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It’s not that hard to understand, really. We all know this fact:

Risk = Reward*

Now, we’ve added a big ol’ asterisk to this statement, and for good reason. In the worst case scenario as investors, we experience the risk side of things, and don’t get the reward like we expect. In our vernacular, we call this, “negative alpha.” Nobody wants negative alpha, yet, there are so many traps and potholes along the way, it’s actually quite easy to get there.

The big question then is, “WHY?”

We believe the #1 reason for underperformance is that, in order to get more reward than the risk we are taking, it requires an investor to fight the very essence of how we are wired as humans. And what hard-wiring it is!

Think about it: the point of maximum potential gain is at the bottom, when markets are washed-out, and all of the selling has happened. The trick, of course, is being able to identify when a true bottom is in place. Too, science has widely proven that we experience the feeling of loss 4x or more compared to the joy of gain. Soundly, we are far-and-away more wired to avoid pain.

When markets are falling, the greater the decline, the more we feel it and want to stop the suffering. But it’s that very situation that puts the markets ‘on sale,’ and a low-risk time to be buying. Quite the conundrum to say the least.

So how do we handle this dichotomy at Infinium? Over 27 years of staring at screens has helped us gauge what to digest and use to make our investment decisions, and what to throw out. Are all of these indicators helpful all of the time? Certainly not. Thus, our job is to ‘read the tea leaves’ and hopefully synthesize all of the information in order to give ourselves the best chance at successfully navigating the twist-and-turns on your behalf.

So far this year, we have been active in this pursuit. And although the road feels rocky, we are seeing mixed performance in the markets depending on which one you are considering. Because we are active in changing our mix of investments – unlike the vast majority of financial advisors out there – you can take solace in the fact that, if we get it right, we should produce far better results than just buying an allocation and hoping for the best.

The markets are talking to us; we just have to listen. 

A Wild Start to the Year

The S&P 500 has returned less than 1% year-to-date, which sounds uneventful. And yet, the first 1 ½  months of the year have been anything but, as we have seen some extraordinary volatility in many asset classes. Through most of January, the new year was an extension of the themes that worked in 2025, and even at an increased rate. Semiconductors like Micron and precious metals like gold & silver started the year with a bang. The semiconductor index appreciated approximately +10% in the first three weeks, Micron almost +45%, gold almost +25%, and silver almost +60%. Then, in a matter of a few days, the semiconductor index fell approximately -10%, Micron almost -20%, gold almost -15%, and silver almost a whopping -40%. So, there was some degree of a ‘blow-off top’ in these themes that helped us outperform so dramatically last year and into the start of 2026. Since then, these have somewhat stabilized, although we are still a bit cautious that we are completely out of the woods just yet.

A New Regime at the Federal Reserve

While frequent readers of our commentary know we generally do not place too much emphasis on news flow – as we primarily prefer to analyze market sentiment and positioning – President Trump did shock the financial markets on January 30^th when he announced Kevin Warsh to be the successor of current Federal Reserve Chairman Jerome Powell. This proved to be the initial catalyst for recent volatility as Warsh is seen as a policy ‘hawk,’ meaning, his stance is to be tight or less accommodative in his monetary policy (i.e prefers higher rates over lower rates etc.). His appointment was confounding as Trump has repeatedly and publicly berated Jerome Powell to cut interest rates and yet he appointed someone who has said: the fed waited too long to raise interest rates in 2022, lost credibility by overstimulating post-COVID, and believes quantitative easing (aka money printing) inflates asset bubbles and wants a smaller Fed balance sheet while focusing on controlling inflation. While on principle we would agree with these statements, in that the Fed has been far too easy in their monetary policy approach generally, it is a phase shift to something much less accommodative and not what Trump has been communicating, hence the sell-off in stocks and precious metals in the last few weeks.

Now, let us briefly review the current US fiscal situation: we have almost $39 Trillion in total debt, increasing approximately $1 trillion every 90 days, $1 trillion of annual interest expense which is greater than the annual defense budget, and the US government is operating at annual deficit of at least $2 trillion (i.e. government spending exceeds all tax revenue which gets added to the total debt). Moreover, the Congressional Budget Office (CBO) recently forecasted that the US national debt is set to rise $2.4 trillion a year for the next 10 years (chart below). This would take our current national debt from $39 trillion to approximately $64 trillion in 2036, a 78% increase in a decade. This is our own government’s base case and irrespective of any recessions or ‘once in a lifetime’ events such as pandemics or financial crises.

We know government spending is not slowing down and thus debt (US Treasuries) will continue to be issued to finance this spending. We know that on net, foreigners have been sellers of US Treasuries for approximately the last 10 years. Hence, the Federal Reserve has had to step in and print money (aka Quantitative Easing) to purchase the continued supply of Treasuries. We know that as interest rates go up, the interest cost to the government goes up, which Trump acknowledges is a problem. So, while Warsh may talk tough, we do not believe he has much room to actually implement any hawkish policies such as raising interest rates or not performing quantitative easing to purchase the debt.

Likely, the situation is so dire that Trump/ Bessent installed Warsh to gaslight the markets because the dollar – as measured by the DXY, an index measuring the value of the dollar against other currencies – has been in a steady decline of -10% over the last year or so. Our view is that they are managing optics and managing the decline of the dollar. We expect Warsh to say some hawkish things while it continues to be business as usual (aka money printing). This will create more volatility than we are used to with Powell, but this should be a classic ‘watch as I do, not what I say’ situation. Exhibit A below, the Federal Reserve re-started quantitative easing for the first time in December since post-COVID. We expect the Fed balance sheet to continue to tick higher, a tailwind for stocks and precious metals.

