The “Don't Fight Trump” Trade Is Working: S&P 500 Ignores Everything and Keeps Surging

SPY has risen about 30% since Election Day 2024 and is up 8.5% YTD, despite elevated inflation, Iran-related geopolitical risk, and shifting tariff policy. The article argues that AI capex, concentrated earnings strength in mega-cap leaders, and a persistent bid from retail/systematic buyers have outweighed macro headwinds, though concentration and rate risk remain key downside threats.

Analysis

The market is increasingly behaving like a policy-volatility suppression machine: every headline shock is being treated as a buying opportunity because traders expect the first reaction to overstate the eventual earnings impact. That dynamic benefits the most domestically levered, policy-sensitive pockets of the market first—defense, infrastructure/industrial power, and select AI capex enablers—because those businesses have the clearest path for political favoritism to convert into revenue. The second-order effect is that leadership narrows further as capital crowds into the handful of names with both secular growth and policy optionality, while the rest of the market becomes a passive funding source rather than a source of alpha.

The risk is not “bad news”; it is a regime change in rates and positioning. If inflation stops bending and long-end yields reprice higher for even 4-8 weeks, the market’s willingness to pay 30-40x for AI beneficiaries gets stress-tested quickly, especially when capex growth slows from acceleration to digestion. In that scenario, the unwind should be mechanical rather than gradual because systematic and retail flows are both leaning into the same winners; a 5-7% index pullback could produce 10-15% drawdowns in the most crowded megacap leaders before fundamentals have time to stabilize.

The contrarian read is that breadth weakness is not necessarily bearish yet—it is a symptom of earnings power being unusually concentrated, not a sign that the cycle is dead. What is underappreciated is that this makes the market more fragile, not less: the index can keep grinding higher until one or two pillars of the narrative—AI monetization or disinflation—miss simultaneously. That creates a cleaner tactical setup in hedges than in outright shorts: the move may continue, but the skew is getting worse for anyone chasing strength at current valuations.

Key Decisions for Investors

• Stay long SPY/SPX only via call spreads or collars, not outright delta, for the next 4-8 weeks; upside can continue, but implied fragility makes paid or financed protection more efficient than naked exposure.
• Overweight XAR or ITA versus the broader market into the next 1-2 quarters; policy favoritism and defense budget inertia give these names better earnings visibility if headline volatility persists.
• Long SMH vs short IWM as a pair trade for the next 1-3 months; the market is still rewarding concentrated AI capex winners while small caps remain rate- and refinancing-constrained.
• Buy 3-6 month SPY puts financed by selling 10-15% out-of-the-money calls if SPX approaches new highs on weak breadth; this preserves upside while monetizing the crowdedness of the tape.
• If 10Y yields break higher on a hot CPI or weak Treasury auction, rotate out of high-multiple AI proxies (e.g., NVDA/AMD-style exposure) into cash-flowing industrial beneficiaries; the first leg of multiple compression should hit the longest-duration equities hardest.