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The Quiet Unwind: EEM/XLK/Financials Reclaim Leadership, Defensive Extreme Fades, Fed Watch Looms

Below is an assessment of the performance of some of the most important sectors and asset classes relative to each other.

See this week’s Weekly Signals for the full 4-signal framework reading. Does the sector rotation below confirm or contradict this signal?

WEEKLY SNAPSHOT — Week Ended July 6, 2026

“Every ratio that printed an Extreme |Z|>2.0 signal a week ago reversed direction this week — and not one of them reached even Notable significance on the way back. That is either the cleanest mean-reversion unwind this framework has logged, or the calm before the next leg.”

24-ASSET MASTER SUMMARY TABLE

Sorted by status — strong leaders first, weak laggards last (never alphabetical). “Weak MA” denotes a ratio trading below both its 20-week and 52-week moving averages.

LEADERS: Emerging Markets and Tech Reclaim the Top, Financials Confirm, Industrials Barely Hang On

Emerging Markets (EEM) – Deteriorating RRG — Aging Leader

EEM/SPY: -1.46% one-month, 1.17% three-month, 9.24% six-month, 17.2% one-year (Signal strength: +0.77σ — Weak)

EEM/SPY posted the largest single-ratio move of the week at +1.96%, reclaiming the top of the leaderboard after last week’s -1.61σ divergence warning failed to extend into a deeper unwind. The move is tactical, not yet structural — the ratio remains in a Deteriorating RRG quadrant, meaning the 4-week rate of change is still decelerating even as the 1-week print jumped. A weaker dollar into month-end appears to be the proximate driver. Whether this is noise or signal depends on whether EM can hold this bid through a second consecutive week; one strong print inside a decelerating quadrant is not yet a trend change.

Technology (XLK) – Deteriorating RRG — Aging Leader

XLK/SPY: -2.06% one-month, 16.25% three-month, 15.71% six-month, 18.43% one-year (Signal strength: +0.24σ — Background)

Technology’s +1.65% weekly bounce is the mirror image of last week’s -2.01σ reversal call that specifically failed to materialize — the sector deepened its losses into Run #21, and this week’s bounce only partially claws that back. The RRG quadrant remains Deteriorating, and the 1-month horizon is still negative at -2.06%, so this reads as a relief bounce inside a structurally strong 3-month/1-year uptrend (+16.25% and +18.43% respectively) rather than a fresh leadership signal. Tactical bounce, structural trend intact.

Credit vs. Treasuries (JNK/GOVT) – Strengthening RRG

JNK/GOVT: 0.19% one-month, 1.24% three-month, 1.33% six-month, 2.6% one-year (Signal strength: +0.24σ — Background)

Credit spreads narrowed modestly this week (JNK/GOVT +0.17%), the second consecutive week of narrowing after last week’s -1.53σ widening call flagged a divergence risk that did not extend. This is the credit-side confirmation the equity leadership board needs to sustain — see the Credit Confirmation panel below for the full read.

Financials (XLF) – Weakening RRG — Aging Leader

XLF/SPY: 4.01% one-month, 0.1% three-month, -6.63% six-month, -10.27% one-year (Signal strength: +0.16σ — Background)

Financials extended a 3-week rising streak, now the longest active streak on the board, even as the RRG quadrant reads Weakening — the ratio is still rising but decelerating. Growth-vs-value axis: XLF’s quiet strength alongside XLK’s bounce suggests this week’s rotation is broad rather than concentrated in a single style factor.

European Banks vs. US Banks (EUFN/XLF) – Strengthening RRG

EUFN/XLF: 1.68% one-month, 0.67% three-month, 10.8% six-month, 21.79% one-year (Signal strength: +0.12σ — Background)

European banks continue to outpace their US counterparts on a 1-year view (+21.79%), and this week’s +0.66% move keeps that structural trend intact on a 2-week rising streak. Global vs. domestic axis: European financials remain one of the cleanest multi-month leadership signals in the entire universe, largely undisturbed by the domestic defensive-to-cyclical whipsaw of the last two weeks.

