Markets, Missiles, and a Big Beautiful Bill

In this episode, Kevin Davitt of Nasdaq returns to unpack how markets are shrugging off rising geopolitical tensions and what a “big, beautiful bill” could mean for investor sentiment and Fed policy.

Summary – IBKR Podcasts Ep. 269

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Andrew Wilkinson 

Welcome to this midweek look at markets. My name’s Andrew Wilkinson with Interactive Brokers, and I’m delighted to have back on this segment Kevin Davitt, who’s the Head of Index Options Content at the Nasdaq. Huge welcome back, Kevin. How are you? 

Kevin Davitt 

Kevin is thrilled to be back on. I’m doing well. It’s the middle of summer in Chicago—I have no complaints. 

Andrew Wilkinson 

Summer starts here tomorrow officially. It’s gonna be 96 degrees in my backyard. 

Kevin Davitt 

That sounds like an official summer day. 

Andrew Wilkinson 

So Kevin, it seems to me that investors have brushed off both domestic and international concerns so far this year. But how are investors now responding to what could be called escalating tensions in the Middle East? What are you seeing? Are people hedging? Are they waiting for a break up or down before jumping back in either way? What’s it look like from your vantage point? 

Kevin Davitt 

I think the way you frame that is quite accurate. It does seem somewhat confusing, given some of the headlines we’ve seen over the past week. We’ll talk about it briefly—this is actually a topic that inspired me to write something that will end up on my Nasdaq author page in short order. But just to kind of frame the reality in market terms… 

I think about two weeks ago, when a spat broke out on social media platforms between the President and Elon, and on that day you saw Tesla shares fall fairly precipitously. At the index level—I follow the Nasdaq-100—it fell just over 2%, and then promptly kind of bounced right back. 

And what we’ve seen for the better part of June is that the index I care about has really been ping-ponging between 20,000 and 21,500. Then last week, we get this—to use your term and potentially euphemism, we’ll see—but these escalating tensions in the Middle East, bombings… and there was a very similar reaction. Roughly a 2% decline in the Nasdaq-100 overnight, and by the morning, indices had largely pared those losses. 

So to your sort of tee-up here, the tensions and the overall concerns that really dominated a couple of months ago have been put aside more recently—rightly or wrongly. I think the reaction to escalations between a nuclear power and an aspiring nuclear power are arguably concerning. 

I then read—because I like to challenge my default assumptions—a take from someone I consider informed, who argued that escalating tensions, using that euphemism, are arguably like the new QE. Because there is typically a whole lot of spending, whether that’s on defense or construction. 

And that was an interesting take. It typically forces central bankers to sort of pause and maybe ease. We will see what shakes out. There are a whole bunch of potential overhangs in the next couple of weeks. So perhaps when I’m back talking with you again, some of this will be resolved and we’ll have something interesting to talk about. But here and now, the market has shaken it off and we’re within sort of a stone’s throw of all-time highs. 

Andrew Wilkinson 

That’s a very interesting response to my question. It seems to me that any of these major disruptions that we’ve seen—whether it’s been from the President or now internationally—they almost serve to become a catalyst for solving something or a positive change. It can’t get much worse. And of course, with a nuclear war it could—don’t get me wrong—but I mean, I feel like the market is ready to spring higher. 

Last time we spoke—either on a webinar or on this session a month ago—you seemed to feel a little bit more reserved about the market. You were, I think, hedging a little bit, looking for more downside risk. Do you still feel the same way now? 

Kevin Davitt 

You’re right. One of the last times, that was my inclination. I would say, big picture, given the business that we’re in, that I’m arguably always wired that way. I’m kind of by default concerned about downside—something I alluded to in that original remark. 

Am I concerned? Yes, because I always am. 

But then I would point to early July being the end of the 90-day pause on—whatever we want to call them—retaliatory tariffs. So if there’s no extension there, what does that mean for our trade partners and the volatility that we saw with the original introduction? 

