tl;dr
A growing number of investors are doubling down on high-risk, high-reward 'run it hot' trades, betting on sustained market growth despite inflation, interest rates, and geopolitical tensions. While the S&P 500 soars, experts warn of vulnerabilities in overexposure to tech and AI-driven stocks.
Investors are increasingly embracing a bold strategy known as the “run it hot” trade, a bet on sustained market growth despite lingering economic uncertainties. This approach involves maintaining full exposure to stocks, particularly in high-growth sectors like technology, industrials, and energy, even as interest rates remain elevated and inflation persists. The S&P 500 has surged to record highs, fueled by corporate earnings that have exceeded expectations for five consecutive quarters and optimism about artificial intelligence’s transformative potential. However, this aggressive strategy carries significant risks that could leave portfolios vulnerable if market conditions shift abruptly.
The “run it hot” trade hinges on the belief that the U.S. economy can withstand high interest rates and inflation without slipping into recession. Investors are betting against traditional caution, avoiding defensive assets like utilities or consumer staples in favor of growth-oriented stocks. J.P. Morgan’s 2025 midyear outlook notes that long-term Treasury yields have stabilized near 4.35%, reflecting confidence that inflation will moderate without derailing economic growth. Yet, this optimism is being tested as inflation remains above the Federal Reserve’s 2% target, and labor market indicators show signs of strain.
Why are investors so committed to this strategy? Part of the allure lies in the recent track record of corporate earnings. Companies like Coca-Cola, IBM, and major banks have consistently beaten forecasts, reinforcing the perception that the economy is resilient. Additionally, the psychology of “buying the dip” has taken root, as investors who held through past market declines have been rewarded with substantial gains. The surge in AI investment further amplifies this momentum. Tech giants are pouring billions into AI infrastructure, from data centers to specialized chips, creating a sense that this is not just a speculative bubble but a tangible shift in productivity and profitability.
However, the risks of this strategy are becoming harder to ignore. Inflation hit 3% in the latest Bureau of Labor Statistics report, prompting concerns that the Fed may need to rein in rates if prices surge again. Meanwhile, unemployment has climbed to 4.3%, the highest since 2021, and hiring has slowed dramatically. Companies are cutting back on expansion plans, with September’s hiring announcements down 71% compared to the previous year. Trade tensions, particularly under the potential return of protectionist policies, add another layer of uncertainty. Tariffs have already disrupted supply chains, and further escalation could erode corporate margins, especially for firms reliant on global trade.
For investors, the key challenge is balancing the potential rewards of the “run it hot” trade with the need for a safety net. Diversification remains critical. Allocating a portion of the portfolio to defensive sectors—such as utilities, consumer staples, and healthcare—can provide stability during market downturns. While technology remains a vital component, overexposure to AI-driven stocks should be tempered with caution. Bonds, too, offer a hedge against volatility; if the labor market weakens, Treasury yields could decline, driving up bond prices and offsetting stock market losses.
The goal is not to predict market movements but to build resilience. By spreading risk across asset classes and maintaining a long-term perspective, investors can navigate the uncertainties of the current environment without being caught off guard. As the economy continues to evolve, the “run it hot” trade may still deliver returns—but only for those who prepare for the possibility of a sudden shift.