Market Musings 010826: Violent theme rotation in market uptrend

Market Musings 010826:
Violent theme rotation in market uptrend

Podcast this week:
Why investors should not ignore commodities (click link to listen)

Report this week:
Investment Strategy Focus August 2026 - Summer Rotation (click link to read)

1. A stronger reflationary environment: a robust global economic rebound developed over June-July even as energy prices rebounded, led by positive industrial momentum. Inflation concerns persist, pushing bond yields higher. Supports value-oriented global stocks, real assets e.g. infrastructure, commodities.

2. Hormuz in a stop-start state: once again, the flow of oil and gas out of the Gulf has been interrupted by re-escalation in military action. The longer the interruption to energy exports, the greater the stagflation risk for the world. Oil refiners continue to benefit from record refining margins on oil products.

3. Copper is strong, will gold follow? These metals have tracked each other higher since 2021 but have diverged in the last 3 months as rising bond yields and a stronger US dollar have weighed on gold. Central banks have turned big gold bullion buyers, while copper is still supported by electrification, tech and defence demand. Maintain Positive views on copper and gold.

4. Summer rotation out of memory: the AI investment theme has corrected sharply since end-May, with big-spending hyperscalers falling 19% since then. Global financials have taken up market leadership, boosted by a strong batch of US Q2 results. We suggest diversifying out of concentrated technology positions into value and US small-cap stock exposure.

5. Buy value-oriented Euro Banks, Poland: European banks have returned 16% this year thanks to strong earnings momentum and shareholder returns. Polish stocks have also demonstrated strong earnings momentum this year, supporting a 20% 2026 return while remaining cheap at 11x forward P/E.

Watch US government bonds: the most important market today

This week, US 10-year and 30-year Treasury bonds sold off following the 29 July news conference of the new Federal Reserve chairman Kevin Warsh. The 30-year US bond yield has now hit over 5.2%, its highest yield since 2007. This move in long-term yields underlines that bond market investors are increasingly worried that the Fed is not focused on bringing down inflation to its stated 2% target.

US 10 and 30-year bond yields rise

The 10 and 30-year bond yields in the US are probably the most important market indicators today. The higher that yields go the greater the pressure potentially on other markets including stocks. All other things being equal, higher bond yields imply lower stock market valuations. This is because there is competition for funding between bonds and stocks, so at higher bond yields investors will be tempted to go for the relative safety and hiring income offered by bonds as opposed to the rather uncertain returns offered by equities, even if historically equities have offered far higher returns in the long term.

In spite of 10-year bonds hitting 4.7% this week, stock markets have so far not been particularly badly affected. The U.S S&P 500 index and the European stock markets such as the FTSE 100, Dutch AEX, Spanish IBEX and STOXX Europe 600 indices are all at or very close to all-time highs. One has to wonder however how long this disconnect can continue between stocks and bonds, if Bond yields are to rise further on the back of continued uncertainty over the Federal Reserve’s inflation policy.

STOXX Europe index around its all-time high

UK FTSE 100, Dutch AEX and Swiss SMI lead in Europe this year

US Equal-weight S&P 500 remains in a steady uptrend

The trend remains your friend

While seasonal effects are typically negative over August and September the overriding trend for stocks remains positive. However that is not to say that there is not severe sector rotation in progress and in rotation between investment trends.

We have had so far this year very strong bull markets in themes such as golden silver, then space, then AI but now we see relative strength developing rather in other sectors such as financials (banks and insurance).

This has therefore been an excellent stock market for those who can accurately follow trends, and who can rotate between trends rather than sticking with one trend for too long. I for my part have been guilty of staying with particular themes for too long, in my case remaining relatively heavily exposed both to precious metals miners and uranium miners. Both of these peaked back in February and have since given back substantial gains. I remain a firm believer in the long term uptrends in both of these sectors, however given their extreme historic volatility I did not take as many profits as I should have back around the peak in January and February, prior to the outbreak of the current Iran conflict.

Gold miners have suffered as the gold price has corrected to $4000

Tech has suffered a brutal correction even as broad indices hold up well

What is perhaps most notable in recent weeks has been the brutal correction suffered by the former leaders of the artificial intelligence trade, particularly in semiconductors, memory chipmakers and AI infrastructure related companies. The NASDAQ 100 index is down substantially and is now underperforming several non-tech sectors such as Banks and Industrials.

US Banks outperform the Nasdaq 100 so far this year

Semiconductors lead the tech sector lower since late June

Despite this brutal correction in the AI trade, overall US stock market volatility remains surprisingly low…

VIX index back close to year lows

Leading sectors: Banks, Insurance, Oil & Gas

The leading sectors in solid medium-term uptrends remain value-oriented sectors with generous dividend yields including European Banks, European Insurance and Global Oil & Gas companies. All of these sectors have seen strong Q1 and Q2 results and are benefiting from strong upwards revisions in analysts’ earnings estimates for this year and next.

European Banks and Insurance continue to lead, as in 2025

Global Oil & Gas stocks benefit from high refining margins and crude oil prices

European Value continues to lead, +18% including dividends in 2026 to date

The ETF I find interesting to add to right now is the Amundi New Energy ETF, holding companies related to AI electricity demand including gas turbine makers, renewable energy companies and battery makers. This has sold off 15% from the highs but is starting to rebound, and is still +20% from the start of the year...

Amundi New Energy ETF could be interesting now

Have a great week and keep an eye on long-term bond yields as the biggest danger to the current bull market in stocks,

Edmund