Leaders-Laggards

Figuring out what’s actually being valued in the AI space right now is getting tougher, but capex spending hasn’t yet been the negative that it could have been. We’ve gotten some traditional risk-off behavior this week - bonds, gold and utilities outperforming with stocks, junk bonds and small-caps underperforming. If the markets are going to turn around here in the short-term, it’s looking less and less likely that tech is going to lead the way.

If China’s DeepSeek is the real deal, it could completely upend what we think we know about the AI market. Even though bond yields have dropped substantially over the past couple weeks, the group is still underperforming stocks, suggesting there hasn’t been a big flight to safety move over the recent past. As value and defensive issues slowly come back to life, so do international stocks.

Even a modest improvement for the U.S. inflation outlook was enough to trigger a sharp reversal for cyclicals. Utilities have been steadily picking up speed again over the past several weeks, successfully picking up the risk-off tone of the markets even before the major averages started dipping. Small-caps got a nice little bounce last week, as would be expected in a cyclical revival, but not enough that it should inspire confidence about another leg higher for equities.