Gold (GLD) – Recovering RRG

GLD/SPY: -2.65% one-month, -21.14% three-month, -15.27% six-month, 1.48% one-year (Signal strength: +0.04σ — Background)

Gold’s relative ratio ticked up +0.18% this week, but the signal is essentially noise (+0.04σ) and sits inside a still-negative 3-month (-21.14%) and 6-month (-15.27%) trend. Last week’s “trend is the trade” call on gold’s falling streak holds — one quiet week inside a 9-plus week decline is not a reversal.

Industrials (XLI) – Strengthening RRG — marginal

XLI/SPY: 3.98% one-month, -2.17% three-month, 5.86% six-month, 2.73% one-year (Signal strength: -0.03σ — Background)

Industrials barely qualify as a leader this week — the Z-score is effectively flat (-0.03σ) and the ratio is up only 0.02% on the week. It earns its spot on the strength of a Strengthening RRG read and a positive 1-month (+3.98%) and 6-month (+5.86%) trend, but this is the weakest leader on the board and worth watching for a possible flip next week.

LAGGARDS: Defensive Extreme Unwinds Across the Board, Utilities Lead the Fade, Small Caps Quietly Slip

Healthcare (XLV) – Weakening RRG — 2-week falling streak

XLV/SPY: 4.15% one-month, -0.38% three-month, -4.58% six-month, 0.07% one-year (Signal strength: -0.74σ — Weak)

Healthcare is the week’s biggest laggard by weekly move (-1.94%) and the most dramatic single reversal on the board — this is the same ratio that printed a +4.63σ Extreme leadership signal just one week ago in Run #21. The entire move has round-tripped from Extreme leader to Weak laggard in seven trading days, the cleanest evidence yet that last week’s defensive spike was a shock, not a structural rotation. Whether this is noise or signal depends entirely on next week’s print: a second consecutive negative Z-score would confirm the unwind as real; a snap-back toward positive would suggest last week’s spike still has legs.

Consumer Staples (XLP) – Deteriorating RRG — 2-week falling streak

XLP/SPY: -2.83% one-month, -7.26% three-month, -1.25% six-month, -12.19% one-year (Signal strength: -0.71σ — Weak)

Staples fell -1.90% this week, reversing sharply from last week’s +2.27σ Extreme defensive signal. The 4-week rate of change flipped from +1.04% to -2.83%, a full deceleration reversal that puts the ratio in a Deteriorating quadrant for the first time in several weeks. Seasonal context: XLP is entering its historically weak May–October window, which is broadly consistent with this fade.

Real Estate (XLRE) – Deteriorating RRG — 2-week falling streak

XLRE/SPY: -3.0% one-month, -5.88% three-month, 2.06% six-month, -9.51% one-year (Signal strength: -0.71σ — Weak)

Real estate’s -1.73% weekly move continues the unwind of last week’s +3.38σ Extreme print, one of the largest positive signals on the board just seven days ago. The 4-week ROC swing from +4.56% to -3.0% is one of the sharpest deceleration reversals in this week’s data, reinforcing the “one-week shock” interpretation of Run #21’s defensive cluster.

Utilities (XLU) – Weakening RRG — 2-week falling streak

XLU/SPY: 0.82% one-month, -12.43% three-month, -0.76% six-month, -7.27% one-year (Signal strength: -0.62σ — Weak)

Utilities — the Core Framework Check ratio — fell -1.86% this week, the second consecutive weekly decline after peaking at +2.42σ in Run #21. Critically, the underlying 4-week ROC that drives the Framework signal is still positive (+0.82%, decelerating from +1.15%), meaning the Risk-Off framework reading has NOT flipped despite the sharp weekly-level fade. This is the tension at the heart of this week’s report: the framework says Risk-Off, the tape says something closer to Risk-On.

Small Caps / Russell 2000 (IWM) – Weakening RRG — 2-week falling streak

IWM/SPY: 0.72% one-month, 3.43% three-month, 5.99% six-month, 11.84% one-year (Signal strength: -0.42σ — Background)

Small caps slipped -0.42% on the week and fall to laggard status for the first time in several editions, but the signal is background noise (-0.42σ) inside a still-strong 1-year uptrend (+11.84%). This looks more like digestion after a multi-week run than a genuine leadership change.

