AI Concerns Prompt Rotation, Not Retreat

Concerns about AI are facilitating a rotation into value stocks — while the markets overall are hitting new highs.

Key Takeaways

• Equity Markets Showing Strong Breadth Amid New Records: Global equity markets hit a fresh all-time high. Even if in a classic price bubble in the U.S., the S&P 500 is showing tremendous resilience and breadth of late. The technical picture is solid with breadth measures improving and no divergences taking place today (unlike in 2000, 2007, and 2022).

• Investors Liked the Rate Cut and T-Bill Purchases: Oracle could not keep the major averages down. Instead of focusing on Jay Powell’s assessment that jobs are contracting, equity investors liked the rate cut, the prospect of another (whenever it comes), and seemingly treating the Fed’s early and larger-than-expected purchase program of $40 billion per month of short-dated Treasury securities as a fresh round of QE.

• The Dow Outperforms as Value Stocks Come Back: We have a very interesting dynamic on our hands, where the Dow is wiping the floor with the other major averages. The composition is the key: until recently, the Tech sector was the clear leader, but in recent months, a notable shift has taken place towards the more “value” areas of the market. Tech makes up 50% of the Nasdaq and 35% of the S&P 500, but only 20% of the Dow.