At its core, "Run It Hot" trade assumes central banks and governments will prioritize growth over inflation, with rate cuts, fiscal stimulus, and continued support for AI infrastructure. This is just a bet — not a wild bet, of course — but a move based on a binary outcome. It's totally up to us whether to join this wheel spin or move away, targeting more down-to-earth criteria such as valuation discounts.
The Rally's Three Engines
We clearly see that monetary policy is at the crossroads. The prolonged government shutdown created a dangerous situation when the suspension of macroeconomic statistical publications left the Fed, along with economists and investors, in limbo about the real state of the economy. In this opaque environment, the Fed's FOMC decided on October 29 to cut the key rate by 25 b.p., showing its no-questions-asked compliance with what's been prioritized by the White House. It essentially said that, from now on, the job market and the economy are the priority over the fight against inflation. Was inflation really defeated then? Not really.
Three forces are essentially shaping this rally:
Growth-first policy stems from the fact that liquidity remains abundant, fueling gains in AI, cloud, industrials, and housing. In turn, the liquidity premium is fueled by relatively cheap money and record AI capex — both of which significantly inflate valuations, especially in speculative software and Treasuries. Risk-on sentiment also plays a role as meme stocks (unlike meme altcoins) are soaring, and options trading is actually booming. Tesla and Palantir are back in vogue, no matter what.
When Policy Lets the Engine Overheat
Lately, what we call the "Run It Hot" trade has become a ticking time bomb. It is essentially a high-octane bet that policymakers will tolerate above-trend growth and mild inflation to keep the post-AI boom alive.
So, this interesting phenomenon is built around the description of today's market mood, where investors bet that policymakers will let the economy run faster than usual, even if inflation stays a bit above target. This notion is comfortable to those who say, come on, doesn't growth matter more than price stability right now? Intuitively, yes, perhaps. In practice, this means money is expected to keep flowing into big technology names, popular growth focused ETFs, crypto‑linked plays, and even long‑dated bonds. This kind of trade has worked well while cash is plentiful and optimism about AI is high, but it carries the risk that the same forces lifting prices could quickly turn against us, investors.
This mindset has already supercharged market returns in mega-cap tech (such as NVIDIA, Oracle, Microsoft and other big tech), as well as high-beta ETFs like QQQ, crypto proxies such as MicroStrategy, and long-duration bonds. But the same forces driving gains can reverse sharply, exposing unhedged portfolios to steep drawdowns.
Again, the gamble at the center of this is pretty bold: growth over price stability principle means more rate cuts, more spending, more AI data centers sprouting up for the sake of it. What's keeping this party going? As I already mentioned, first of all, there's plenty of cash floating around, which means AI, cloud, industrials, and even housing remain hot and under the investors' radars. Risk appetite is back in a big way — retail is piling in, meme stocks are refusing to die, and options desks are humming. Tesla and Palantir, somehow, are cool again.
Risk Appetite vs. Reality Check
The market's rally is being driven by three main forces at the moment. A growth-focused outlook dominates, with money still relatively cheap and widely available. Cash continues pouring into AI, cloud computing, industrials, and housing. This abundance, combined with record AI investment, is lifting prices, particularly in speculative software and Treasurys. Risk appetite has returned in force as retail investors re-enter, meme stocks surge, and options trading heats up. Names like Tesla and Palantir are back in favor.
Mixed economic signals haven't deterred investors. Oracle's jump of $247 billion in a day reflects real deals and improved margin expectations. Stocks, bonds, and gold are all rising together, which tends to indicate a flood of liquidity. Fund managers who had underweighted tech are now rushing to catch up, driven by fear of missing out and underperforming benchmarks.
However, let's admit: risks are mounting. The S&P's forward P/E jumped above 22, raising concerns that even small earnings disappointments could trigger a correction. The top 10 Nasdaq stocks now account for more than half of this year's gains, a striking concentration that suggests fragility. Policy changes such as delayed tax cuts or unexpected inflation could stall hopes for swift rate reductions. Tariffs and increasing wages keep inflation risks alive. If rate cuts fail to spur new borrowing, the economy could face a liquidity trap. And if rate cuts turn out to be a wet blanket — very few want to borrow anyway in this environment — well, that's how you get a classic liquidity trap.
The Rally's Weak Spot: Concentration Risk
There is about a 35% chance that the S&P could decline by over 15% within the next year. Possible warning signs include core PCE rising above 3%, 10-year TIPS yields exceeding 2%, a spike in FRA-OIS, a jump in the MOVE index, or downward revisions to tech earnings. The rally is genuine, but so are the risks.
What worries me the most is that the whole story is being plotted on the same small handful of tech giants — the ones commonly known as the "Magnificent Seven." Most of them still look credible, but the complacency makes the whole setup fragile. What if even one of these pillars starts constantly missing? Everywhere else — consumer hardware, ad-driven platforms, electric vehicles — the shine is coming off. Markets are crowded, margins are slipping, and prices aren't holding up. Tesla's recent numbers made that painfully obvious.
The shockwaves could spread quickly through the entire market.
That said, the valuations already don't look healthy. As always, investors are paying for future profits. The gap between tech's weight in the S&P 500 and its share of actual profits is significant. Tech now represents nearly 44% of the index's value but delivers only about 30% of its profits. This suggests that exuberance, rather than fundamentals, is playing a major role, with high expectations fueling ever-higher valuations simply because the crowd expects them to continue rising.
Even with the economy throwing out mixed signals, investors just keep doubling down. Oracle's monster leap — two hundred billion in a day — wasn't just some meme; rather, it was about its new contracts and a little bit of hope about widening margins. The fact that stocks, bonds, and gold are all rocketing at the same time? That almost never happens. So what's behind it? I see the managers whose bets against tech are suddenly scrambling, so they are now worried they'd get left behind by their benchmarks and haunted by FOMO.
The math is daunting. For tech to actually earn its weight, profits would have to explode — nearly double in a couple of years. It seems that nobody's really expecting that, not with margins and demand feeling the upcoming squeeze. The only ones who look close are the AI and cloud frontrunners, but I'm afraid there aren't enough of them to carry the rest.
The Last Word: Hope, Headwinds, and Growth
Sure, there are reasons behind the whole story — tech can scale, margins are better. But lately it feels like hope is doing more of the heavy lifting than hard results.
And yet, even with all the alarms blaring, S&P 500 companies still scraped out nearly 11% profit growth year over year. That's no small thing, considering the headwinds. American businesses just keep finding ways to adapt, even when the ground feels like it's shifting under their feet. From my own experience, though, one lesson never changes: growth is welcome, but valuation is king.
Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.
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