LEADERS: THE WAR PREMIUM FADES, BUT THE ROTATION IT CREATED STILL LEADS

Energy (XLE) – Still the Three-Month King, but the Crown Is Slipping

The ceasefire that arrived late Tuesday changed everything for energy. The XLE/SPY ratio crashed 7.5% this week — the second consecutive week of violent underperformance — as WTI crude collapsed from $112 to $95.63 on the two-week ceasefire agreement between the U.S. and Iran. But the three-month outperformance remains an extraordinary 25.1%, keeping energy firmly in the leader column despite the weekly carnage. The math is straightforward: even after two weeks of selling, energy has given back only a fraction of the gains accumulated during the war’s escalation. The ceasefire, brokered by Pakistan and announced just two hours before Trump’s 8pm deadline to strike Iran’s power grid, is contingent on Iran reopening the Strait of Hormuz. Iran agreed but warned its “hands remain on the trigger.” The market is pricing roughly 50% odds that this ceasefire holds, which means energy equities are still far above where they would trade in a genuine peace scenario. I’m keeping energy as a leader on the three-month trend, but the war premium unwind is the single most important trade to monitor.

Utilities (XLU) – Defensive Leadership Bends but Does Not Break

Utilities underperformed SPY by 1.4% this week but the three-month outperformance of 13.3% remains intact. In a week where the S&P 500 surged 3.7% and posted its best single day in a year (+2.5% on Wednesday’s ceasefire announcement), defensive sectors naturally underperform on a relative basis. The 10-year yield settling at 4.289% provides a supportive rate environment, and the AI data center power demand narrative continues to offer a structural growth catalyst. The VIX dropping below 20 for the first time since the war began is the key signal that the fear trade is fading, which will pressure defensive leadership going forward. For now, the three-month trend holds.

Materials (XLB) – Reshoring Survives the Peace Trade

Materials gained 0.3% relative to SPY this week and maintain a 10.2% three-month outperformance. The sector’s resilience during the ceasefire rally is notable: unlike energy and other war trades, materials did not sell off because the reshoring, defense spending, and tariff-driven demand are not dependent on the Iran conflict. ISM Manufacturing at 52.7 continues to support the fundamental case. The one-month gain of 2.7% confirms the trend is intact and arguably more durable than energy’s because it is not at risk of a ceasefire unwind.

Industrials (XLI) – The Dual-Scenario Winner

Industrials gained 1.0% relative to SPY this week, outperforming both defensives and energy during the ceasefire rally. The three-month outperformance of 8.2% and one-month gain of 1.8% make industrials one of the most consistent leaders of the cycle. The sector led all S&P 500 sectors this week at +5.3% per Financial Synergies’ weekly recap. Industrials benefit from war through defense contracts and from peace through transportation and logistics normalization. This is the rare sector that wins regardless of the ceasefire’s outcome.

Real Estate (XLRE) – Income Assets Catch a Falling-Rate Bid

Real estate underperformed SPY by 0.6% this week but the three-month ratio at 8.4% remains firmly in leader territory. The 10-year yield at 4.289% is lower than the 4.44% peak from two weeks ago, and if the ceasefire holds and oil continues to decline, the disinflationary impulse would push yields lower and benefit rate-sensitive real estate. Data center REITs continue to provide a structural growth engine within the sector.

Emerging Markets (EEM) – The Ceasefire’s Biggest Winner

This week’s ceasefire announcement was a game-changer for emerging markets. The EEM/SPY ratio surged 2.8% for the week and is now up an impressive 8.0% over three months. Energy-importing EM nations — India, South Korea, and Southeast Asia in particular — benefit directly from oil’s collapse from $112 to $96. International equities rallied 3.5% on Wednesday alone per the Financial Synergies recap. The dollar’s stabilization and the tightening of credit spreads to January levels provide additional tailwinds. EM equity has quietly become one of the strongest three-month leaders as the war premium unwinds and the peace dividend flows to the biggest victims of high oil prices.

International Developed (EFA) – Europe and Japan Get Their Reprieve

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LEADERS: THE WAR PREMIUM PERSISTS, BUT THE BOUNCE IS TELLING YOU SOMETHING

Energy (XLE) – Still the Trade of the Year, Even After This Week’s Whipsaw

Energy gave back ground this week but remains the dominant leader by a wide margin. The XLE/SPY ratio fell 7.9% for the holiday-shortened week as the S&P 500 surged 3.78% on ceasefire optimism while energy fell 4.37%. The whipsaw was extraordinary: on Monday, stocks rallied nearly 3% on unverified reports that Iran’s president was open to ending the war, sending oil from $109 down toward $100. Wednesday added gains as Trump announced a two-to-three-week withdrawal timeline. Then Thursday’s prime-time address crushed the optimism — Trump offered no clear resolution and pledged to escalate strikes on Iranian infrastructure, sending WTI crude surging 11% in a single session to $111.54 per barrel, the largest single-day dollar gain since 2020 according to Barron’s. Despite the weekly pullback in the ratio, the three-month outperformance remains an extraordinary 35.7%. The Strait of Hormuz is still effectively closed to normal transit, and until a verifiable ceasefire materializes, energy’s structural advantage holds. The weekly pullback is noise against a three-month trend that shows no sign of breaking.

Materials (XLB) – The Reshoring Bid Won’t Quit

Materials pulled back 1.0% relative to SPY this week but the three-month outperformance of 14.1% keeps the sector firmly in the leader column. The slight weekly underperformance came as the broad market relief rally lifted everything, compressing the relative advantage of defensive and commodity-linked sectors. But the structural drivers remain intact: defense spending acceleration, tariff-driven import substitution, and persistently elevated PPI at 3.4% headline and 3.9% core are creating a floor for commodity-linked equities that didn’t exist a year ago. Import prices surged 1.3% month-over-month in the most recent data, more than double consensus, signaling that input cost pressures continue to favor producers over consumers. Materials have become a structural leader alongside energy, and the one-month gain of 3.2% confirms the trend remains intact despite weekly noise.

Utilities (XLU) – Defensive Leadership Tested by the Risk-On Bounce

Utilities underperformed SPY by 2.8% this week as the relief rally favored risk-on assets over defensives. The three-month outperformance of 12.3% remains substantial, but this week’s price action is a reminder that defensive sectors give back ground quickly when sentiment shifts. The 10-year yield fell to 4.31% by Wednesday from 4.44% the prior week, which should have helped utilities, but the magnitude of the equity bounce (S&P 500 +2.9% on Monday alone) overwhelmed the rate tailwind. I still believe the three-month trend is intact: the AI data center power demand narrative provides structural support, and the VIX’s move back above 30 on Thursday after Trump’s speech suggests the risk-off environment hasn’t truly ended. Utilities gave back a week’s worth of relative gains, but one week does not reverse a quarter of outperformance.

Consumer Staples (XLP) – The Defensive Rotation Takes a Breather

Staples underperformed SPY by 3.6% this week, the sharpest weekly relative decline in the current cycle. The three-month outperformance of 10.1% remains meaningful but the one-month figure has flatlined at -0.1%, signaling that the defensive rotation may be losing momentum if equities find a bottom. The University of Michigan consumer sentiment at 53.3 with inflation expectations at 3.8% still supports the fundamental case for staples, but when the Nasdaq surges 3.8% in a single session on ceasefire hopes, nobody is rotating into Procter & Gamble. This is the classic challenge for defensive positions: they protect on the way down but drag on the way up. I’m keeping staples in the leader column on the three-month trend, but I’m watching the one-month ratio closely for signs of a more durable shift.

