Your portfolio could be more vulnerable than the market’s march upward this year might make it look. Investors are piling into stocks despite relatively high interest rates, a slowing economy, and concerns over the potential for an AI bubble. Wall Street calls it the “run it hot” trade, and it’s pushing the S&P 500 index, a broad measure of the stock market, to record highs.
If the market is going pedal to the metal, what’s not to like? If inflation ticks back up or corporate earnings stumble, your 401(k) could take a hit before you have time to react. Here’s what you need to know about this high-stakes bet—and how to protect yourself.
What the ‘Run It Hot’ Trade Is
The “run it hot” trade describes a strategy where investors stay fully invested, particularly in stocks, amid high rates and still-elevated inflation, assuming the economy can handle the pressure. Essentially, it’s a rejection of recession fears. Instead of rotating into bonds or defensive assets, such as shares of companies that tend to do fine during recessions, retail investors are doubling down on growth-oriented sectors such as technology, industrials, and energy.
According to J.P. Morgan’s 2025 midyear outlook, long-term Treasury yields remain stable around 4.35%, reflecting confidence that inflation will cool without triggering a collapse in growth. Demand for growth assets (like AI stocks) has rebounded with the view that the Federal Reserve may not need to tighten policy further, though this view is being tested as inflation runs well above the Fed’s official target of 2%.
Why Investors Are All In
Coming into this month, corporate earnings have beaten expectations for five straight quarters, even as interest rates only recently started to come down. Companies like Coca-Cola (KO), IBM (IBM), and the major banks have topped forecasts. To many traders, that’s proof that the U.S. economy can take the heat.
Psychology also drives much of this momentum. After years of market turbulence, investors have learned that sell-offs rarely last. Drops in the market have reversed each time in recent years, rewarding those who have “bought the dip” as the market came back to rise even higher.
Optimism about AI’s future profits has amped up the stock market boom. Tech giants are pouring unprecedented money into AI infrastructure. The massive capital expenditure spending on data centers and AI chips is unlike anything seen since the tech boom of the late 1990s, convincing investors that this isn’t just hype—companies are betting billions that AI will transform productivity and profits for years to come.
Put simply, investors see an economy that’s accelerating, not breaking—making the “run it hot” bet look like a better deal than potentially missing out on further gains.
The Hidden Dangers
With inflation hitting 3% last month in the latest Bureau of Labor Statistics report, the Federal Reserve might need to rethink its loosening interest rate policy. Meanwhile, unemployment is at 4.3%, and it’s climbing, reaching the highest levels since 2021. Hiring has essentially frozen—the rate in August matched the lowest level since 2013, and companies announced 71% fewer hiring plans in September than they did a year earlier.
The on-again-off-again tariff regime and trade tensions add another layer of risk. Tariffs have already disrupted supply chains and pushed up costs for manufacturers and retailers. If the Trump administration escalates trade conflicts further, corporate profit margins might shrink fast—especially for companies that rely on global supply chains or international sales.
In addition, the stock market is trading near record highs, which gives you little room for error. If strong growth pushes inflation back above 3%, the Fed could resume rate hikes just as the labor market weakens further. That’s the nightmare scenario, and your portfolio could get caught in the crossfire before you see it coming.
How to Protect Your Portfolio
If you’re worried, here’s how to reduce your “run it hot” risk:
- Diversify across defensive sectors: You can add utilities, consumer staples, and health care—companies with steady earnings that tend to hold up when growth slows.
- Keep tech exposure, but don’t overdo it: AI spending remains strong, but don’t bet your entire portfolio on it.
- Build up your bond positions: If the labor market faces turmoil, Treasury yields could fall, and bond prices would rise, cushioning losses.
The goal isn’t to time the market perfectly—it’s to make sure you can weather a correction without panicking or being forced to sell at the worst possible moment.