Investors overlook the Fed’s balance sheet impact on liquidity, which could pressure crowded AI and megacap tech stocks, says veteran trader.
Legendary trader Victor Sperandeo argues investors are misjudging the Federal Reserve’s influence by focusing on interest rate cuts rather than its balance sheet. While rate reductions lower borrowing costs, they do not guarantee easier liquidity if the Fed simultaneously shrinks its asset holdings, he said.
Sperandeo, known as “Trader Vic,” highlighted that the AI rally—driven by semiconductor, data center, and megacap tech stocks—is particularly vulnerable to liquidity conditions. Markets are pricing in a potential June rate cut, but his warning centers on the balance sheet’s role in determining actual money supply.
The trader suggested incoming Fed Chair Kevin Warsh may push for a small rate cut paired with balance sheet reduction, a scenario not fully priced by markets. Such a move could tighten liquidity despite lower rates, pressuring crowded trades.