Industrials (XLI) – Reshoring Plus Risk-On Equals Double Tailwind

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LEADERS: ENERGY, HARD ASSETS, AND THE YIELD CURVE TELL THE REAL STORY

Energy (XLE) – The Only Trade That Keeps Working

Energy’s dominance reached absurd proportions this week. The XLE/SPY ratio surged another 4.7% for the week ending March 20 and is now up an extraordinary 42.1% over three months — the most extreme relative energy move since the 2022 Russia-Ukraine supply shock. Brent crude rose 8.8% for the week to close at approximately $112 on Friday, March 20, having hit $119 intraday the day before on the South Pars and Qatar LNG strikes. The S&P 500 fell 1.9% for the week while energy was the only sector to gain, up approximately 2.75%. Year-to-date, energy is now up a staggering 33% while the S&P 500 is down approximately 3%. The Interactive Brokers weekly commentary noted this marks the second widest YTD sector performance dispersion since 2002. Monday’s Trump-Iran “productive talks” announcement briefly sent Brent plunging from $109 to $92, but Iran’s parliament quickly denied any negotiations were taking place, and crude recovered above $100. The Strait of Hormuz remains at approximately 5% capacity. Until a verifiable ceasefire materializes, the energy premium isn’t going anywhere.

Utilities (XLU) – Rate Sensitivity Catches Up to the Defensive Darling

Utilities remain a three-month leader with the XLU/SPY ratio still up 10.4% over that period, but this week delivered a wake-up call: the sector dropped approximately 5.0% for the week ending March 20, the steepest weekly decline among all S&P 500 sectors. The catalyst was the dramatic spike in Treasury yields — the 10-year jumped 14 basis points to 4.39% on Friday alone, its highest level since July 2025. The 30-year yield surged to 4.96%, within a hair of the psychologically important 5% level. Mortgage rates spiked to 6.53%. Markets began pricing in a roughly 30% probability of a Fed rate hike by October, up from just 6% the day before, according to CME Group data. Utilities are the most rate-sensitive equity sector, and when yields spike this aggressively, even the strongest defensive positioning gets punished. The AI data center demand narrative and the risk-off bid that has powered utilities all year haven’t disappeared, but they’re now fighting a rising-rate headwind that wasn’t present two weeks ago. I still believe utilities are a three-month leader, but the near-term trend deserves monitoring.

Treasuries (GOVT) – The Safety Bid Survives the Yield Spike

Despite the dramatic rise in Treasury yields — the 10-year surging from 4.20% on March 17 to 4.39% on March 20 — the GOVT/SPY ratio still rose 1.3% this week and is up 3.4% over three months. This seems contradictory, but the math is simple: equities fell faster than bonds. The S&P 500 dropped 1.9% for its fourth straight losing week while Treasuries delivered a positive 0.15% return, their first meaningful weekly gain in weeks according to the Bloomberg Aggregate data. The bond market is caught in a fierce tug-of-war: hedge funds are unwinding complex leveraged Treasury positions — including 2-year/10-year yield spread trades and swap spread bets — which is aggravating the selloff in yields, according to Bloomberg. At the same time, flight-to-quality demand from equity investors is providing a floor for bond prices. The FOMC’s March 18 decision to hold at 3.50–3.75% now looks like it may have been the last hold before the conversation shifts to hikes. The Fed is in an impossible position: oil above $100 is feeding inflation, but the economy printed negative payrolls in February. Treasuries outperforming equities tells you risk appetite is deteriorating despite the yield noise.

TIPS (TIP) – The Inflation Trade Nobody Can Ignore

The TIP/GOVT ratio pulled back slightly this week (down 0.4%) but remains positive over three months at +0.4%, maintaining its quiet but consistent outperformance of nominal Treasuries. February PPI came in hot at 0.7% month-over-month — the largest monthly gain since July 2025 — with the year-over-year rate accelerating to 3.4% headline and 3.9% core. The FOMC raised its 2026 PCE inflation forecast to 2.7% for both headline and core, acknowledging that inflation progress has stalled. Breakeven inflation rates are trending higher as the market prices in an environment where energy costs remain structurally elevated. The tariff regime on metals and industrial inputs is adding another layer of cost pressure that has not fully filtered through to consumer prices. TIPS continue to offer the most direct portfolio hedge against the stagflation scenario that is rapidly becoming the base case — rising prices alongside economic deceleration. With the bond market now pricing a 30% chance of a rate hike, the case for inflation-protected securities has only strengthened.

Lumber/Gold Ratio – Gold’s Collapse Powers an Even Bigger Move

The lumber/gold ratio delivered another dramatic week, surging 11.1% as gold’s crash deepened. Gold fell another 12% this week — on top of last week’s 7.4% decline — bringing the cumulative drop to approximately $640 per ounce from the $5,020 high just two weeks ago. Spot gold hit a four-month low of $4,359 on Monday morning, March 23, in what USAGOLD described as gold’s worst single-session move in years, before partially recovering on Trump’s Iran talks announcement to approximately $4,503. Lumber futures at $596 held relatively steady, and the mechanical effect of gold’s collapse has pushed the lumber/gold ratio up 5.7% over three months and 24.4% over the past month. The gold crash appears driven by the same forces that spiked yields: hedge fund deleveraging, the repricing of rate cut expectations to rate hike risk, and a dollar that has stabilized. This ratio normally signals the balance between economic optimism and fear. When it surges this sharply on gold’s decline rather than lumber’s rise, it’s telling you the fear trade is unwinding violently — but that doesn’t necessarily mean the economic outlook has improved.

Industrials (XLI) – Reshoring Narrative Provides a Floor

Industrials gained 0.2% relative to SPY this week and remain up 9.0% over three months, making this a sector that continues to lead despite the macro turbulence. The reshoring mega-cycle, driven by the tariff regime and administration priorities around domestic manufacturing, is providing structural support that few other cyclical sectors enjoy. Toyota’s announcement of a $1 billion investment in its Kentucky and Indiana plants — part of a $10 billion U.S. commitment over five years — is the latest example of the capital flow that is reshaping the industrial landscape. The sector’s three-month strength has come despite rising input costs from oil above $100, which is a tax on the transportation and logistics backbone of the industrial economy. ISM Manufacturing has been in expansion territory, and the tariff-driven reshoring tailwind appears strong enough to offset the cyclical headwinds from the war. Industrials are down 2.9% over the past month, but the broader trend remains intact. This is a sector where the secular story — onshoring, infrastructure, defense spending — is powerful enough to ride out even the kind of macro volatility we’re experiencing.

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LEADERS: THE WAR PREMIUM IS REAL AND DEFENSIVES ARE THE ONLY GAME IN TOWN

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LEADERS: DEFENSIVES, COMMODITIES, AND THE REST OF THE WORLD ARE EATING AMERICA’S LUNCH

Energy (XLE) – Iran Tensions and Tariff Chaos Fuel a Monster Year

Energy stocks continue to be the undeniable leader of 2026, with XLE up a stunning 25% year-to-date against a flat S&P 500. The ratio to SPY has surged to new 52-week highs, and the uptrend shows no signs of slowing. Iran nuclear tensions escalated sharply late in the week after U.S. negotiators left Geneva disappointed, and President Trump signaled that military options remain on the table. WTI crude jumped nearly 3% on Friday alone to close around $67 per barrel, with prices spiking above $72 intraday on Monday. The combination of geopolitical risk premium, OPEC discipline, and the Supreme Court’s tariff ruling — which eliminated IEEPA tariffs but left the new 15% Section 122 global tariff intact — continues to create a supportive backdrop for energy equities. This is one of the most decisive relative trends I’ve seen in years.

Consumer Staples (XLP) – The Defensive Bid That Won’t Quit

Staples have staged a remarkable turnaround in 2026, up nearly 16% year-to-date on a total return basis and sharply outperforming the S&P 500. The ratio has broken out to levels we haven’t seen since late 2022, and the momentum is accelerating. Consumer staples gained another 2.7% last week — the second-best sector performance — as investors continue to rotate into predictable cash flows amid rising macro uncertainty. With Q4 GDP printing at just 1.4% annualized and consumer confidence expectations stuck below 80 for the 13th consecutive month (a historically reliable recession signal), the bid for defensives makes complete sense. After two years of being left for dead, XLP is back.

