Research Notes

Strategy

• The Fed held and the market responded with a bull steepener, as the 2-year fell about 5bp while the 10-year held near 5%.
  • Breadth has improved across nearly every sector except Technology, where momentum has slipped to the 47th percentile despite a still-positive relative trend.
  • Communication Services and Investment Banks & Brokers have flipped bearish, while earnings continue to reward restraint over heavy spending.
  • With the 10-year near 5%, the market is increasingly charging capital-intensive companies and rewarding cleaner cash-flow stories.
• Our breadth thrust signal has fired. While it was led by defensives, it’s a key bullish indicator for market participation and capital remaining in equities.
  • Historically, this resets the bull market shot clock and the S&P is higher 11 out of 12 instances 3m and 6m out. Investors are selling the AI trade, but they aren’t taking their ball and moving to bonds or cash.
  • Instead, they’re rotating defensively within equities into areas such as health care (our favorite sector), staples, energy, software, quality, and value.
  • Watch 2 minute video here
• The Equal-weight S&P is approaching an important test as it reaches a flattening 50-DMA after nearing +3 on our oscillator.
  • Trends and breadth remain intact, but we want to see how the index handles overbought conditions before pressing exposure.
  • November is historically the S&P's best month, but a significant seasonal headwind for equal-weight Energy, with just a 32% win rate and the median excess return near -200bps.
  • We would add on weakness rather than chase strength into those seasonal headwinds.
• Alphabet's roughly $500B market-cap loss masked a much healthier tape underneath, with 777 Russell 1000 stocks advancing and the median stock gaining 1.4% Thursday.
  • Equal-weight S&P outperformed cap-weight by roughly 1.5 points, a 99th-percentile spread, suggesting Thursday was more rotation than broad market weakness.
  • Communication Services had already been deteriorating on a relative basis, reinforcing the value of relative strength in identifying weakness before the headline break.
  • The market is increasingly rewarding cash generation over capital intensity. Alphabet and Amazon were punished, while Lily's stronger fundamentals were rewarded.
  • Health Care remains the beneficiary, with relative highs across Pharma, Biotech and Diagnostics. Sentiment is stretched, so we would stay long but prefer adding on consolidation rather than chasing strength.
• Aerospace & Defense bounced roughly 5%, but the group remains one of the weakest areas in the market.
  • The relative trend is still negative and momentum sits in the 29th percentile, so we would treat the bounce as sellable strength.

Economics

• The Fed held rates, but the broader message remains hawkish, with Warsh still unwilling to call financial conditions tight and September's hike only removing a "dose of accommodation".
  
  • The Fed may be settling into an every-other-meeting hiking cadence, but that gradualism risks leaving inflation above target for longer and has already helped push breakevens higher.
  • With growth still describing as strong and inflation elevated, the bias remains toward additional tightening.
  • The main risk is that skipping hikes now simply means more tightening later.
• Central banks are still leaning hawkish, but the underlying growth backdrop argues for caution on how much tightening can actually be delivered.
  • The BoC hiked 25bps to 2.5% to limit the risk of energy inflation spreading, even with core inflation near 2% and excess supply still evident.
  • That makes us skeptical the BoC can deliver as many hikes as markets currently price, especially with labor-market slack and softer growth ahead.
  • In the euro area, credit conditions are tightening further while loan demand is weakening, particularly in housing, adding another restraint on activity.
• US growth remains firm, with Q3 GDP up 3.4% SAAR and private domestic demand running even stronger at roughly 5%.
  • Consumer spending and business investment continue to support activity, while jobless claims remain low, showing little sign of labor-market deterioration.
  • The near-term caution is Q4: September consumption was flat and the saving rate fell to 3.8%, leaving less cushion if markets weaken further.
• Firms are seeing stronger sales, healthier hiring and rapidly rising AI investment, suggesting the business sector is not bracing for a slowdown.
  • Sales growth has accelerated to 6.1% YoY, while employment growth is running near pre-pandemic norms and hiring plans have firmed.
  • AI adoption is already widespread, with spending per employee expected to roughly double from $522 to $1,024.
  • For now, AI investment is occurring alongside more hiring, not replacing it.
• Consumers are seeing a firmer labor market and remain optimistic on equities, pushing back against near-term fears around AI-driven job losses.
  • The Conference Board's Labor Differential rose to its best level since April, driven by more consumers saying jobs are plentiful.
  • Equity sentiment remains elevated, with the net share expecting higher stock prices at 24.9, more than one standard deviation above normal.
  • Bottom line, consumers still see a stable-to-improving jobs backdrop and a constructive equity outlook.
• The AI build-out is becoming increasingly debt-funded, with hyperscalers on track to spend more than $800B on capex and bond issuance already reaching $222B.
  
