‘Funds Will Get Wiped Out’: Massive Rotation Happening Now | David Cervantes

Invesco S&P 500 Equal Weight ETF

Across the shows: 3 speakers in other episodes, 4 bullish and 0 bearish calls, past 30 days

• David Cervantes · Pinebrook Capital ManagementBullish

  The equal-weight S&P 500 (RSP) is the layup trade as capital rotates out of mega-cap tech.

  The S&P 500 is only a few percent below its all-time high and still positive for the year, while money has rotated into healthcare and financials. Cyclical names may come back. An equal-weight index captures that broader rotation without relying on the mega-cap tech names that have been selling off.

  “the layup trade would be the RSP, the equal weight of S and P 500.”at 16:10

Health Care Select Sector SPDR Fund

• David Cervantes · Pinebrook Capital ManagementBearish

  Healthcare ETF XLV is overstretched after its rotation; Cervantes has been short it since October and it has gone against him.

  The rotation into healthcare began in June. Healthcare's correlation with the broader market fell to lows not seen in 30 or 40 years, and healthcare has raised earnings projections. Cervantes measures XLV at about three standard deviations above the S&P 500 over the last hundred days, which he calls a little over the top. He is short XLV, but the trade has gone against him because stretched positions can keep getting more stretched.

  “I'm short XLV. I've been short since, I believe, October, and, you know, that hasn't worked out.”at 24:19

AI infrastructure & data centers

• David Cervantes · Pinebrook Capital Management

  Meta-backed off-balance-sheet data center debt trades like junk despite its A rating; hyperscalers now tap capital markets.

  Hyperscalers used to fund their AI buildout from free cash flow, recycling it to suppliers. Now they are going to capital markets. Meta's off-balance-sheet special purpose vehicle for its Louisiana AI campus, Hyperion, was rated A on paper because Meta backs it, yet it traded like junk. Cervantes sees this as a disconnect the market has to resolve, comparable to subprime debt labelled triple-A before the financial crisis.

  “even though on paper, it had an a rating because it was backed by Meta, it was trading like junk. It was trading like absolute garbage.”at 5:27

• David Cervantes · Pinebrook Capital Management

  The market is now pricing 2028 hyperscaler capex, since 2027 budgets are locked in.

  Nvidia sits at the center of the buildout. As long as it keeps pushing spending, its suppliers' revenue grows and they have a chance to recover. The 2026 and 2027 capital budgets are already locked in, so the market is now focused on hyperscalers' 2028 capex plans, which is the next catalyst.

  “Those capital budgets are locked in. The market is really trying to understand 2028 at this point.”at 12:09

• David Cervantes · Pinebrook Capital Management

  Political pushback will not roll back the AI buildout; governors are protecting permitted and locked-in projects.

  Some Democrats oppose data center build-outs, but Cervantes argues the fear of a major rollback is misplaced. The incoming Texas governor has said permitted, planned and already locked-in projects will not be touched, so the debate shifts to how to manage growth. He adds that even a lame-duck president keeps a veto as a national guardrail.

  “Whatever is permitted, whatever is planned, whatever is already locked in, we're not gonna mess with that. So this idea that there's gonna be this huge rollback of the AI build out, I think, is misplaced.”at 12:51

US Treasuries & yields

• David Cervantes · Pinebrook Capital Management

  Rates rose on war-driven energy inflation, strong growth and supply shocks, spiking levered firms' funding costs.

  Rates were expected to rise because the Iran war's energy shock lags about six months before it reaches the broader economy. That lag window hit around August and September, and the 10-year reached about 5.32% intraday. Strong Q2 growth combined with supply-driven price pressure formed a cocktail for higher rates. Levered companies then saw their cost of funding jump, which was where the selloff started.

  “you had this kind of cocktail recipe for higher rates. ... a lot of these companies, that were levered up, well, they just saw their cost of funding really just moonshot.”at 4:20

• David Cervantes · Pinebrook Capital Management

  Hyperscaler retreat from debt markets should ease pressure on long-end Treasury yields.

  Long-end yields have been pressured by heavy competition for capital from hyperscalers issuing debt to fund AI buildouts. If hyperscalers pull back, that competition falls and the long end should get relief. Cervantes says this should help the long end, while the front end keeps rising because the Fed is behind the curve.