We have this effort to pass a budget resolution, which they’re apparently targeting for early July. There are real issues with corporate tax rates, with credits, with state and local tax reform. It is a big, big bill. Whether you believe it’s beautiful or not is not going to be resolved here, but it’s a big issue that has potential market implications—and potential interest rate implications. 

And then at the same timeframe, you have stuff like ISM and CPI, the inflation data that the Fed will target, monthly non-farm payroll… and all of that potentially influences the path for the Fed going into Q3. 

One of the things you and I talked about—today is a Fed day, right? And so what impact, if any, will that have? Remains to be seen a couple hours from now. I’m not sure what the Interactive Brokers take is, but it has been slow of late, and the market does seem to want to move toward those old highs. 

Andrew Wilkinson: Let’s talk about individual names on the Nasdaq. What are you seeing moving these days, Kevin? 

Kevin Davitt 

One resource available to your listeners is that there is a page—if you go to your search engine of choice and put in “Nasdaq most active”—it will take you to a market activity page. You can see it at this point, a half hour into a trading session or at the end of the day. 

What I would say is that, generally speaking, the names that get a great deal of attention from the derivatives landscape are the ones that are most active in the cash markets. So invariably, you’ll see something like Nvidia up there—Apple, Palantir, Amazon, Tesla, Broadcom, names like that. That was me looking yesterday at the close; those were all in the top 15. 

And that’s relatively stable—outside of days where you see something like a deal or real kind of story stocks. And so that remains fairly consistent. 

I think if we take a step back—and I think, Andrew, you know this well—from across the landscape, whether it’s derivatives or cash markets, those names have been focal points for attention for two and a half, three years now. That could, and at some point will, change. But what the catalyst for that is, I don’t know. Here and now. 

Andrew Wilkinson 

A lot of the names you mentioned there, Kevin, go directly into what’s known as the Magnificent Seven. Is that Magnificent Seven still a market force, or is the pendulum shifting elsewhere—particularly in the wake of developments with artificial intelligence? 

Kevin Davitt 

I would say both pendulums move back and forth, and so there’s an ebb and flow—just like the market. From my perspective, I would say the excitement around some of those names has largely played out or crested at some point, without a huge pullback like we saw in 2022. But I think it still remains fairly active. 

We spoke on, I believe, a webinar, where in the pullback earlier this year, individual investors really did go after and pick up exposure to some of these Magnificent Seven and adjacent names, and institutional types had lightened their load. They have really been proven correct there. But that excitement around those names—just based on flows data—has arguably slowed quite a bit. 

Now, that could also be influenced by the fact that this is the middle of summer. It’s gonna be 96 degrees in your backyard tomorrow. And by the nature of this point in the calendar, things do tend to slow down. 

Andrew Wilkinson 

Kevin, you alluded to it earlier on—it is Fed Day, and there’s probably going to be no change in the Fed funds rate. I’d be shocked if there was. But we are going to get a change in the Fed projections for the quarter and a new dot plot. Any additional thoughts on the Fed’s output today? 

Kevin Davitt 

There’s always parsing of the statements and comparisons as to where they see something like the terminal rate on dates where they update that plot—that dot plot, pardon me. 

The expectation here and now—and it kind of has been for the past couple of months—is that the next cut, following this pause of whatever length it is, will likely be September. 

Could that change? Most certainly, given the uncertainty at the macro level. So we’re talking about things like budget resolutions and tariffs. I would be surprised to see—given the Fed’s sort of dual mandate—a move in advance of some of that uncertainty being addressed. 

I can and have been wrong in the past, and interest rate markets can get it wrong. And so it will be a data point. I don’t expect it to be hugely market-moving. But maybe next time you have me on, it’ll be the two of us talking about how wrong we were about that June Fed meeting. We’ll see. 

Andrew Wilkinson 

Brilliant. Kevin Davitt, Head of Index Options Content at Nasdaq—thank you for joining me. 

Kevin Davitt 

Thank you for having me, Andrew. 

Andrew Wilkinson 

And to the audience—if you liked today’s episode, don’t forget to subscribe wherever you download your podcasts from. Bye.