The Biggest Disconnect on Wall Street
The Weekend Edition is pulled from the daily Stansberry Digest.
The market looks euphoric right now.
Retail investors are buying every dip. Momentum stocks are crushing the broader market. And AI leaders have quickly recovered from June's pullback.
That sounds like the kind of environment where investors should start getting nervous.
But one group isn't buying into the rally...
As of Thursday midday, federal-funds futures traders still see a more than 60% chance the Federal Reserve raises interest rates by October... and more than a 75% chance of a hike by year-end.
That disconnect matters.
But if those expectations are too pessimistic, today's rally could have much further to run.
The new guy has thoughts...
Central bankers gathered this week for the European Central Bank annual forum over in Portugal. New Federal Reserve Chair Kevin Warsh was among them.
A panel discussion on Wednesday marked Warsh's first public appearance since leading his first Fed policy meeting last month. In some ways, Warsh sounded a lot like his predecessor, Jerome Powell.
Warsh said the Fed is sticking to its 2% inflation target, and anyone who thinks otherwise is going to be "disappointed." He was asked if that could include President Donald Trump, a fan of lower interest rates and a loud critic of Powell for not cutting rates the past two years.
"We have been an independent central bank for a long time," Warsh said. "We are going to be an independent central bank at this moment, and you will see no changes on that."
What a new-looking Fed could do...
After his first meeting as Fed chair, Warsh talked about the various task forces he's putting together to evaluate U.S. central bank policy.
On Wednesday, he said his "aspiration" is for the Fed to start using real-time data to make monetary policy within a year.
Right now, the Fed uses backward-looking, economic numbers that can be significantly flawed. By the time the Fed actually makes a rate move, it's based on jobs or inflation data that is months old – at the earliest.
Change at the top – during the AI boom (which is "exponential... hyper Moore's Law stuff," Warsh said) – just might trigger a new-looking Fed. Warsh continued...
We're no longer going to have to rely solely on data that we get from government agencies with mismeasurement problems that have surveys that are no longer relevant...
Many of these indicators are echoes of history. We need indicators that tell us what things are when we look out our window today.
As for what he sees right now, Warsh said "inflation risks have come down." He was referring to what we've seen in the past few weeks, with oil flows being unlocked in the Persian Gulf.
Elsewhere, some things never change...
We're officially at the halfway point of 2026, which means it's a good time to reflect on first-half trends and think about what might come in the second part of the year. I have a couple of early observations to share on that subject.
1. Buying the dip has never been more popular...
A first-half report from Citadel Securities shows that folks are putting money to work on any pullback in the market at "a new extreme." From the report...
Retail investors purchased nearly 3.5x the average daily amount on SPX [S&P 500 Index] down days during the first half of 2026, the strongest buy-the-dip behavior in our dataset. Even on SPX rallies, they continued to buy nearly 1.5x the daily average.
2. Greed is winning...
"Momentum stocks," in broad terms, are how investors describe those experiencing the best, sustained rises in price (regardless of fundamentals).
Well, as of last month, this group of stocks – as measured by the S&P 500 Momentum Index – have outperformed the S&P 500 by around 120% on a rolling three-year basis, as the Daily Chartbook newsletter recently pointed out.
In other words, the best-performing stocks – many of which come from the semiconductor sector and are tied to the AI boom – are beating the "rest" by a difference last seen in the late 1990s... during the dot-com boom.
In "average" periods when momentum stocks outperform the market, it's a sign that a downturn could be ahead. When it's extreme like this, you probably want to pay even more attention.
That said, things can still get crazier before momentum turns the other way.
Bottoms up...
It looks like the recent pullback in mega-cap tech might be over. The Magnificent Seven, on an equally weighted basis, fell about 10% through the first three weeks of June – an overdue breather.
But since last Thursday's close, the Roundhill Magnificent Seven Fund (MAGS) is up about 8%. Investors have bought the dip, and the market is setting up for perhaps an even more explosive move higher.
Earlier this week, Ten Stock Trader editor Greg Diamond said he was expecting stocks like Nvidia (NVDA), Alphabet (GOOGL), and Amazon (AMZN) to find a bottom. As Greg wrote...
This rally could form a euphoric bubble. Future gains could dwarf the gains we've already seen in the market.
Markets can be irrational for longer than you think. And things could get downright crazy.
Greg's technical analysis doesn't necessarily care about the "why." But he did say that with some inflation expectations coming down, the Fed "might not have to raise interest rates to combat worsening inflation." That could be a catalyst for higher stock and bond prices.
That's why we listened to what Warsh had to say in his second big public appearance as Fed chair.
Again, the market still expects additional rate hikes... But they may be surprised. Warsh suggested that inflation risks have eased. And he made it clear he wants the Fed to make decisions using more timely information rather than relying solely on outdated reports.
If the pace of inflation comes down, expectations for additional rate hikes could fade.
That would likely fuel more bullish sentiment... And there's plenty out there in today's market already.
All the best,
Corey McLaughlin
Editor's note: Before you buy another AI stock, Altimetry chief investment officer Joel Litman and veteran investor Landon Swan say you should understand what's set to change on July 10. They believe the next wave of AI gains won't come from household names like Nvidia... but from a small group of overlooked companies positioned to benefit from what's coming next.