The Rally Is Real, But So Is the Risk

A chip-war truce… It's not just Nvidia… High demand for low-quality stocks... Wall Street is 'all in,' too… Everything's turning up greedy… The rally is real, but so is the risk… The 'low-interest people' are coming out...

Editor's note: Dan Ferris is off this week, so we're sharing more of our "regular" Digest fare from me (Corey McLaughlin) and Nick Koziol... Dan will be back with his regular Friday essay next week.

The dark cloud has parted...

Over semiconductor stocks, at least.

We mentioned briefly on Tuesday that on a "mixed" day for the U.S. stock market indexes, the tech-heavy Nasdaq Composite Index was the lone gainer and hit a new record high. It was all powered by a 4% rise in Nvidia (NVDA) shares, which hit their own all-time high.

The highflying chipmaker had run into trouble in April. That's when the U.S. imposed new export controls on one of its high-end semiconductor chips, which is popular for performing AI functions. The U.S. expressed concerns about Chinese startup DeepSeek's AI technology.

But now, President Donald Trump's administration has assured Nvidia it will have a license to resume exporting these "H20" chips to China. The company had designed them to comply with prior export controls imposed during Joe Biden's presidency.

The latest move was a "negotiating chip" in trade talks with China, Treasury Secretary Scott Bessent said on Tuesday. More to the point, it meant that fighting Chinese AI models through export controls isn't a priority anymore for the White House.

As DailyWealth Trader editor Chris Igou put it to his subscribers yesterday...

Nvidia's H20 chip saga sent a clear message to the markets: America would rather curb its own chip exports than give China an AI advantage.

This stance has been a major headwind to semiconductor stocks. But today, the barriers seem to be lifting...

It's not just Nvidia...

A thaw in U.S.-China relations is "lifting tides across the semiconductor sector," Chris wrote.

Also this week, chipmaker Advanced Micro Devices (AMD) said it would resume shipments of its "China friendly" AI chip. And an executive with ASML (ASML) – which makes lithography systems used to build advanced AI chips – said easing chip controls would boost demand for its equipment.

Chris' subscribers are already up about 11% in just a few weeks on a DailyWealth Trader recommendation related to this trend. And he said it isn't too late to profit from a bull run in chip stocks...

With Chinese buyers flooding back into the market, we expect even bigger gains for the sector going forward.

Semiconductors have a big influence on the market. Nvidia alone accounts for 7.5% of the S&P 500 Index and more than 11% of the Nasdaq. So bullish sentiment in the semiconductor sector could be a tailwind for the broader market.

Today, the action was choppy. The major U.S. indexes bounced between slight gains and losses, and the benchmark S&P 500 finished essentially flat... just a day removed from notching another new all-time high.

Overall, the 'retail' frenzy is back in full swing...

According to data from the New York Stock Exchange and Citi, individuals (known as retail investors) now make up about 14% of all single-stock trading... the highest level since at least 2018.

That even surpasses the 2021 "meme stock" frenzy high of 12%. And it's not just that retail investors are becoming a more important part of the market. It's what these folks are buying that illustrates today's market environment...

Put simply, low-quality stocks are seeing huge demand. The Goldman Sachs Non-Profitable Technology Index (yes, there is one, and it measures a basket of tech companies that are losing money) has soared as the markets have returned to all-time highs.

Since an April low, this index is up 66%. That's nearly double the Nasdaq 100's 35% over the same time period.

Once again, this is just like the meme-stock craze in 2021 – when individual investors would pile into shares of companies on the verge of (or sometimes in) bankruptcy. Remember the surges that GameStop (GME), Hertz (HTZ), and even Bed Bath & Beyond saw back then.

As regular Friday Digest readers know, this is behavior that Dan likes to point out as a telling signal...

Higher retail participation, coupled with a surge in low-quality stocks, is a worrying sign for the market. Back in 2021, it marked the peak of the post-COVID bull market (Dan called the top in tech stocks nearly to the day back then). A drawn-out bear market wasn't far behind.

This behavior shows that folks are investing with emotion – greed – and trying not to miss out on the next big winner.

As we noted in the July 9 Digest, retail investors have poured into shares of Tesla (TSLA), despite the company trading at more than 150 times earnings. If that's not investing in the fear of missing out ("FOMO"), we don't know what is.

But they're not the only ones piling into stocks at the moment.

Professional investors are now 'all in,' too...

In the latest monthly Bank of America Global Fund Manager Survey – which gleans insights from more than 200 Wall Street pros with more than $500 billion combined in assets under management – the average respondent had allocated just 3.9% to cash.

That's the lowest level for money managers' cash position since... 2021.

In other words, the "smart money" has about as much of its assets allocated to stocks as during a notable frenzy in stocks four years ago. Take a look...

When cash allocations hit 5% or higher, Bank of America views this as a bullish indicator. And that has a history of marking major market bottoms. But when the cash position falls below 4%, like it is today, the survey triggers a "sell signal."

It demonstrates a broad appetite for risk on Wall Street, and also that pro money managers have relatively less cash than they have had to put into stocks, meaning that selling stocks is their more likely next move rather than buying and pushing prices higher.

