The Federal Reserve’s latest policy move— no change in rates but a $20 billion slowdown in Quantitative Tightening (QT)—has sparked debate about whether the liquidity contraction is truly easing. While some see this as an early signal of a potential shift, macro liquidity remains constrained, and high-valuation tech stocks like Microsoft (MSFT) remain exposed. AI-driven optimism is clashing with tightening financial conditions, setting up a critical test for the market.
Microsoft (MSFT) – Featured Stock
Mainstream Narrative
Microsoft (MSFT) remains a dominant force in tech, with bullish analysts pointing to AI, cloud growth, and enterprise software resilience as drivers of continued success.
- Cloud Strength: Azure continues to gain market share, competing aggressively with AWS.
- AI Expansion: Microsoft’s OpenAI partnership and integration of AI across its ecosystem—Copilot in Office, Azure AI services, AI-powered Bing—are seen as long-term catalysts.
- Enterprise Stickiness: Strong business software adoption ensures recurring revenue.
Wall Street remains overwhelmingly bullish, arguing that Microsoft’s pricing power and AI-driven innovations will outpace macroeconomic challenges.
Chart Review
Microsoft’s cycle structure has broken below a macro liquidity-driven major wave channel, signaling that macro liquidity constraints are exerting downward pressure. The cycle wave envelopes suggest support at last week’s low. The Cycle Wave Composite™ still shows negative momentum, and it is still some distance from the level of the last low major low, reinforcing concerns that AI-driven optimism may not be enough to counteract macro headwinds. The stock will remain at risk until this indicator curls upward.
Reality
Microsoft’s fundamentals are strong, but macro liquidity constraints present growing risks.
-
Big Tech’s AI Spending is Not Unlimited
- AI-driven cloud and GPU demand fueled Microsoft’s rally, but corporate AI budgets depend on liquidity conditions. If credit tightens, so will enterprise AI spending.
- AI infrastructure costs remain high, and profitability from AI services is unproven at scale.
-
Microsoft Trades on Liquidity—And Liquidity is Tightening
- Microsoft’s stock moves with broad market liquidity.
- As Fed QT continues—even at a reduced rate—capital outflows from the U.S. are increasing, and risk premiums are rising. Liquidity-sensitive tech stocks will struggle.
- The 2024 S&P 500 rally was built on sentiment driven, self reinforcing excess liquidity, but those conditions have faded.
-
Capital is Leaving U.S. Markets
- Both foreign investors and U.S. global investors are shifting capital away from U.S. tech, seeking better returns abroad.
- A rising risk premium will weigh on high-valuation stocks as liquidity contracts.
Conclusion: NEUTRAL (Mainstream vs. Reality)
Microsoft remains an industry leader, but economic headwinds and macro liquidity constraints pose challenges. The AI-driven growth thesis is not immune to tightening financial conditions.
Looking for the right edge in today’s market? Liquidity Trader offers exclusive insights for institutional traders and serious investors. Request a report to see how you can navigate these uncertain times, with expert analysis from Lee Adler.
Market Update
Spotlight: Liquidity, the Fed, and Market Sentiment
Mainstream Narrative
- Financial media is focused on the Fed’s latest decision to hold rates steady, with speculation on whether slowing growth and persistent inflation will delay expected cuts.
- Bond markets remain priced for easing, though the timeline is increasingly uncertain.
- Tech bulls continue to push the AI boom narrative, downplaying macro risks.
- Wall Street maintains confidence in a soft landing, viewing recent economic turbulence as temporary.
Reality
Liquidity is tightening, and the Fed remains in contraction mode—despite a modest slowdown in QT.
Note on Tightening: Here, liquidity tightening refers not to the Fed’s actions, but to a broad market contraction in liquidity. Investor behavior is shifting, with capital outflows from U.S. equities and investors reducing leverage, which is decreasing the liquidity available for risk assets. This tightening dynamic is driven by capital flows, self-generated liquidity exhaustion, and a reduction in credit demand, rather than by direct Fed actions.
Chart Review
The S&P 500 has tested critical cycle wave support levels where the cycle wave structure showed a convergence indicating a potential inflection point. But it has now twice tested an upper channel convergence area around 5700. The trend channel breakdown and cycle wave composite suggest a resumption of downside unless there’s a breakthrough imminently. The recent bounce could be temporary, with further downside risk if macro headwinds persist.
- The Fed Slowed QT by $20 Billion—But Liquidity is Still Shrinking
- The FOMC reduced its monthly balance sheet runoff from $95B to $75B, a slight policy shift.
- This is not a pivot, but rather a modest adjustment.
- (Lee Adler will cover the Fed’s QT adjustment in depth in today’s Liquidity Trader update.)
- Market Volatility Will Rise
- With macro liquidity growth stalled, investors must reassess risk exposure.
- The 2024 rally was fueled by self generated liquidity from rising animal spirits (bullish sentiment) and resulting credit growth, not fundamentally driven—and that support is fading.
- Capital is Leaving U.S. Markets
- Both foreign and U.S. global investors are rotating capital away from U.S. equities in search of stronger risk-adjusted returns.
- A rising risk premium will weigh on high-valuation stocks.
Conclusion: Mostly Reject (Mainstream Narrative)
The Fed has not pivoted, and a liquidity stall remains in effect. Risk assets face pressure as sentiment driven tightening conditions persist.
Looking for the right edge in today’s market? Liquidity Trader offers exclusive insights for institutional traders and serious investors. Request a report to see how you can navigate these uncertain times, with expert analysis from Lee Adler.