Utilities (XLU) – Rate Sensitivity Meets Safe Haven Demand

Utilities were the best-performing sector last week, up 2.9%, and are now up nearly 12% year-to-date. The ratio to SPY has been climbing steadily since the start of the year, and the breakout above the downtrend that was in place from late 2023 through most of 2025 is now well-established. The drop in the 10-year Treasury yield below 4% — the first time in months — is a powerful tailwind for this rate-sensitive group. With the 10-year settling at 3.97% after falling roughly 25 basis points through February, utilities are benefiting from both their yield appeal and their defensive character. The VIX rising above 21 from under 18 in just a few sessions only adds fuel to the defensive rotation.

Emerging Markets Equity (EEM) – Outperformance of a Generation

This is the chart that should have every U.S.-centric investor’s attention. EEM is up approximately 15% year-to-date versus the S&P 500’s near-zero return, and over the past year, emerging markets have crushed domestic equities with a 42.5% return against SPY’s 15.6%. The ratio has broken out of a multi-year downtrend, and the move is broad-based — not just China. The weak U.S. dollar, which is trading around 98 on the DXY (down nearly 8% over the past 12 months), is a massive catalyst for EM equities. Add in the global tariff regime reshuffling trade flows, improving EM fundamentals, and the sheer valuation discount to U.S. stocks, and this ratio could have significantly more room to run. I’ve been waiting for this breakout for years.

EAFE / Developed International (EFA) – Rest of World Pulls Ahead

It’s not just emerging markets. EFA outperformed SPY by a 31.6% to 17.7% margin in 2025, and the trend has only intensified in early 2026. European banks (EUFN) have been a standout within the international allocation, benefiting from rising European yields and a re-rating of the financial sector abroad. The narrative that the U.S. is the only game in town — a narrative that held for over a decade — is being directly challenged by price. The dollar weakness is a compounding factor here: every basis point of DXY decline amplifies international returns for U.S.-based investors. With the DXY stuck in a 96–102 range and structurally lower versus a year ago, the tailwind persists.

TIPS (SPIP) – Inflation Protection Is in Demand Again

The ratio of TIPS to nominal Treasuries has been grinding higher, and January’s inflation data gave the move fresh legs. Headline PPI shocked to the upside at +0.5% month-over-month, with core PPI printing +0.8% versus the +0.3% consensus — the biggest miss in recent memory. While headline CPI eased to 2.4%, the PPI data suggests pipeline price pressures remain very much alive, particularly with the new 15% global tariff adding cost pressures to imported goods. ISM Manufacturing prices paid have been in expansion territory for 16 consecutive months, printing at 59.0 in January. The market is starting to price in the possibility that the last mile of the inflation fight is stickier than the Fed wants to admit. TIPS are reflecting that concern.

Bonds / Treasuries (GOVT) – Bonds Finally Leading Stocks

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• The Invesco Solar ETF (TAN) is up more than 23% year-to-date through February 24, 2026, versus less than 1% for the S&P 500 proxy SPY.¹

• The U.S. Energy Information Administration expects a record 86 GW of new utility-scale capacity in 2026, with solar representing 51% of additions.²

• Forward S&P 500 valuation sits at 21.5x earnings, while TAN’s portfolio shows low trailing multiples but uneven profitability.³ ⁴

• IRS construction timing rules and new compliance guidance are actively shaping project acceleration and vendor selection.⁵ ⁶

• Residential and inverter names carry elevated short interest, signaling persistent skepticism despite ETF-level strength.⁷

Relative Leadership Built on Policy Timing and Capex Cycles

Solar has emerged as one of the early leaders of 2026. The Invesco Solar ETF (TAN) has gained approximately 23.23% year-to-date through February 24, while SPDR S&P 500 ETF (SPY) has advanced just 0.80% over the same period.¹ The outperformance is clear and investable.

Yet the narrative underpinning the move is more nuanced than “solar demand is booming.” The sector is rebounding from a prolonged stretch of policy uncertainty, rate volatility, and inventory dislocations. Investors are selectively re-engaging the utility-scale segment, while remaining cautious on residential exposure.

The structural driver is visible in federal data. The U.S. Energy Information Administration projects that developers plan to add a record 86 gigawatts of utility-scale generating capacity in 2026, with solar accounting for 51% of that total.² In its latest Short-Term Energy Outlook, the EIA expects solar generation to increase 17% in 2026 and 23% in 2027.⁸ Solar is no longer marginal capacity; it is central to incremental supply.

Timing mechanics matter. IRS Notice 2025-42 specifies that full clean electricity credit eligibility depends on projects beginning construction before July 5, 2026 under defined continuity standards.⁵ Recent Treasury and IRS guidance regarding “prohibited foreign entities” and “material assistance” adds compliance complexity that affects procurement and supply chains.⁶ Developers and manufacturers are reacting accordingly, accelerating activity where possible and adjusting sourcing decisions. Policy is not background noise. It is actively shaping order flow.

This explains the two-speed tape. Companies tied to utility-scale infrastructure and domestic manufacturing are benefiting from capex visibility and policy leverage. Residential installers and inverter suppliers remain more exposed to financing conditions and tariff variability.

Valuation, Rates, and the Economics of Financing

Solar equities remain high-beta and rate-sensitive. Financing costs influence customer economics, tax equity availability, and project internal rates of return.

As of late February, the 10-year Treasury yield stands near 4.08%, the 2-year around 3.48%, and the average 30-year fixed mortgage rate approximately 6.01%.⁹ These levels are not prohibitive, but they are restrictive relative to the ultra-low-rate era that fueled residential solar adoption. Household economics remain financing-driven.

At the index level, FactSet reports the S&P 500 trading at 21.5x forward 12-month earnings, above both its 5-year and 10-year averages.³ Multiple compression since year-end has been modest. Against that backdrop, TAN’s December 31, 2025 fact sheet shows a trailing P/E of 10.41x and price-to-book of 2.38x, alongside a negative weighted return on equity.⁴

The temptation is to label solar “cheap.” That framing is incomplete. Profitability dispersion within the sector is significant. Some companies generate substantial cash flow and operate with contract visibility; others remain loss-making or margin-constrained. Traditional P/E comparisons can obscure cyclicality and policy exposure.

Trade friction compounds the complexity. Enphase Energy disclosed that reciprocal tariffs reduced non-GAAP gross margin by 5.1 percentage points in Q4 2025.¹⁰ That magnitude directly connects macro policy to reported profitability. On the input side, copper prices averaged roughly $12,987 per metric ton in January 2026, according to IMF data via FRED.¹¹ For balance-of-system suppliers, commodity exposure can materially affect gross margins where contracts lack pass-through mechanisms.

Positioning data reinforces the divergence. Short interest as of the January 30, 2026 settlement date shows Sunrun with approximately 56.76 million shares sold short, near one quarter of float. SolarEdge and Enphase also carry elevated short percentages. First Solar’s short interest is materially lower by comparison.⁷ Investors are distinguishing between durable earnings profiles and recovery or financing-dependent models.

Company Dispersion Defines the Opportunity Set

First Solar illustrates the utility-scale anchor of the sector. The company reported 2025 net sales of $5.2 billion and net income per diluted share of $14.21, with a year-end gross cash balance of $2.9 billion. It guided 2026 net sales of $4.9 to $5.2 billion and adjusted EBITDA of $2.6 to $2.8 billion.¹² The stock reacted sharply to guidance, underscoring how even fundamentally profitable names remain sensitive to cadence assumptions and policy framing.¹³

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• Cybersecurity stocks have underperformed the S&P 500 by more than 36% over the past year as capital rotated aggressively into perceived AI winners.¹

• Valuations across the sector now sit near five-year lows despite improved profitability and stronger balance sheets.²

• AI is expanding the threat surface, reinforcing — not weakening — long-term cybersecurity demand.³

• Enterprise security budgets remain resilient, with global spend projected at $212 billion in 2025.⁴

• Market leadership and platform consolidation favor high-quality operators within the HACK ETF.

