At a macro level, the credit contraction is the biggest long-term threat to financials, but investors are reacting currently to how margin pressures are declining due to the rate decline. I think it’s important to remember here that the Fed begins cutting rates because they see cyclical weaknesses ahead and rallies tend to be short-term in nature. The cyclical rally is giving dividend stocks a lift here, but the defensive nature of many payers is acting as a counterweight.

Utilities have finally settled down, but they’re not indicating the risk-on signal that investors want. Value is not providing any kind of meaningful outperformance here, which is something you might expect in a strong cyclical recovery trade. The move in yields looks a little overdone and credit spreads are back to 20-month lows, so there’s plenty of downside potential here.

Like gold, recent outperformance in utilities has been partially derived from falling interest rates, but also from a flight to safety pulse that’s not apparent in the major averages. Cyclicals are enjoying a real run here amid optimism that an anticipated Fed rate cutting cycle might help pull off the soft landing after all. While bulls will use this as evidence that risk-on sentiment is in full force, we’ve seen small-caps lead in adverse markets before.