  “now with hyperscalers pulling back, the competition for capital will be a lot less... That should be helpful for the long end.”at 17:44

US growth & recession risk

• David Cervantes · Pinebrook Capital Management

  The economic cycle is still risk-on, since strong nominal GDP growth flows into company revenue.

  The main growth case is that nominal GDP growth is still very strong. Nominal GDP growth flows directly into top-line revenue for companies, which underpins tech earnings even after the selloff. Cervantes adds that the overall economic and risk cycle remains risk-on, with rotations inside it and some investors losing money along the way.

  “the thesis for growth is that nominal GDP growth is still very strong... Nomable GDP growth just basically flows into top line revenue growth for companies.”at 10:14

Middle East & Iran

• David Cervantes · Pinebrook Capital Management

  Ending the Iran war would ease inflation and pull Treasury yields back toward the mid-to-low 4% range.

  After the midterms, pressure on the president to end the Iran war should increase. Ending the war would turn the supply shock into a smaller one, which would bring inflation down and let the Treasury yield fall back from under 5% toward the mid-4s to low-4s. Cervantes thinks investors are not yet pricing this, and that the lower yields would juice the economy and lift nominal GDP and corporate revenue.

  “We get the treasury back. Right now, it's now under five, but we start pulling back closer to the mid four and low fours.”at 11:12

US elections & politics

• David Cervantes · Pinebrook Capital Management

  A Democratic president in 2028 is a virtual lock, since Texas has flipped and Republicans cannot win without it.

  Cervantes says Texas has flipped, and that it is mathematically impossible for Republicans to win the electoral votes they need without it. Unless they badly mess things up, he would pencil in a Democratic president in 2028. He notes the candidate is unknown and that markets would discount the outcome, so the view is a hypothetical rather than a call he would base a portfolio on.

  “I think a democratic president in '28 is a virtual lock at this point... Texas has been flipped. It is mathematically impossible to get the electoral votes for a republican win without Texas.”at 14:09

US inflation

• David Cervantes · Pinebrook Capital Management

  Core CPI will print around 0.29%, above the 0.24% consensus, driven by rents and used cars.

  Affordability problems have pushed many people into renting, and rent carries a heavy weight in CPI but much less in PCE. Car and used-car prices are also still under pressure. Together these keep CPI elevated, and some of that pressure will eventually move into PCE. Cervantes has published his own projection, 0.29% core against consensus of about 0.24%.

  “I put out an inflation projection. We've got CPI coming out on Tuesday. Consensus is around point two two four on a core. I'm at point two nine above consensus.”at 16:39

US rates & the Fed

• David Cervantes · Pinebrook Capital Management

  The Fed will hike faster and stay independent now that Trump is weakened; a December hike is still in play.

  Trump had been pressing Fed chair Warsh to moderate policy, but with Trump politically wounded the Fed should become more independent. Inflation is still sticky and the Fed is behind the curve, so it will need to keep hiking rather than stop after one move. That keeps the two-year yield rising, which is why Cervantes is not excited about Treasuries. He still sees a December hike as very much in play.

  “So I think the pace is actually gonna accelerate... the Fed is gonna be a lot more, politically independent.”at 18:35

US jobs & labor market

• David Cervantes · Pinebrook Capital Management

  Unemployment is heading to a three-handle as immigration shrinks the labor force and lowers breakeven job growth.

  Unemployment fell from about 4.5% a year ago to 4.1%, which Cervantes attributes to Trump's immigration policies shrinking the labor force. A smaller labor force mechanically lowers the job growth needed to hold unemployment steady, so the economy can add far fewer jobs and still push the rate down. He expects the rate to reach a three handle, and he has been writing about this in his Substack.

  “I've been very, very bullish in labor market... we will very likely see a, three handle on the unemployment rate”at 19:36

Oil & fuels

• David Cervantes · Pinebrook Capital Management

  Oil shock feeds into all costs; crude and refined products are the key inflation signal to watch.

  Anything physically moved needs energy, so oil costs pass through into shipping, restaurants and most other prices. Moving crude has also become more expensive because insurance costs have risen, so the whole energy complex, including refined products, matters beyond crude itself. Cervantes calls inflation at this point essentially an energy supply-shock story, and says the energy complex is the indicator to watch.