• The current setup reflects sentiment dislocation more than structural deterioration.

Rotation, Not Ruin: Why Cyber Fell Behind

Cybersecurity entered 2026 as an unexpected laggard. The Amplify Cybersecurity ETF (HACK) trailed the S&P 500 significantly over the past year.¹ The underperformance was not triggered by collapsing demand or structural disruption. It was driven by capital rotation.

As enthusiasm around artificial intelligence intensified, investors crowded into mega-cap AI beneficiaries — semiconductors, hyperscale cloud providers, and infrastructure names — while rotating out of software. Analysts described the move as an “AI scare trade,” where anything perceived as vulnerable to AI disruption was sold first and evaluated later.³

The damage was broad. The Nasdaq Software Index shed roughly $2 trillion in market value from its October peak.³ Even industry leaders such as CrowdStrike declined meaningfully despite steady operational execution.³

This type of rotation is typically sentiment-driven rather than fundamentals-driven. Cybersecurity companies were swept into the broader software reset despite their mission-critical positioning. Breaches did not slow. Ransomware did not disappear. Regulatory scrutiny did not ease.

What changed was positioning.

The result is a sector trading at valuation levels last seen five years ago.² When sentiment overshoots reality, dislocations form. That appears to be the case today.

Leaner Balance Sheets, Expanding Threat Surfaces

The current backdrop is materially different from prior cybersecurity cycles. Companies are leaner. Margins are stronger. Capital discipline has improved.

Palo Alto Networks reported a non-GAAP operating margin above 30% in its latest quarter, reflecting both scale and efficiency improvements.⁵ Fortinet operates at mid-30% operating margins and continues generating substantial free cash flow.⁶ Many industry leaders now comfortably meet or exceed the Rule of 40 threshold.

This matters. During the 2020–2021 software expansion, growth was often prioritized over profitability. The 2022–2023 correction forced internal restructuring. The survivors are more durable businesses.

Meanwhile, AI has not reduced cybersecurity’s relevance. It has intensified it.

Generative AI is accelerating phishing sophistication, automating vulnerability discovery, and compressing attack cycles.⁷ Analysts increasingly argue that AI proliferation expands risk exposure and reinforces security budgets.⁸

Industry conferences in 2026 are expected to highlight AI-enabled defense tools — from real-time deepfake detection to automated threat containment.⁹ The narrative is shifting from AI as threat to AI as defense multiplier.

Enterprise budgets reflect this reality. Global cybersecurity spending is projected to reach nearly $240 billion in 2026.⁴ Even in tighter macro environments, security ranks among the least discretionary IT line items.⁴

There is also a structural labor shortage in cybersecurity talent, forcing enterprises to consolidate around trusted platform vendors.⁴ That dynamic benefits scaled operators embedded within HACK.

The sector is not contracting. It is consolidating.

Five Names Positioned for Recovery

Within HACK’s portfolio, several companies represent distinct expressions of cybersecurity’s structural tailwinds.

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• Builder confidence has softened, but resale supply remains tight, reinforcing structural imbalance.

• A credible rate-cut cycle could reduce incentive pressure and stabilize margins.

• Pro-supply policy initiatives may improve permitting timelines and capital efficiency.

• Select XHB constituents offer land optionality, liquidity, and operating leverage to a demand rebound.

U.S. housing enters 2026 with mixed signals. The NAHB/Wells Fargo Housing Market Index fell to 37 in January, reflecting weaker buyer traffic and subdued expectations.¹ Builders are pacing starts carefully and relying on incentives to maintain orders.

Meanwhile, existing-home sales declined 8.4% in January to a 3.91 million seasonally adjusted annual rate, with inventory near 1.22 million and the median price reaching a January record.² Tight resale supply persists, in part because homeowners with low mortgage rates remain reluctant to sell. Federal Reserve commentary has acknowledged the “lock-in” dynamic limiting move-up supply.³

That combination creates asymmetry. If rates fall, affordability improves while resale supply likely remains constrained. Builders can deliver inventory into that gap.

Policy developments add another catalyst. A January 2026 executive order targets federal support connected to large institutional purchases of single-family homes while carving out build-to-rent communities and directing further agency guidance.⁴ Separately, legislative proposals aimed at streamlining permitting and incentivizing zoning reform remain active in Congress.⁵

Within the State Street SPDR S&P Homebuilders ETF (XHB), five builders stand out for balance sheet strength, land strategy, and valuation: D.R. Horton (DHI), Lennar (LEN), PulteGroup (PHM), NVR (NVR), and Toll Brothers (TOL).⁶ XHB trades at a mid-teens multiple, below the broader market, underscoring its cyclical pricing.⁷

Incentives Now, Operating Leverage Later

Recent Census Bureau data show permits near 1.4 million SAAR and starts near 1.25 million, with single-family permits around 876,000.⁸ Builders are cautious.

Margins reflect elevated incentives. Mortgage-rate buydowns have compressed profitability across the industry. If base rates decline, those incentive costs shrink, allowing margin recovery even before pricing power improves.

Structural supply constraints remain. Tight resale inventory and demographic demand continue to support long-term housing fundamentals.³ Policy efforts that shorten permitting timelines could improve capital efficiency and land turns.

Land optionality is critical. Builders controlling lots through option agreements rather than outright ownership can scale production upward without carrying excessive land risk.

Five Builders With Rate Sensitivity and Balance Sheet Flexibility

D.R. Horton (DHI)

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• The current software selloff is being driven more by narrative than confirmed structural deterioration in enterprise demand.¹

• Markets are rapidly pricing a “software is dead” scenario under the assumption that AI will commoditize SaaS.¹

• The Federal Reserve is no longer tightening at the margin, and futures markets have begun pricing renewed easing in 2026.² ³

• Forward valuations for software have compressed toward multi-year lows even as revenue growth remains positive across large platforms.⁴

• Large, embedded systems-of-record platforms with recurring revenue and net liquidity may offer asymmetric upside if the narrative shifts from replacement to integration.

The Macro Backdrop: AI Panic Meets Policy Inflection

The software drawdown is increasingly framed as existential. The dominant narrative argues that “agentic AI” will compress subscription pricing, erode moats, and replace large portions of the SaaS stack. That view has gained traction following earnings reactions and headlines emphasizing AI’s ability to generate code and applications at lower cost.¹

Yet markets are discounting a clean substitution effect in a business that historically behaves more like a toll system than a commodity. AI may alter interfaces and workflows, but enterprises still require governance, permissioning, audit trails, compliance, uptime, and data orchestration. Those needs do not disappear when automation improves. In many cases, they intensify.

The repricing is visible in the iShares Expanded Tech-Software Sector ETF (IGV), which showed a materially negative year-to-date return as of mid-February 2026.⁵ That move reflects aggressive de-risking rather than confirmed collapse in enterprise software spending. Reuters reporting in late January described broad declines across software names as investors leaned into a “worst-case” AI disruption scenario.¹

The macro overlay amplifies the volatility. The Federal Reserve’s January 28, 2026 statement maintained the federal funds target range at 3.50% to 3.75%.² The effective federal funds rate has remained in the mid-3% area.³ At the same time, futures markets lifted the implied odds of a mid-year rate cut following softer inflation data.⁴

For long-duration equities such as software, that shift from tightening to optional easing alters valuation math. The sector’s forward valuation has fallen toward levels not seen in roughly three years.⁶ Historically, when multiples compress under narrative pressure while policy risk moderates, the setup for contrarian re-rating improves.

This is not about dismissing AI risk. It is about recognizing that policy is no longer tightening at the margin, and that price action may be overshooting fundamentals.

Leaders: Platforms Being Priced Like Commodities

Using IGV as the software universe provides a practical framework. The fund’s fact sheet highlights heavy exposure to large enterprise platforms including Salesforce, Adobe, ServiceNow, Intuit, and Atlassian.⁷ All five were referenced in recent reporting on the AI-driven selloff.¹

Across these names, a consistent pattern emerges: steep year-to-date drawdowns alongside continued revenue growth and, in several cases, strong liquidity positions.

