Today is a risk-off day to sell the things that have done well, says DCLA's Sarat Sethi
Speakers
Summary
- The market is experiencing a "risk-off" day driven by renewed uncertainty regarding tariffs and the subsequent implications for Federal Reserve rate cuts.
- A distinct rotation is occurring: Investors are selling year-to-date winners, specifically Financials, and moving capital into "Hard Assets" like Energy and Consumer Staples.
- There is growing anxiety regarding Private Equity and Private Credit (Blackstone, KKR, Ares) due to fears of opaque exposure to the recent "implosion" in software valuations within their private portfolios.
- Nvidia's upcoming earnings are viewed as the critical market stabilizer; the market requires confirmation that Hyperscaler CapEx remains robust to prevent a deeper sell-off.
Trade Ideas
"The Amex one is quite surprising to me... Amex has been a phenomenally good stock. We own it. It's done really well." Sethi explicitly states his firm owns the stock and finds the current sell-off unjustified ("surprising"). He views the price action as a result of broad sector selling rather than a fundamental flaw in the company. LONG (Hold/Buy on weakness). If the consumer economy weakens significantly due to tariffs, credit card spending and delinquency rates could worsen.
"It feeds into Blackstone and KKR and Ares and then where's the exposure? ... Do we really know where the exposure is? ... whether it's the software stocks or what else is in these private portfolios." The market is de-rating alternative asset managers because investors fear "second derivative" damage—specifically that the crash in public software valuations implies massive, yet-unreported write-downs in private equity portfolios. WATCH / AVOID until there is clarity on the valuation of their private holdings. If these firms clarify that their exposure is minimal or hedged, the stocks could rebound sharply.
"Today it's a risk off day... sell the things that have done well which have been financials... You're seeing kind of where is the money going? It's going to the hard assets, right? It's going into the energy assets, into consumer staples assets." Uncertainty regarding tariffs and rates is forcing a rotation out of high-flying cyclical sectors (Financials) into defensive, inflation-resistant sectors. Following the flow of funds suggests buying where the safety rotation is heading. LONG Energy and Staples as defensive plays during this volatility. If the tariff threat is resolved quickly or rates drop faster than expected, risk-on sentiment could return, reversing this rotation.
"The market needs Nvidia just to stabilize it... I think what you need to hear is CapEx is still strong. The hyperscalers are spending." Nvidia is the linchpin for the entire market. The trade isn't just about NVDA's numbers, but about the macro signal regarding AI spending. A miss or weak guidance on CapEx would trigger a broader market sell-off; a beat stabilizes the risk-off sentiment. WATCH for the earnings print to determine broader market direction. Double-ordering or demand deceleration would be catastrophic for the stock and the broader tech sector.
"The software stocks this week are reported. You've got Salesforce. You've got Workday. You've got Intuit... And I think that's where kind of the where we're getting most of this negative activity in the market." These earnings are occurring in a hostile environment ("sell first narrative"). The market is already pricing in fear regarding software valuations; these reports will either validate the "implosion" narrative or provide a relief rally. WATCH for volatility around earnings. Disappointing guidance in the current environment will likely be punished severely.
