ORLANDO, Florida, June 26 (Reuters) - As the first half

of the year closes, financial markets are in limbo, waiting to

see how the kaleidoscope of global trade deals will - or won't -

come together after July 9, when Washington's pause on its

"reciprocal tariffs" expires. But if investors are wrong-footed,

which trades will be the most vulnerable?

The state of suspended animation in today's markets is

remarkably bullish. U.S. growth forecasts are rising, S&P 500

earnings growth estimates for next year are running at a punchy

14%, corporate deal-making is picking up, and world stocks are

at record highs.

The uncertainty immediately following President Donald

Trump's April 2 "Liberation Day" tariffs seems a distant memory.

The relief rally has ripped for nearly three months, only taking

a brief pause during the 12-day war between Israel and Iran.

It's a pretty rosy outlook, some might say too rosy. If we

do see a pullback, what will be the biggest "pain trades"?

The major pressure points are, unsurprisingly, in asset

classes and markets where positioning and sentiment are most

overloaded in one direction. As always with crowded trades, a

sudden price reversal can push too many investors to the exit

door at once, meaning not all will get out in time.

To identify the most overloaded positions, it's useful to

look at the Bank of America's ( BAC ) monthly global fund manager

survey. In the June survey, the top three most-crowded trades

right now are long gold (according to 41% of those polled), long

"Magnificent Seven" tech stocks (23%), and short U.S. dollar

(20%).

This popularity, of course, means these three trades have

been highly profitable.

The "Mag 7" basket of Nvidia ( NVDA ), Microsoft ( MSFT ), Meta, Apple ( AAPL ),

Amazon, Alphabet and Tesla shares accounted for well over half

of the S&P 500's 58% two-year return in 2023 and 2024. The

Roundhill equal-weighted "Mag 7" ETF is up 40% this year, and

the Nasdaq 100 index, in which these seven stocks' make up more

than half of the market cap, this week hit a record high.

Meanwhile, the gold price has virtually doubled in the last

two-and-a-half years, smashing its way to a record high $3,500

an ounce in April. And the dollar is down 10% this year, on

track for its worst first half of any year since the era of

free-floating exchange rates was established more than 50 years

ago.

SLASH AND ... BURN?

In some ways, these three trades are an offshoot of one

fundamental bet: the deep-rooted view that the Federal Reserve

will cut U.S. interest rates quite substantially in the next 18

months, a scenario that would make all these positions

money-spinners.

Even though the Fed's revised economic projections last week

were notable for their hawkish tilt, rates futures markets have

been upping their bets on lower rates, largely due to dovish

comments from several Fed officials and a sharp fall in oil

prices. Traders are now predicting 125 basis points of rate cuts

by the end of next year.

Economists at Morgan Stanley are even more dovish,

forecasting no change this year but 175 basis points of cuts

next year. That would take the Fed funds range down to

2.5%-2.75%.

Lower borrowing costs would be especially positive for

shares in companies that can expect high future growth rates,

like Big Tech. Low rates are also, in theory, good for gold, a

non-interest-bearing asset.

But, on the flip side, it's difficult to construct a

scenario in which the economy is chugging along, supporting

equity performance, while the Fed is also slashing rates by 175

bps.

Easing on that scale and at that speed would almost

certainly signal that the Fed was trying to put out a raging

economic fire, most likely a severe slowdown or recession. While

risk assets may not necessarily collapse in that environment,

over-extended positions would be exposed.

Granted, this isn't the first time investors have banked on

Fed cuts in the past three years, and we have yet to see a major

blow-up as a result. Markets have handled "higher-for-longer"

rates much better than many observers warned, soaring to new

highs in the process.

Still, if "pain trades" do emerge in the second half of the

year, it will likely be because of one sore spot: a hawkish Fed.

(The opinions expressed here are those of the author, a

columnist for Reuters.)

Enjoying this column? Check out Reuters Open Interest (ROI),

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(Editing by Alex Richardson)

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