Salesforce (CRM)

Salesforce remains a central system-of-record for enterprise customer workflows. Revenue continues to grow, according to trailing data compiled by StockAnalysis.⁸ The company reported substantial cash and marketable securities relative to debt in its most recent Form 10-K.⁹

The market is treating Salesforce as a front-end interface vulnerable to AI replacement. That assumption overlooks data gravity, workflow entrenchment, and integration complexity. If AI increases automation inside customer systems, the governance layer embedded within Salesforce may become more—not less—critical.

Adobe (ADBE)

Adobe’s distribution across creative and document ecosystems remains difficult to replicate at scale. Trailing revenue growth has remained positive despite sharp multiple compression.¹⁰

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• After a prolonged period of underperformance driven by rising interest rates, several REIT subsectors appear positioned for a cyclical rebound as monetary policy shifts.

• Anticipated Federal Reserve rate cuts in 2026 could meaningfully reduce financing costs, stabilize capitalization rates, and improve equity valuations across real estate.

• A potential second Trump administration introduces policy variables that may favor deregulation, domestic investment, and infrastructure development, creating differentiated outcomes across REIT segments.

• Selectivity remains critical, as structural headwinds persist for certain property types despite improving macro conditions.

The U.S. REIT sector endured one of its most challenging stretches in decades between 2022 and 2024. Rapid Federal Reserve tightening pushed policy rates to restrictive levels, compressing equity valuations, increasing borrowing costs, and pressuring property values across nearly every real estate category. During this period, many REITs significantly underperformed broader equity benchmarks, reinforcing investor skepticism toward interest-rate-sensitive assets.¹

That backdrop is beginning to change. Forward-looking indicators increasingly suggest that the next major inflection point for real estate may arrive in 2026, as inflation moderates and the Federal Reserve pivots toward easing. Moody’s Analytics projects that the federal funds rate could decline from roughly 4.5 percent to the 2.5–3.0 percent range over the coming years, a shift that historically has been supportive for REIT performance.² Lower policy rates reduce debt service costs, improve refinancing conditions, and tend to stabilize capitalization rates, all of which are central to real estate valuation models.³

Layered onto this monetary shift is a potential political transition. A second Trump administration would likely prioritize deregulation, tax incentives, and policies aimed at accelerating domestic economic activity. During Trump’s first term, efforts to streamline environmental reviews and reduce regulatory friction altered the economics of development and capital deployment.⁴ A renewed emphasis on domestic manufacturing, energy production, and infrastructure investment could again reshape demand patterns across multiple real estate segments.⁵

However, the benefits of these changes are unlikely to be evenly distributed. Office properties continue to grapple with secular changes in work behavior, while certain retail formats remain exposed to structural e-commerce pressures. Against this backdrop, identifying relative leaders and laggards becomes more important than broad sector exposure.

Equity REITs Positioned for Recovery

Residential: Mid-America Apartment Communities (NYSE: MAA)

Mid-America Apartment Communities operates a portfolio concentrated in high-growth Sunbelt markets, an exposure that has proven resilient despite recent supply pressures. While new multifamily construction weighed on rent growth during 2024 and 2025, occupancy across the portfolio remained consistently above 95 percent, reflecting persistent housing demand and constrained affordability in single-family markets.⁶

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• Investor positioning is shifting toward consumer staples as volatility rises and earnings visibility fades.

• Pricing power and brand loyalty are allowing select staples companies to defend margins despite slower growth.

• Essential household goods, food, tobacco, and discount retail historically outperform during market corrections.

• Predictable cash flows and durable demand are once again being rewarded as risk appetite weakens.

Why Consumer Staples Are Regaining Leadership

Consumer staples stocks are quietly reclaiming leadership as investors rotate toward safety amid rising market volatility and late-cycle uncertainty. After trailing high-growth technology shares for much of 2025, staples have begun to outperform as risk appetite fades and capital seeks durability rather than momentum.¹

Staples companies sell necessities rather than aspirations: food, household products, beverages, tobacco, and essential retail goods. Demand for these products tends to remain steady even as economic growth slows. During downturns, consumer behavior often shifts in ways that favor staples. Households eat more meals at home, trade down to value brands, and prioritize essentials over discretionary spending.²

The current environment reflects these dynamics. Inflation has eased but remains persistent enough to pressure discretionary budgets. At the same time, earnings visibility across cyclical sectors has deteriorated. In contrast, many staples companies continue to demonstrate pricing power, stable volumes, and predictable cash flows. The result is renewed investor interest in businesses that can defend margins and dividends even if broader markets weaken.

Pricing Power and Brand Loyalty: Household, Food, and Beverages

Procter & Gamble (PG) remains the archetype of defensive consistency. The company has navigated a challenging consumer environment by leaning on brand strength and disciplined pricing. Even as volumes flattened, modest price increases across core categories allowed Procter & Gamble to maintain organic growth while preserving margins.³ Management has emphasized stability rather than strength in consumer demand, yet that stability has proven sufficient to sustain earnings through cost pressures and currency headwinds.⁴

What distinguishes Procter & Gamble is not growth, but resilience. Its portfolio of everyday essentials allows for incremental price adjustments without triggering meaningful demand destruction. Combined with scale efficiencies and steady innovation, this has kept cash flows predictable and dividends reliable during periods of market stress.⁵

PepsiCo (PEP) offers a different form of defensiveness through diversification. Its combination of beverages and snacks creates multiple demand anchors across income levels and geographies. Recent results showed continued pricing gains with limited volume erosion, supported by strong brand loyalty and international expansion.⁶

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• The Trump administration’s December 18, 2025 executive order materially advanced federal cannabis rescheduling.

• A move to Schedule III would remove 280E tax constraints, reshaping cannabis company cash flows.

• Cannabis reform is no longer a purely partisan issue, altering political risk assumptions.

• Several U.S. operators are positioned for outsized upside if reform proceeds.

• Current equity valuations do not reflect the probability of federal normalization.

The U.S. cannabis industry has spent years trapped in an awkward middle ground. State legalization expanded rapidly, yet federal prohibition continued to impose punitive taxes, restrict banking access, and prevent interstate commerce. The result has been a prolonged bear market for cannabis equities, marked by balance-sheet stress, forced asset sales, and widespread investor fatigue. Ironically, those same pressures have created the conditions for a contrarian opportunity.

That opportunity became more tangible in December 2025, when the Trump administration took the most consequential federal action on cannabis policy in decades. For investors willing to look past recent disappointments, the disconnect between operating fundamentals and equity valuations has rarely been wider.

Federal Reform Is No Longer Hypothetical

On December 18, 2025, President Donald Trump issued an executive order directing the Department of Justice to accelerate the administrative process to reclassify cannabis from Schedule I to Schedule III under the Controlled Substances Act.¹ The order instructed the Attorney General and the Drug Enforcement Administration to complete the rulemaking process as expeditiously as possible, reviving an effort that had stalled after the initial proposed rule was published in 2024.¹

While the executive order does not itself legalize cannabis, its implications are substantial. A move to Schedule III would formally acknowledge accepted medical use at the federal level and, most importantly for operators, remove the application of Section 280E of the Internal Revenue Code.² That provision has prevented state-legal cannabis companies from deducting ordinary business expenses, resulting in artificially high effective tax rates and chronic cash-flow pressure.

The political context matters. Cannabis reform has long been framed as a Democratic issue, yet this directive came from a Republican administration, underscoring how detached federal cannabis policy has become from traditional partisan lines.³ At the same time, resistance remains. Several Republican lawmakers publicly criticized the rescheduling effort in early 2026, highlighting that reform momentum, while real, remains contested.⁴

For markets, however, the signal is clear. Rescheduling is no longer a theoretical campaign promise. It is an active administrative process with explicit White House backing. Even partial follow-through would materially improve after-tax earnings, balance-sheet flexibility, and access to capital for U.S. cannabis operators. The companies below are not priced for that outcome.