A Road to Nowhere

Before diving into the second major catalyst driving recent volatility, let us take a step back and review what the major stock indexes have done since the end of October:

• The Russell 2000, an index of small companies, represented by the yellow line at the top of the chart below, has appreciated +6%.
• The S&P 500, represented by the next blue line, is down -1%.
• The tech-heavy Nasdaq, represented by the next light blue line, is down over -4%.
• The Magnificent 7, comprised of the major tech companies Google, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla, represented by the next teal line, is down almost -10%.
• The IGV, comprised of software companies such as Salesforce, Oracle, and Adobe, represented by the purple line at the bottom, is down nearly -30%.

So, while the S&P 500 has done exactly nothing for the last 3 ½ months (or even slightly negative), we have seen is massive dispersion under the surface. The Big Tech companies (specifically the Magnificent 7 companies) that have driven the market higher the last number of years have been declining – and software companies even worse yet – while the economically sensitive small companies of the Russell 2000 Index (as well as cyclical companies such as industrials and energy) have appreciated nicely as the economy has been performing well. In fact, our preferred gauge on the economy, EconPi (below), which scatterplots various economic data points, has been in the expansion quadrant each week of this year, after generally being neutral to declining in the second half of last year. Let’s dive deeper into AI’s impact on technology next.

The AI Conundrum

Since Chat GPT was released in November 2022, Big Tech earnings growth has exploded over 150%, driving the S&P 500 some 80% higher. This initial phase of AI was led by Big Tech spending on infrastructure (ie data centers, GPUs, etc.) and efficiencies that would boost company margins. However, recent AI tool launches – such as Anthropic’s ‘Cowork’ plugins for automating legal, finance, marketing, and research tasks, or Alibaba’s Qwen 3.5 model for independent complex execution – have sparked panic that AI will cannibalize revenue in labor-intensive industries along with leading to a white-collar job recession. This has hammered software stocks (ie Salesforce, Oracle down >30%), brokerage services (ie, Charles Schwab -10%, Raymond James -8%), logistics/transportation (ie, CH Robinson -11%), and even real estate services, as investors fear reduced need for human workflows, lower advisory fees, and compressed margins. IT services like Infosys and Wipro have seen drops of 6-10% on similar automation concerns.

Additionally, Big Tech spending, which was previously lauded as driving revenue for data center buildouts and demand for semiconductors, is now being viewed as a highly uncertain return on investment. Specifically, the Magnificent 7 is forecasted to generate almost $1 trillion of cash flow from operations this year. Their planned capital expenditures (capex) towards AI for 2026 is almost $700 billion (below), a staggering sum, but profitability remains uncertain in the near term. Investors are questioning whether this spending will yield quick returns or just inflate costs. This has led to a ‘sell first, ask questions later’ mentality, with the market selling AI-exposed firms before fundamentals fully reflect the impact.

Furthermore, these companies’ free cash flow – which represents how much cash they have left from operations less capex – will be down approximately -25% from 2025. For instance, Amazon is forecasted to generate $180 billion of cash this year and they have guided Wall Street analysts to spending $200 billion on capex (ie AI related buildout costs). This indicates they will be free cash flow negative to the tune of $20 billion (vs positive $11 billion last year). Wall Street and stock investors like to see positive and growing free cash flow. It projects strength and is a sort of margin of safety. It also allows companies optionality such as buying back their own stock, which helps to add some degree of a ‘floor’ to the stock price. In this case, Amazon has not bought back a single share of their own stock since Q2 2022. As the Kobeissi Letter points out, Meta slashed share repurchases to $3.3 billion in the second half of 2025, down from $33.5 billion in 2021. Alphabet (Google) cut buybacks to $17 billion, nearly half of the $30.6 billion spent in 2024. Combined buybacks by Amazon, Alphabet, Microsoft, Meta, and Oracle plunged to $12.6 billion in 2025, the lowest since Q1 2018.

Sentiment Driven Market

Interestingly, Apple drastically underperformed the Nasdaq in December and early January. The fears around Big Tech AI spending had yet to materialize, and as you can see from our chart above, Apple has not committed to the AI capex buildout and instead continues to generate significant free cash flow. At the time, the market viewed Apple as a loser in the AI race for being too conservative. Fast forward to today, Apple has been outperforming most of these companies for exactly that reason, not spending all their cash flow on AI.

This is instructive to us in that market sentiment just decidedly flipped negative on AI. In fact, S&P 500 earnings for Q4 were the strongest since Q3 2022 and even most of the Magnificent 7 earnings were quite good, save for the massive AI spending that has worried investors.

Long-time readers of ours know we actively watch CNN’s Fear & Greed Index which measures the level of exuberance or despair in the market by several statistical metrics. As you can see below, the market most recently peaked with a Greed reading of 65 before the Warsh announcement in late January and has since retreated into the 30s and 40s registering Fear and Neutral. We are actively watching these levels which will instruct us, and likely, how the market will continue to view the Big Tech AI spending situation. If Fear & Greed holds these levels and works higher, the market will likely view the AI spending fears as overblown for now. By contrast, if Fear & Greed breaks below support of the low 30s, you can expect us to reduce risk in the portfolios as market sentiment is flipping decidedly negative.