marked the April 2026 inflection when the uptrend in value stocks was interrupted by the first quarter capex announcements by the hyperscalers.
One quarter later….
It seems the same capex wave is starting to spark the opposite trade rotation now, beginning with Google’s earnings analysis.
What I see from here is a continuation of the tug-of-war that’s been covered in all our morning digests.
However,
It seems the HALO and real economy rotation is gaining a lot more traction than the momentum trade, which still sits between a correction and a bear market.
When you look at breadth (in green), this idea becomes supported.
We are near a crossover where breadth - the real economy - will outperform momentum on a year-to-date basis.
Essentially the market’s vote on that 50% GDP share returning back to normal, back to software and other HALO picks.
That’s where the Offside Portfolio is focused on.
CHART OF THE DAY
Credit default swaps (CDS) for Oracle are spiking beyond a point of no return.
Roughly $140 billion in Oracle bonds are going into junk status as agencies downgrade these instruments.
I believe this is a highly probable outcome considering where these CDS are going.
What’s troubling is the fact that recent high-yield issuance is just over $300 billion…
Meaning, Oracle alone will wipe out half this year’s high-yield market.
ARE YOU COVERED? —>
What happens after that is a spike in high-yield spreads.
An indicator that drives over 75% of the price action behind mid-caps.
Stay ready, if this happens it will give us the ultimate opening for the asset class and our watchlist.
IMPORTANT GAUGES
Managers declined their S&P exposure by 13% last week.
As we just saw, over 50% of GDP growth is now coming from AI investments and infrastructure, and the momentum unwind is directly threatening this setup.
With value beginning to gain traction, the rotation out of the concentrated areas is being reflected in the manager exposure index above.
A channeling - and flat - S&P along with unwinding reminds me a lot of the late 2025 setup before the first quarter selloff.
Fundamentally, mechanically, and technically… We are seeing increased odds of a 10-15% decline in the index.
Unless something changes this earnings season…
Now let’s cover some items for this coming week:
New Earnings:
Nucor reports tomorrow after the bell.
If you read our long/short metals trade thesis, you know that this company’s earnings will be a direct gauge into data center construction appetite.
Which also tracks back to this GDP theme we just mentioned.
Wednesday and Thursday are the most important events though:
Microsoft
Meta
Amazon
Apple
Like Google and Intel, I will deliver my earnings analysis when they are released.
Stay tuned.
Monday - Durable Goods:
Durable goods = Manufacturing PMI health.
In my long bonds and mid-caps idea, the manufacturing PMI has a vital role behind the success of these investments.
Meaning,
Durable goods orders will need to show strength beyond AI-related materials, justifying the view of a strengthening HALO and real economy trade.
Thursday - PCE Inflation:
Like durable goods, PCE will have a direct impact on all of my current ideas.
From the potential long bond trade, down to mid-caps recovering.
Inflation will influence the Fed and which areas of the economy are affected directly from where inflation is being driven.
AI-related vs non-AI.
That’s the game to watch in PCE, the same game the Fed is tracking.
A Final Note
COMING UP NEXT (Reminder for This Week)
Chinese AI models have created a postmortem trade in US technology stocks, an opportunity to rebalance previous extremes.
The percentage of AI investing relative to GDP is alarming, though someone’s panic can be our profit center.
Chinese stocks could be the third link in this bonds and mid-caps trade, research is being done and will be posted soon.
Meanwhile, here’s the latest from Goldman Sachs, covering all of the ongoing risks in the market and their importance.
Go toward the second half to land on their take on high-yield spreads, where I think we’ll eventually get our ultimate mid-caps and bonds opening:
Until next time,
OFFSIDE RESEARCH
Against the Tape, Ahead of the Curve.