  • Off-balance-sheet financing is adding another $75-$100B, concentrating risk across hyperscalers, insurers, private credit and banks.
  • The structures are vulnerable because commitments can exceed reported debt and chips are weak collateral given how quickly they depreciate.
  • Spillovers to yields have been limited so far, but if issuance continues at this pace, long-term rates are likely to feel more pressure.
  • Read more from BIS

Research Notes

Economics

• US labor market continues its downtrend. Weekly job postings continue to trend down, layoffs picking up, quits are cooling.
  
  
• March data showed broad economic weakness, with declines in services, confidence, housing, and commercial real estate.
  
  
• Rising inflation, weakening job outlooks, and cautious business spending point to growing economic strain.
  
  
• Home prices are cooling, which may curb spending as household wealth dips and the savings rate edges higher.
  
  
• The rebound in capital goods shipments looks fragile, with growth mostly tied to tech and broader investment plans weakening.
  
  
• New tariffs could cut 0.5% from GDP, strain trade ties, and raise car prices before production shifts take effect.
  
  
• Auto repossessions are at their highest since 2009, and tariffs may push buyers to the used market, keeping prices elevated.
  
  
• Despite trade tensions, signs of de-escalation and strong profits offer some cushion, with markets already pricing in much of the downside.
  
  
• Q4 growth was lifted by consumer and government spending, but with investment falling and key supports fading, a broader slowdown seems likely.

Strategy

• Market technicals show potential for a rebound. We think Mag7 approaches 50dma and potentially crosses through, getting to overbought, high beta stocks slowly recovering, and excessive outflows in IWM and SPY could fuel a tactical bounce.
   
  • Remember, this was a beta-driven correction, not a momentum-driven one.
    
    
• Bullish signals may re-emerge if a high percentage of stocks move about their 20dma and hit 20-day highs, suggesting a reassertion of the bull trend.
  
  
• Despite heightened policy uncertainty and a dark cross in tech, strong credit markets and sentiment tied to returns suggest the current pessimism may be overdone.
  
  
• Semi's continue to weaken, with even "good" ones coming under pressure.
  
  
• Staples pulled back at resistance levels, maintaining relative downtrend. Sharp unwind in beta and extreme underperformance suggests continued downward pressure.
  
  
• Transports reiterate bearish trend but flagging oversold and in "seller's frenzy". Expect short-term tactical bounce but fade the move.

Policy

• Debt limit deadline ("X-Date") likely between July and October, with resolution hinging on reconciliation or bipartisan deal amid uncertain cash flows.
   
  • Delays risk market volatility and a Moody's downgrade, raising U.S. borrowing costs.
    
    
• Trump will announce reciprocal tariffs on April 2, targeting about 15 key partners; recent moves on oil, autos, and threats to the EU and Canada may be strategic leverage.
  
  
• Section 232 is being used more broadly to justify tariffs on national security grounds, covering autos, copper, timber, and pharma, with an emphasis on U.S. production.
  
  
• Tariff timing and scope remain unclear, with Trump using them as a flexible tool, adding to market uncertainty.