Cheap Credit and Tech Enthusiasm Power the Rotation Trade

Small caps melt up as the K-shaped cycle sustains cheap financing and strong profit growth.

Key Takeaways

• Stock Market Rotation Dominates the Tape: Calm markets, tight credit spreads, and cheap capital are keeping risk assets supported, with profitability trumping policy noise and over-investment worries for now. The stock rally is broadening and rotating. Small caps are leading as investors lean into cyclical value, while the “AI buildout” trade is shifting attention toward upstream constraints like power infrastructure and Asian Tech stocks.

• Metals Rip as Inventory Hoarding Fuels Momentum Trades: Industrial and precious metals keep rising as investors positioning for a weaker U.S. dollar fueled the upward trend, but inventory hoarding and leverage are amplifying the price moves. Geopolitical risks and tariff uncertainty are blending with leveraged retail ETF flows. The near-term setup looks tactically fragile.

• Bank Profits Show a Microcosm of the K-Shaped Cycle: Blockbuster, trading-driven bank profits highlight how capital-markets activity can thrive even as consumer sentiment and the labor market stay sour. Goldman’s fourth-quarter profit rose by +12% to $4.6 billion, powered by a surge in investment-banking fees and a standout quarter in equities trading. Morgan Stanley’s profits rose +18% to $4.4 billion, with investment-banking fees jumping by nearly +50%. These blockbuster profit prints are arriving alongside the largest employee headcount cuts in the banking sector in the past ten years.