Other data are pointing to the same conclusion...

CNN's famous Fear & Greed Index is in "extreme greed" range as of today.

Plus, our Stansberry's Investment Advisory team has its own proprietary indicator to measure inflows into stocks and mutual funds.

Put simply, when folks can't get enough of stocks and are buying them hand over fist, it's time for smart investors to get cautious. And that indicator is still flashing a warning signal today.

We're not saying you should go out and sell all your stocks today. But when sentiment appears more greedy than fearful, it's a sign you should be careful. And we'll repeat our advice to keep holding high-quality, capital-efficient companies, at least a little gold, and some cash.

The 'low-interest people' are coming out...

In other news, we wrote earlier this week about Trump's priorities for the next Federal Reserve chair (after current Fed head Jerome Powell's term ends in May, or if he leaves before then).

Yesterday, Kevin Warsh – a former Fed official thought to be a leading candidate to replace Powell – went on CNBC for an extended interview (or maybe de facto job interview). He made it clear that lowering rates would be his first order of business to "reform" the central bank.

Also yesterday, a current Fed policymaking board member – Christopher Waller, another potential Powell replacement – gave a speech at New York University. He began clearly...

My purpose this evening is to explain why I believe that the Federal Open Market Committee should reduce our policy rate by 25 basis points at our next meeting.

He contended that:

1. "Tariffs are one-off increases in the price level," and related inflation would be temporary.
2. "A host of data argues that monetary policy should be close to neutral, not restrictive." And...
3. It's better to lower rates now when the labor market appears "fine on the surface" because some indicators – like stalled private-sector payroll growth – suggest possible jobs weakness ahead.

We agree with a lot of that, but you could also argue with any of it. The point is that it put Waller down for a rate-cut vote at the Fed's next meeting in about two weeks. He is also firmly in the camp of "low-interest people" that Trump is looking for to be the next string-puller at the central bank.

As we see it, there is no shortage of candidates open to taking the job. This tells us that ultimately interest rates should go lower from here, by the middle of next year at the very latest. So this ripe market environment could get juicier, for better or worse.

New 52-week highs (as of 7/17/25): ABB (ABBNY), Allegion (ALLE), Broadcom (AVGO), Alpha Architect 1-3 Month Box Fund (BOXX), CBOE Global Markets (CBOE), Cameco (CCJ), Comfort Systems USA (FIX), GE Vernova (GEV), Houlihan Lokey (HLI), iShares Convertible Bond Fund (ICVT), iShares U.S. Aerospace & Defense Fund (ITA), Lumentum (LITE), Microsoft (MSFT), Neuberger Berman Next Generation Connectivity Fund (NBXG), abrdn Physical Palladium Shares Fund (PALL), Construction Partners (ROAD), ProShares Ultra Technology (ROM), Sprott (SII), Synopsys (SNPS), TransDigm (TDG), Global X Uranium Fund (URA), ProShares Ultra Semiconductors (USD), Vanguard S&P 500 Fund (VOO), and Industrial Select Sector SPDR Fund (XLI).

In today's mailbag, feedback on yesterday's Digest, which covered a possible "regime change" at the Fed... and more of your thoughts on tariffs... We're going on a week of discussion now. Keep your notes coming, and as always, send them to feedback@stansberryresearch.com.

"Corey and Nick, Fantastic article on the 17th. I learned a lot, especially about the Fed." – Stansberry Alliance member Dale H.

"So far, the [new trade policy] hasn't really impacted me (directly), but as for my comments on it:

"1) So what if we have a trade deficit with other countries? We all have 'trade deficits' both positive and negative. My employer has a deficit with me, and I have a deficit with the grocery store where I buy food at. But we are all better for it, as it is the trade of one value for another value... While at the same time we are more service orientated and it's hard to track that in the same way as goods, as we are doing knowledge work; such as consulting, or I.T. or web development or any other number of 'products.'

"2) I do work in a manufacturing area, and we build some intricate/complex things where lots of rules are followed, but in general people only stay in that role [or in quality control] for an average of about two to three years before they move on, so we are in a near constant state of hiring and training people (although this year, for the first time since I've been there in almost 12 years, 25 or so people were laid off, as we do rely primarily on government contracts). So with that knowledge even though he wants to bring manufacturing jobs back, unless they are in areas with little employment opportunities, (with more and more people moving to cities), it doesn't mean all the jobs will be filled, or they'll be mostly automated from what they are able to do.

"3) Not really tariff related, but trade related, in my economics class, we'd talk about the efficient market where if country A is making 10 widgets a day, and country B makes 15 widgets in a day and a half, it's more economical for country B to make the widgets and country A to make gadgets instead, which also goes back to the knowledge base, where we are better at service orientation roles instead of goods roles.

"Thanks for reading." – Subscriber Ryan S.

"I have read a lot of comments on tariffs. Just to give my 2 cents worth... It was industry that shipped jobs overseas for cheaper labor, or shall I say more profit. It [was] not free trade. Where were their morals? In the world today it is darn hard to do all things at 'home'..." – Subscriber D.M.

All the best,

Corey McLaughlin and Nick Koziol
Baltimore, Maryland
July 18, 2025

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