  “Oil makes its way into everything because whatever whatever something needs to be physically moved, it requires energy.”at 21:21

Emerging markets

• David Cervantes · Pinebrook Capital Management

  Emerging markets sold off because they trade like AI tech via South Korea and Taiwan, whose AI names have collapsed.

  Emerging markets were trading like a tech stock because of heavy exposure to South Korea and Taiwan. Those markets are loaded with AI-linked names such as TSMC, SK Hynix and Samsung, which are derivatives of the AI trade. Those names have been spectacularly blown up, which dragged the broader EM index down.

  “emerging markets just got really hit. I mean, emerging markets were trading kind of like a tech stock because of South Korea and Taiwan”at 25:34

International equities

• David Cervantes · Pinebrook Capital Management

  European equities look attractive on valuation once eurozone inflation eases, despite the French yield blowout.

  French yields blew out last month and European markets have been under pressure as a result. Once inflation relief arrives in Europe, its equities should look attractive on valuation. Cervantes sees Europe as the place to look for safety outside the US.

  “French yields have, you know, blew out, last month... once there is some relief on the on the inflation front there, you know, Europe look attractive on a valuation basis as well.”at 25:59

Market sentiment, positioning & volatility

• David Cervantes · Pinebrook Capital Management

  Nearly a dozen large hedge funds and pods were blown up in days, driving the violent tech selloff.

  Cervantes says close to a dozen big funds and pods with billion-dollar allocations were completely blown up in the last 48 to 76 hours. He cites the Nasdaq falling 5% in a single day. He believes this forced selling explains how violent the selloff was, although he is not certain of which funds were hit.

  “There's close to a dozen big funds and pods with, billion dollar, allocations that just got completely blown up in this. And we saw it on the tape.”at 27:33

Credit markets

• David Cervantes · Pinebrook Capital Management

  Lower-tier high-yield spreads are the early warning; weak issuers' spreads started blowing out back in July.

  Investment-grade issuers still access markets easily, so the stress sits in CCC and single-B issuers. Cervantes watches a 'trash spread' of the lowest-rated bonds versus the broader high-yield index, currently about 952 basis points. A turn in that spread would signal that funding stress in weaker players is easing. Spreads for weaker issuers started widening in July, so credit led the stock market here.

  “I like to look at the lower end of the credit spectrum. That's kind of where the cockroaches are hiding.”at 28:43

Private credit

• David Cervantes · Pinebrook Capital Management

  Private credit funds face wipeouts as tech-linked credit risk has migrated out of regulated banks.

  Post-crisis reforms pushed the riskiest lending out of regulated banks into less regulated parts of the financial system, which is now private credit and private equity funds. If tech-linked borrowers default, those funds will take the losses, and some investors may be zeroed out. Cervantes frames this as a sector-specific loss rather than a macro event, comparing it to a casino bet that went bad.

  “people may lose their shirt... funds will get wiped out. People will get zeroed out, but that's not a macro event. That's just... people went to the casino, gambled, and lost.”at 31:24

Venture capital & startups

• David Cervantes · Pinebrook Capital Management

  Startups are funded by venture equity first; private credit only enters when they scale, so credit drying up would not slow them.

  Startups are first funded by venture capital, which is risk equity and the starting point of the funding chain. Once they are scaling fast, they often borrow from credit markets to avoid selling more equity. So private credit is a later layer of funding that is more about how growth is financed. Cervantes disagrees that falling private credit would slow down the startup ecosystem.

  “I disagree with that because the startups, they're funded by venture capital. So that's on the equity side... The private credit stuff comes later when they're scaling up.”at 31:55

Earnings & corporate profits

• David Cervantes · Pinebrook Capital Management

  Q3 earnings are less impressive than strong Q1 and Q2, so assets are being repriced.

  Q1 and Q2 had very strong earnings, which supported the rally. Q3 earnings have been less impressive, so the market is repricing assets, and what goes up does not always keep going up. Cervantes says long-term allocators look at return on invested capital over five years rather than one-quarter EPS misses, but the market will question the long-term case once it doubts the big projects.

  “Q1 and Q2 had really strong earnings... This quarter's earnings have not been as impressive. So we're kind of just seeing kind of like a repricing of assets.”at 35:11