Four Underappreciated Cannabis Operators

Trulieve Cannabis (TCNNF)

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• A multi-year global rearmament cycle is underway, driven by active wars, renewed great-power rivalry, and depleted military inventories.¹

• Defense spending growth is increasingly structural rather than cyclical, with record budgets and long-dated procurement commitments.¹²

• Market pricing remains uneven, leaving several strategically critical aerospace and defense firms trading at discounts to intrinsic value.⁶

• Opportunities span the full defense stack, from legacy missile and propulsion leaders to drone warfare and rapid-development specialists.¹⁰¹¹

• The primary risk for investors may be under-allocation as markets focus on short-term execution issues instead of long-duration demand visibility.¹⁸

A Sector Re-Entering a Strategic Cycle

Geopolitics has entered a decisively different phase. Russia’s invasion of Ukraine, persistent conflict in the Middle East, and intensifying rivalry among major powers have accelerated a new global arms race. Military spending across NATO and allied nations is rising at its fastest pace in decades, reversing years of post–Cold War underinvestment.¹

That shift is already visible in market performance. U.S. defense equities outperformed the broader market in 2025, with smaller, technology-focused firms often leading gains.² The divergence reflects more than investor enthusiasm; it signals a change in how wars are fought and how militaries procure equipment. Unmanned systems, loitering munitions, missile defense, and networked command platforms have moved from experimental concepts to battlefield necessities.¹³

The U.S. fiscal-year 2026 defense budget request underscored this transition, directing a disproportionate share of incremental funding toward drones, counter-drone systems, and advanced missiles while deemphasizing traditional platforms.² This reallocation has also exposed weaknesses in the defense industrial base, prompting renewed emphasis on domestic production capacity and supply-chain security.⁷

Against this backdrop, several aerospace and defense stocks remain mispriced relative to their strategic relevance and long-term earnings power.

RTX Corporation (RTX): Scale Meets Strategic Demand

RTX occupies a central role in modern defense, supplying missile defense systems, propulsion platforms, sensors, and avionics that are actively deployed in ongoing conflicts. The company entered 2025 with a record backlog exceeding $200 billion, driven by strong international demand and expanding NATO defense budgets.⁴

Despite this momentum, RTX’s valuation continues to reflect investor caution tied to manufacturing issues at its Pratt & Whitney commercial aerospace unit. Those issues triggered significant share-price weakness when first disclosed and have lingered in market psychology.⁵ The problem, however, is largely orthogonal to RTX’s defense franchises, which remain aligned with the fastest-growing areas of Pentagon and allied spending.

From a contrarian perspective, this disconnect matters. Missile defense, advanced propulsion, and integrated air-and-missile systems are core U.S. priorities, and RTX’s scale and installed base create durable competitive advantages. Morningstar continues to estimate that RTX trades at a material discount to fair value, suggesting that near-term concerns are overshadowing long-term fundamentals.⁶

L3Harris Technologies (LHX): Infrastructure for Modern Warfare

L3Harris has quietly repositioned itself as a backbone provider for modern military operations. Through targeted acquisitions and internal investment, the company now spans secure communications, missile propulsion, space-based sensing, and classified defense programs.⁷

The acquisition of Aerojet Rocketdyne proved particularly strategic, securing a critical chokepoint in U.S. missile production at a time when demand for munitions and hypersonic systems is accelerating. Production capacity has expanded meaningfully, and new facilities are coming online to support long-dated contracts.⁷

Despite this progress, L3Harris continues to trade below intrinsic value estimates.⁶ The market appears to be discounting integration complexity while underestimating the durability of demand tied to space defense, missile modernization, and secure communications. For contrarian investors, L3Harris offers exposure to the infrastructure layer of modern warfare rather than headline weapons systems.

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This revival is not a short-term trade. Nuclear operates on multi-decade timelines, and the policy, infrastructure, and capital commitments now underway suggest the current cycle may have more durability than prior rebounds.

Uranium Fundamentals Are Tightening

Uranium prices are hovering near their highest levels since 2011, while long-term contract prices have moved even higher as utilities prioritize supply security over spot market exposure.² This reflects a structural imbalance. Global reactor requirements are expected to rise steadily over the coming decades as new reactors are built in China, India, and the Middle East, and as Western countries extend the life of existing fleets.³

Supply, however, remains constrained. A decade of underinvestment following Fukushima left little excess capacity, and production remains geographically concentrated. The United States consumes tens of millions of pounds of uranium annually while producing only a negligible share domestically.⁴ This mismatch has elevated uranium from a cyclical commodity to a strategic resource.

Policy and Energy Security as Structural Tailwinds

Policy support has become one of the most important pillars of the current nuclear cycle. Uranium’s reclassification as a critical mineral in the United States has unlocked federal funding, accelerated permitting timelines, and increased support for domestic production and fuel-cycle infrastructure.⁵ The Inflation Reduction Act reinforced incentives for existing nuclear plants, while subsequent executive actions outlined ambitious long-term goals for expanding nuclear capacity.⁶

Energy security has further strengthened the case. Western governments are actively reducing reliance on Russian nuclear fuel services, accelerating investment in domestic enrichment and advanced fuel capabilities.⁷ Nuclear is increasingly viewed not as a transitional technology, but as a cornerstone of long-term grid reliability and decarbonization.⁸

Valuations Require Selectivity

The rally in uranium equities has lifted valuations, particularly among early-stage producers. On traditional metrics, some stocks appear expensive, reflecting expectations for sustained high prices and future production growth.⁹ That said, improving earnings have begun to justify these valuations, with sector-wide multiples compressing as revenues catch up to prices.¹⁰

Selectivity is now essential. Balance-sheet strength, asset quality, jurisdictional stability, and execution capability matter far more than thematic exposure alone.

Stock Ideas Across the Nuclear Value Chain

Cameco Corp. (CCJ) remains the cornerstone large-cap uranium exposure. As one of the world’s largest producers with tier-one assets in Canada and a deep book of long-term contracts, Cameco offers leverage to higher uranium prices with comparatively lower operational risk. Its strategic ownership stake in Westinghouse Electric adds exposure to reactor construction and nuclear services, broadening its earnings profile beyond mining alone.¹¹

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After spending much of the past decade in relative obscurity, platinum has re-emerged as one of the strongest performers in the precious-metals complex. Since late 2024, prices have risen sharply, outpacing both gold and broader equity markets as investors return to hard assets amid persistent inflation and rising geopolitical risk.¹ This move is not the result of speculative enthusiasm alone. Instead, it reflects a convergence of structural supply constraints, renewed industrial demand, and a macroeconomic backdrop that increasingly favors scarce real assets.

At the center of platinum’s resurgence is a market that remains structurally undersupplied. The World Platinum Investment Council estimates that global platinum supply will fall short of demand by nearly one million ounces in 2025, extending a deficit that has now persisted for several consecutive years.² With roughly four-fifths of global production concentrated in South Africa, chronic power shortages, labor disruptions, and underinvestment in new capacity have left supply fragile and highly sensitive to disruption.³

At the same time, demand dynamics have quietly shifted in platinum’s favor. Automotive catalysts remain the largest end market, and recent policy and economic developments have slowed the pace of electric-vehicle adoption in key regions. Each incremental reduction in EV penetration translates into incremental demand for platinum group metals, as internal-combustion engines continue to rely on catalytic converters.⁴ Beyond autos, platinum demand is expanding in electronics, chemical processing, and hydrogen-related technologies, while jewelry demand, particularly in China, has rebounded as consumers seek alternatives to elevated gold prices.⁵

Together, these forces have created a market in which inventories are thin, substitution is limited, and marginal supply is increasingly expensive. For miners, that combination can be powerful.

A Valuation Gap Still Intact

Despite its recent price gains, platinum remains historically undervalued relative to gold. On a long-term basis, platinum has typically traded at a premium to gold. Today, it trades at a steep discount, with the platinum-to-gold ratio well below its historical average.⁶ This gap reflects years of investor neglect rather than an absence of fundamental support.

