Last week, we pointed out that despite the rally in the equity market, underlying economic data has largely been coming in below expectations. This week’s chart provides a clue as to how both these things could be possible at the same time. Stocks are up a bit in the second quarter, but the dispersion among individual sectors has been quite wide. Most defensive and interest-rate sensitive areas of the market have been leading, while cyclical sectors have been performing less well. When Utilities is the clear leader, it usually means the market is in free fall and investors are flocking to relative safety. There are two potential reasons why it’s taken the reins in a bull market. One is that its proximity to AI-related investment (i.e., demand for electricity from data centers) has pushed its multiple higher. The other is that we are seeing what we typically see at the end of prolonged bull markets, which is a risk-off rally that tends to last until the labor market softens and the Fed begins to cut interest rates. We aren’t quite buying the first story, though it may be playing a role. Ultimately, the business cycle is the more powerful explainer, which would mean Utilities are just at the start of their leadership campaign.

The Macro Week In Review

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