Time to Reduce Equity Risk: Why Underappreciated Macro Risks Could Derail the Bull Market | Warren Pies

Episode Summary

Executive Summary: Warren Pais argues the market should be neutral-to-underweight stocks into mid-October because earnings strength is now fully priced while macro risks are rising, especially a coin-flip September Fed meeting, weaker market structure, and seasonal headwinds. He remains constructive on AI/tech long term, but expects near-term rotations, possible volatility spikes, and continued strength in energy as a strategic portfolio hedge.

Main Topics: Why stocks were downgraded to neutral (Priority: 5/5): Pais says the rally off earnings created a good point to take risk down. He moved stocks from overweight to benchmark weight and shifted excess exposure to cash because the August 15-October 15 window has poor seasonality and an unfavorable structure. Fed September meeting as the key macro risk (Priority: 5/5): He thinks the September Fed meeting is a genuine coin flip, with the market underpricing the chance of a hike. In his view, political pressure, oil prices, and a still-live inflation story make a hike more plausible than market commentary suggests. Market structure: low correlations, low single-stock volume, earnings rear-view (Priority: 4/5): Pais argues the market remains rotational with low correlations and crushed single-stock volume, which makes it vulnerable once earnings season ends and attention shifts back to macro catalysts like Jackson Hole, the Fed, and elections. AI/tech leadership and semis versus software rotation (Priority: 4/5): He remains bullish on AI but thinks the market is in a broadening phase where semiconductors lead. He expects software weakness during AI IPOs, while semis and hyperscalers ultimately need to reassert leadership for the next leg higher. Energy as a permanent portfolio overweight (Priority: 4/5): Pais treats energy as a structural hedge for equities in an inflationary/geopolitical regime. He says the sector remains attractive given oil above $90, strong crack spreads, and the possibility the Fed becomes more sensitive to energy-driven inflation. Treasury market, issuance, and the scapegoat debate (Priority: 3/5): He rejects the idea that AI-related corporate issuance is the main driver of higher long yields, arguing that fiscal deficits and treasury-market dynamics matter more. He sees markets searching for scapegoats—tech, energy, politics, or the Fed.

Key Arguments: The earnings rally was real and still intact, but it is now in the rear view; macro is the next market driver. A September Fed hike is not fully priced and remains a live risk; if certainty existed, he would be underweight stocks. The current window from mid-August to mid-October is unattractive because of seasonality, event risk, and weak market structure. Single-stock volatility has fallen and correlations remain low, leaving the market vulnerable to a macro shock that could force correlation toward one. The Fed is feeling political pressure from inflation, gas prices, and labor-market signals; this could push a hawkish outcome. A Fed hike would likely flatten the yield curve rather than solve long-end rate pressure; it would not automatically bring the 10-year down. AI remains the core long-term theme, but semiconductors, hyperscalers, and software will not move uniformly; leadership needs to broaden and then re-concentrate. Energy should remain an overweight because it diversifies equity risk in an inflationary, geopolitically volatile regime. AI-related issuance is not the primary cause of higher borrowing costs; fiscal deficits and broader sovereign issuance are more important. IPO timing for AI labs could weigh on software before it helps the hardware/semiconductor complex.

Data Points: Stocks positioning: Overweight from mid-April to about Aug. 10; downgraded to benchmark/neutral roughly two weeks before the interview - Pais describes the portfolio shift after the post-earnings rally Risk window: August 15 to October 15 - He says seasonals and market structure are unfavorable during this period Fed hike odds (September): ~75% in July, down to ~30%, then back around ~40% - He says the market has oscillated on the probability of a September hike Core PCE nowcast: 0.28% month-over-month - Pais says his model points to a still-elevated inflation reading Term premium (ACM model): ~80+ basis points - Used to argue the market is not pricing a major Fed credibility problem 2s10s yield curve: ~45-50 basis points - He says the curve does not reflect a severe credibility crisis Historical rate impact per hike: +20 bps in 2-year, +12 bps in 10-year; ~8 bps flattening per 25 bps hike - Based on seven hiking cycles since the 1980s S&P 500 level after rally: ~7,800 - Level at which he said it was a good time to take risk off Single-stock volatility: Above 50% before earnings; fell to around 35% - He cites this as evidence market structure became less favorable Semiconductor volatility: Around 80% - Used as an example of elevated stock-specific risk in the sector S&P 500 sector weight for semiconductors: ~18% of market cap - Pais uses this to argue semis are central to market leadership Energy sector weight in S&P 500: ~3.5%-4% - He cites the small index weight as a reason for a structural overweight Equal-weight vs tech performance: Equal-weight S&P 500 making new highs - Evidence of broadening participation despite low correlations Software vs semiconductors performance in Q3: Software/services +19.99%; semiconductors/semiconductor equipment -7.47% - He says the spread reflects a technical rotation, not a fundamental regime shift Lab ARR estimates: Combined estimate ~115B vs. leaked snapshot ~105B - He says the ~$10B miss matters for AI capital formation Blackwell B200 availability: 0 in his tracking - He says this remains the key constraint even as H200 availability improved Non-financial gross issuance: Higher than every year on record except 2020 - He argues issuance is high in absolute terms but not extreme relative to GDP/market cap HFGM marketing claim: #1 Morningstar-rated fund since inception in the U.S. macro trading category - Sponsor message about the ETF discussed in the episode

Pivotal Quotes: "If I knew with certainty the Fed was going to hike in September, I'd be underweight stocks right now." — Warren Pais: He answers the question of how he would position if the hike were certain "I think it's that this is that window. We highlighted the window from August 15th to October 15th as a period where I don't like the seasonals and I don't like the structure." — Warren Pais: Explains why he reduced risk after earnings season "My view is that that's all roads lead back to those AI trades. And, you know, that's the leadership spot." — Warren Pais: His long-term view on where market leadership should ultimately reside

Implications: Listeners should expect a choppier tape, with event risk around the Fed, Jackson Hole, and elections likely to keep volatility elevated. Near term, he favors neutrality/cash, energy as a hedge, and selective AI exposure—but only if semis and hyperscalers regain leadership.