Equities tied to platinum production mirror this disconnect. Many platinum group metal producers continue to trade at single-digit EV-to-EBITDA multiples, discounted net asset values, and depressed enterprise-value-per-ounce metrics. In several cases, balance sheets have improved meaningfully since the last cycle, yet valuations still reflect skepticism shaped by the metal’s long period of underperformance.

Macro conditions add another layer of support. Inflation remains above target in much of the developed world, while fiscal deficits continue to widen. Central banks, constrained by debt dynamics and economic fragility, appear increasingly tolerant of elevated inflation. This environment has historically favored scarce, real assets, and platinum has begun to reassert itself alongside gold and silver as part of that trade.⁷

Established Producers with Leverage to the Cycle

Among large and mid-cap producers, several companies stand out for their scale, balance-sheet strength, and direct exposure to platinum pricing.

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Silver has dramatically outperformed broader markets this year, driven by a convergence of macro catalysts that have revived interest in precious metals. Persistent inflation, declining real yields, and a shift toward tangible safe-haven assets have strengthened the case for silver, which has long benefited from its dual identity as both a monetary and industrial metal.¹² Earlier extremes in the gold-to-silver ratio underscored silver’s relative undervaluation, drawing in investors who recognized the asymmetry. The renewed demand has propelled the sector into a position of strength after years of neglect.

A Macro and Valuation Backdrop Reinforcing the Uptrend

Silver’s volatility is well established. On average, the metal swings at multiples of gold’s daily moves.³ Mining equities amplify that behavior, often dramatically. This year, stronger pricing has translated into sharply higher earnings that compressed sector valuations from previously stretched levels. Across the industry, operating margins expanded as costs stabilized and realized prices rose—reversing the dynamic of prior years when inflation eroded profitability.⁴⁵

Producers have begun reporting record cash flows as this improved environment takes hold. Institutional investors have responded with substantial inflows into silver-focused products, attracted by diversification benefits and the potential for additional upside during policy shifts or inflationary episodes.⁶ Yet, despite improving sentiment, positioning remains far from speculative. Many generalist investors still hold minimal exposure to precious metals, leaving room for continued re-rating as fundamentals strengthen.

The broader setup remains constructive. Industrial use—from solar technology to electronics—continues to expand, providing secular support. Meanwhile, monetary policy uncertainty and geopolitical tension elevate silver’s appeal as a hedge. The miners, shaped by years of capital constraint, now offer leaner cost structures and healthier balance sheets. This combination creates a more stable foundation than in past cycles, enhancing the credibility of the current rally.

Company-Level Opportunities Within SIL

The Global X Silver Miners ETF captures a broad universe of producers and developers, and within that basket several names stand out for contrarian or underappreciated traits. These profiles highlight companies that pair improving fundamentals with differentiated strategic positioning.

Pan American Silver (PAAS)

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The biotech sector has found its footing again after several difficult years. The equal-weighted S&P Biotechnology ETF (XBI) has staged an impressive rebound, helped by a revival in risk appetite, firmer macro conditions, and a noticeable pickup in dealmaking. Investor sentiment toward innovation had been suppressed through much of the rate-hike cycle, but falling yields and clearer policy signals have brought capital back into the space. The shift has helped push biotech ahead of the broader market, ending a long stretch of relative weakness.¹

Several forces are working in biotech’s favor. First, the broader equity market has turned risk-on, lifting higher-beta segments that lagged during the tightening phase. Second, expectations for an acceleration in mergers and acquisitions have been building for months and are now showing up in completed transactions. Large pharmaceutical companies face looming patent expirations and are reaching for externally developed science to replenish pipelines. A notable example came in November, when Abbott agreed to acquire diagnostic firm Exact Sciences in a deal valued at $21 billion, a premium emblematic of renewed competitive urgency.² Third, the return of lower long-term interest rates has eased pressure on companies that rely heavily on external financing. The pullback in Treasury yields—after briefly touching multi-decade highs in 2023—has historically been a catalyst for biotech outperformance.¹

Valuation Reset and a More Supportive Backdrop

Even with the rally, valuations across the sector remain reasonable given how far prices had fallen. The four-year slump left many companies trading at steep discounts, and by mid-2025 industry observers still described biotech valuations as depressed relative to long-term norms.³ This has created a setup in which improving sentiment can translate quickly into performance. Fund flows, after years of steady outflows, have started to turn as investors reconsider long-duration growth exposures. Biotech has tended to benefit meaningfully during easing cycles, particularly among small-cap names, which were hit hardest during the rate-hike period.³⁴

The macro environment is also more navigable. Borrowing costs have stabilized, and fears of sweeping drug-pricing reforms have tempered. The FDA has kept approval activity at a robust pace, helping reduce uncertainty for companies nearing key regulatory milestones. Meanwhile, pent-up demand for acquisitions is beginning to be released. In the third quarter of 2025, biotech deal value nearly doubled from the prior quarter, reflecting the pressure big pharma faces from one of the largest patent-expiration cliffs in recent memory.¹ Estimates suggest hundreds of billions of dollars in annual revenue across major pharmaceutical companies will come under threat by 2030, with more than $1 trillion in balance-sheet capacity available to support dealmaking.¹ The result is a landscape that encourages consolidation and rewards firms with de-risked assets.

Biotech remains volatile by nature, and not all companies will participate equally in a rising tide. Clinical disappointments, regulatory hurdles, and capital needs can still derail individual stories. Even so, the improving macro backdrop, combined with years of operational discipline forced by the downturn, has left many companies fundamentally stronger. Analysts have noted that the sector now features a broad group of firms whose valuations still do not reflect their underlying progress, particularly in areas where recent clinical or commercial milestones have reshaped long-term outlooks.⁴

Notable Opportunities Within XBI

Within XBI, several companies illustrate the type of undervalued or contrarian setups attracting renewed investor interest.

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Retail stocks have spent most of 2025 on their back foot. The equal-weighted SPDR S&P Retail ETF (XRT) is down for the year, badly trailing the S&P 500’s gain.¹ A rotation away from consumer cyclicals has hardened into a broader risk-off stance, and XRT recently broke key technical support on heavy distribution selling — a classic signal that institutions are stepping aside as consumer cracks widen.²

The Valuation Reset

Valuations across the retail landscape have compressed meaningfully. The S&P Retail Select Industry Index now trades near 15× forward earnings, a steep discount to the broader market.³ Schwab’s sector models place consumer discretionary among the weakest corners of the market in 2025, reflecting skepticism about earnings durability.⁴

High interest rates amplify those concerns. Consumer discretionary carries the highest debt-to-equity ratio of any major sector, which makes rising borrowing costs disproportionately painful.⁵ Higher financing expenses squeeze retailers, while household budgets are increasingly strained by elevated credit costs.

Inflation in necessities — food, fuel, and shelter — continues to erode discretionary budgets. Retail analysts noted a wave of negative Q4 pre-announcements as demand softened and shoppers became more price-sensitive.⁶ Many households are prioritizing essentials, driving a wedge between resilient value retailers and struggling apparel or department-store chains. Falling conversion rates and shrinking basket sizes tell the same story.⁶

Consumer confidence fell to multi-year lows heading into the second half of the year, while student-loan payments, rising delinquencies, and higher living costs weighed on household resilience.² Retailers themselves face higher wage bills, elevated inventory-carrying costs, and persistent shrink — all of which limit their ability to pass costs on to consumers.

With so many pressures converging, it is no surprise that many retail stocks trade as if a recession is already underway.

