Why the Flat Index is a Lie
Mechanics of the right-tail, software de-risking, and the death of the AI displacement narrative?
I published my positioning breakdown on Tuesday. What I want to talk about today is something different. Not what the positioning looks like, but what it means for where we go from here.
Nothing has happened for two months.
If you only watch index, it feels like a holding pattern. The range has been unusually tight and you could argue that we’re drifting. You could argue we’re digesting. Some will argue the market is tired.
But underneath the surface, this has been anything but calm.
Growth has been hit. Beta has been hit. Software has been hit. Factor spreads have blown out and dispersion has been elevated. Single-stock realised vol has felt closer to a correction than a sideways tape.
And STILL the index hasn’t broken.
When the index compresses while internals churn, you’re not in equilibrium. You’re in storage mode. Energy builds quietly in regimes like this. And when it releases, it rarely does so gently.
The narrative doing the damage right now is AI displacement.
Job destruction, recursive automation, permanent impairment of white-collar demand. The sort of framing that sounds inevitable when you string enough hypotheticals together… But in my opinion, there’s a difference between technological capability and economic diffusion. There’s a difference between what a model can theoretically do and what companies actually deploy at scale. Adoption curves don’t go vertical because a Substack went viral. When a Fed board member feels compelled to publicly address a newsletter post, you're not watching a fundamental repricing. You're watching narrative saturation.
Markets don’t wait for nuance. They price fear fast. Software sold off hard. Anything remotely vulnerable to AI was de-rated instantly. Hedge funds cut more exposure and long-only weighed in to their defensive lean. Put hedging surged, skew steepened, and call demand evaporated. The market moved like something was structurally broken. Nothing was.
Some have described the current environment as a 'price-informing narrative' market, where price action sets the tone rather than the other way around (I agree). The tactical cure for negative sentiment in a one-way positioned market could simply be higher prices. That observation matters because it means the reversal doesn't need a fundamental catalyst. It needs the price to move.
It was simply positioning unwinding in response to narrative escalation. The gap between narrative intensity and macro reality has widened more than ever and that gap is important.
Right-tail events do not emerge from optimism. They emerge from situations where positioning has moved further than fundamentals.
What Positioning Actually Looks Like
Prime data shows software exposure has been cut dramatically from prior peaks. AI-disrupted cohorts are sitting near the bottom of historical exposure percentiles. This to me looks like peak fear.
Meanwhile, semiconductors and specific AI infrastructure names remain heavily owned. Consistently net bought YTD… Exposure there is not light.
The spread between semis and software positioning is stretched across every region. The rotation has been forceful, painful for many too.
But something subtle has shifted recently. De-grossing in North America has stopped. Gross exposure has been added globally over the past several sessions. Some things I monitor that had deteriorated are resetting toward neutral. For example, the tactical positioning monitor from JPM Prime just hit neutral, sitting at the 48th percentile since 2015. Software, after several standard deviation weeks of selling, is showing some early signs of stabilisation.
This doesn’t mean leadership has flipped. To me, it means the selling impulse has exhausted itself. And, markets rarely pivot when positioning is still building in one direction. They pivot when the marginal seller is tired.
We are much closer to that condition now than we were a month ago.
Add to this… 80% of 2026 corporate buyback programs have yet to be executed. The market’s largest sponsor is not going away. Repurchase authorisations are tracking at a near-record pace, and the mega-cap names that dominate these programs are still directing significant cash back into their own stock. It is a relentless structural bid sitting underneath the market every single day. (I know I have touched base on this recently, but I think its important for those who might have not seen the last post).
The Semi Cycle Is Mature in Time
I think we can all agree that the semiconductor run has been extraordinary. On duration metrics, the cycle looks statistically mature. But duration alone does not end cycles. What ends cycles is demand concentration and valuation extremes unsupported by diffusion. If AI demand broadens beyond training infrastructure, into inference, enterprise deployment, workflow integration, robotics, edge computing - the next leg is not multiple expansion in chips.
It is application-layer monetisation. That’s software.
Right now, the market has split tech into two clean buckets: physical AI infrastructure and digital AI disruption. One owned and the other has been totally discarded.
If infrastructure earnings hold and software shows incremental resilience rather than collapse, the forced rebalancing between those buckets could be sharp. And sharp rotations in stretched positioning environments create convex moves.
The partnership announcements coming out recently are worth paying attention to. Intuit and Anthropic. Docusign integrating into Anthropic's Cowork platform. Klaviyo and Google. A bit different to what the market sentiment is suggesting..