Macy’s: Luxury Strength in a Difficult Backdrop

Despite gloomy sentiment, Macy’s has shown early signs of stabilizing. In Q2, the company posted a 1.9 percent comp-sales increase, led by solid results at Bloomingdale’s and Bluemercury.⁷ Macy’s beat earnings expectations and raised its full-year outlook — a notable contrast with much of the sector.⁷

CEO Tony Spring is reshaping the company with disciplined cost control and targeted investment. Macy’s closed dozens of underperforming stores in 2025 and plans 150 closures by 2026.⁷ At the same time, it is modernizing its digital infrastructure and leaning into its higher-margin luxury categories, which generate merchandise margins north of 45 percent.⁷ With a mid-single-digit forward P/E, strong liquidity, and active buybacks, Macy’s valuation reflects deep skepticism that may prove too harsh.

Kohl’s: A Deep-Value Contrarian Setup

Kohl’s has been among the sector’s biggest casualties. By late summer, shares traded near half of book value — an extreme discount relative to history.⁸ Years of strategic missteps had weighed on confidence, but recent quarters point to emerging traction.

Kohl’s beat sales and earnings estimates for the second consecutive quarter in Q2.⁹ Adjusted EPS nearly doubled expectations, aided by a roughly 4 percent reduction in SG&A.⁹ Management lifted its full-year profit outlook and emphasized tighter merchandising discipline and cost control.⁹

Interim CEO Michael Bender has refocused the retailer on value-conscious shoppers through sharper pricing, stronger private-label brands, and the full rollout of the successful Sephora shop-in-shop partnership.⁹ Leaner inventories and improving traffic in categories such as activewear and back-to-school merchandise add support. While challenges remain — comps are still negative — extremely low expectations and distressed valuation levels position Kohl’s as a compelling mean-reversion candidate if stabilization continues.

Foot Locker: A Reset and a Potential Catalyst

No retailer has undergone a more sweeping overhaul than Foot Locker. The company has closed more than 400 stores since 2020 as part of its “Lace Up” restructuring plan.¹⁰ These moves created near-term pain, including large impairment charges, but early signs of recovery are visible. In Q2, North American comps rose 1.4 percent even as Europe lagged.¹¹

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In early November 2025, markets stumbled after an extraordinary tech rally. Global indexes slipped as investors questioned whether the artificial-intelligence (AI) boom had gone too far. Even the entire “Magnificent Seven” — Nvidia, Amazon, Apple, Microsoft, Tesla, Alphabet, and Meta — fell in a single session, with the Nasdaq down about 2 percent and the S&P 500 off 1 percent amid worries over “elevated valuations.”¹ Palantir plunged nearly 8 percent despite a strong earnings report, and Nvidia gave back a chunk of its gains.² Warnings from JPMorgan’s Jamie Dimon and others that markets were “priced for perfection” suddenly appeared prescient.³

For nearly two years, the AI trade had been relentless. Since the viral debut of ChatGPT in late 2022, investors poured into anything AI-linked. The result was a breathtaking concentration of market wealth — and growing vulnerability when sentiment shifted.

Tech Titans and the AI Gold Rush

The “Magnificent Seven” have defined the post-pandemic bull market. In 2023 alone, they rose 76 percent, versus 24 percent for the broader S&P 500.⁴ By year-end they represented roughly 28 percent of the index’s total capitalization.⁵ Nvidia’s chips became indispensable to AI data centers, while software firms such as Palantir saw their shares soar thousands of percent.⁶ Altogether, the S&P 500 surged about 75 percent from late 2022, largely on AI enthusiasm.⁶ Bulls argued that big spending today would yield massive productivity gains later, noting that eight of the ten largest U.S. companies are AI-driven, together worth nearly $23 trillion — about the size of U.S. GDP.⁷

Yet the rally carried bubble-like hallmarks. The group’s combined market value topped $22 trillion before early-November’s drop erased $1 trillion in days.⁸ At their peak, these firms traded near 58 times free cash flow — about 77 times if adjusting for stock-based pay — levels rarely seen outside speculative manias.⁹ Their annual free cash flow was roughly $385 billion, well below the $568 billion in reported net income.¹⁰ By any historical standard, valuations were stretched.

Cracks in Tech’s Armor

When expectations run that high, even good news can disappoint. Investor Michael Burry, of “The Big Short” fame, took notice: filings showed Scion Asset Management devoted about two-thirds of its portfolio to put options on Palantir and another 14 percent on Nvidia — a $1 billion bet against the AI leaders.¹¹ Within days, markets shuddered. The Nasdaq slid 2 percent, the S&P 500 fell 1 percent, and the Magnificent Seven all declined.¹ Palantir dropped 7 percent, Nvidia 3.7 percent, and Amazon nearly 3 percent.² Even after Palantir raised its outlook, prices fell further — a sign that sentiment, not fundamentals, was driving trades.

The tremors spread abroad. Asian markets posted their sharpest losses in months as bank chiefs from Morgan Stanley and Goldman Sachs echoed JPMorgan’s warnings of a possible correction.³ Reuters reported that fears over “elevated valuations” in AI and tech had triggered the wobble.² It had been nine months since U.S. markets saw anything similar, and the speed of the $1 trillion sell-off reminded investors how quickly momentum can reverse.

Strategists split on the meaning. Some called it a “speed bump, not a wall,”² arguing that profit-taking after a blistering rally was normal. Others warned that multiples above 50× free cash flow left little margin for error — when valuations soar that high, “time itself becomes the biggest risk.”¹²

The Valuation Overhang

Fundamentals ultimately determine returns, and many signals suggest prices have outpaced earnings power. The Cyclically Adjusted Price/Earnings (CAPE) ratio for the S&P 500 now sits near 39.5, matching late-1990s bubble highs.¹³ Since 1957, the CAPE has exceeded 39 for just 22 months in total — all during the dot-com era.¹³ Following such extremes, the index’s average three-year return has been around –30 percent.¹⁴ While history isn’t destiny, it offers a clear caution.

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The U.S. Utilities sector has outperformed the broader market for most of 2025. As of early November, the Utilities Select Sector ETF (XLU) is up roughly 20% in total return versus 17% for the S&P 500 (SPY)—an apparent lead that masks a volatile year.

Despite their reputation as stable, dividend-rich assets, utilities have been overshadowed by high-growth technology names. The sector’s total market capitalization, roughly in the low trillions, is small compared with megacap tech—reinforcing its “under-the-radar” status. Meanwhile, persistent macro headwinds—elevated rates, sticky inflation, and regulatory uncertainty—have weighed heavily.

Why Utilities Aren’t Up More Despite AI Optimism

While the power boom coming from AI is a powerful tailwind, there are still other factors that weight on performance.

High Interest Rates. Utilities are capital-intensive, and financing remains costly with 10-year Treasury yields above 4%³. Even modest Fed cuts have done little to reduce long-term borrowing costs.

Policy Ambiguity. The current administration has not clarified whether the 2022 Inflation Reduction Act’s energy tax credits will be renewed or modified⁴. Uncertainty over carbon pricing and permitting rules further clouds the outlook.

Muted Power Demand. Electricity usage outside of data centers and EV charging remains tepid. While AI workloads are surging in select regions, overall consumption is growing slowly.

Exploding Capex. Utilities are pouring capital into grid upgrades and new generation projects. Construction timelines now stretch three to seven years, and plant costs have tripled to about $2,400 per kilowatt⁵. Free cash flow has tightened even as balance sheets stay levered.

Investor Rotation. With volatility low and growth stocks in favor, defensive sectors have seen outflows. As one analyst put it, the recent drop in utilities “implies investors are comfortable shifting into cyclical and growth stocks”⁶.

Valuations Near Historical Lows

This persistent underperformance has left utilities cheap by most metrics. The sector trades around 19–20× forward earnings⁷⁸, below the S&P 500’s 21–22× multiple and near the lower end of its decade-long range. EV/EBITDA ratios hover near 13×⁹—discounted relative to the broader market—and XLU’s price-to-book is just 0.94×⁸, implying assets valued below replacement cost.

In essence, investors are paying low multiples for stable, regulated cash flows. Historically, such valuation gaps have coincided with forward outperformance once sentiment normalizes.

Catalysts for a Reversal

Several potential shifts could bring utilities back into focus as a major potential top performer.

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