Materials (XLB) – Deteriorating RRG — 2-week falling streak

XLB/SPY: -1.53% one-month, -9.42% three-month, -0.21% six-month, -5.04% one-year (Signal strength: -0.36σ — Background)

Materials continued lower (-0.92% weekly), extending a 2-week falling streak and now trading below both its 20-week and 52-week moving averages. Cyclical-vs-defensive axis: materials’ weakness alongside industrials’ marginal leadership is a mixed cyclical signal this week, not a clean read in either direction.

Investment Grade Bonds (LQD) – Deteriorating RRG — 2-week falling streak

LQD/SPY: -1.48% one-month, -9.56% three-month, -8.04% six-month, -13.99% one-year (Signal strength: -0.36σ — Background)

Investment-grade credit fell -0.84% this week, unwinding part of last week’s +2.12σ Extreme defensive signal. Combined with JNK/GOVT’s narrowing, the overall credit complex is sending a mixed message: high-yield is confirming the risk-on equity move while investment-grade duration is still fading.

Long-Duration Treasuries (TLT) – Deteriorating RRG — 2-week falling streak

TLT/SPY: -1.53% one-month, -10.22% three-month, -9.03% six-month, -14.84% one-year (Signal strength: -0.33σ — Background)

Long bonds fell -0.94% this week, extending a 2-week losing streak and remaining well below both moving averages. Inflationary-vs-deflationary axis: TLT’s persistent weakness alongside a still-elevated FOMC hike probability (see Three Things below) suggests duration risk remains a live concern heading into the July 29 decision.

Energy (XLE) – Deteriorating RRG — 2-week falling streak

XLE/SPY: -8.43% one-month, -15.22% three-month, 6.06% six-month, 0.93% one-year (Signal strength: -0.29σ — Background)

Energy remains the weakest sector on a 1-month (-8.43%) and 3-month (-15.22%) basis, though this week’s -1.03% move is background noise on the weekly Z-score. Both energy and utilities lagging together is a slightly unusual combination — typically an inflationary-vs-deflationary tell worth watching if it persists.

Communication Services (XLC) – Recovering RRG

XLC/SPY: -2.54% one-month, -12.53% three-month, -13.61% six-month, -13.58% one-year (Signal strength: -0.03σ — Background)

Communication services fell -0.31% this week — essentially flat on a Z-score basis — but the RRG quadrant has improved to Recovering as the 4-week ROC decelerated its decline (-4.15% to -2.54%). This is the earliest-stage signal on the board and not yet actionable, but worth tracking for a potential flip to leader.

Consumer Discretionary (XLY) – Recovering RRG

XLY/SPY: -0.13% one-month, -5.51% three-month, -12.48% six-month, -11.81% one-year (Signal strength: +0.09σ — Background)

Consumer discretionary’s Z-score is technically positive (+0.09σ) but the ratio fell -0.11% on the week and remains below both moving averages, so it lands in the laggard camp on trend despite the marginally positive signal strength — a genuine edge case this week.

Lumber/Gold Macro Scenario

Lumber/Gold is currently in the “Both Falling” configuration (Lumber 4-week ROC -0.24%, Gold 4-week ROC -1.14%). Historically this favors watching JNK/GOVT for credit stress confirmation over favoring either cyclical or defensive sectors outright. The sector ratios above partially confirm this reading: credit (JNK/GOVT) is narrowing rather than stressing, which argues against the deflationary-pressure interpretation carrying much weight this week — a genuine cross-asset tension rather than a clean confirmation.

PREVIOUSLY ON LEADERS-LAGGARDS

Run #20 (June 23): “Streak Broken” edition — EEM, IWM, XLK, XLI, EUFN, TLT, XLF, and XLB led; XLE, XLV, XLC, XLRE, GLD, XLU, XLY, and XLP lagged. Extreme signals: EEM/SPY +1.81σ, XLE/SPY -1.95σ. Outcome: The XLC/SPY reversal call (7th week of underperformance, expecting a 3-5% bounce within 2 weeks) was partially correct — XLC did bounce, but only +0.32%, far short of the 3-5% target. Direction right, magnitude wrong.

Run #21 (June 30): “Defensive Sweep” edition — the most violent single-week reversal in the framework’s recent history. XLV, XLRE, IWM, XLU, XLP, LQD, XLF, XLI, TLT, and XLB led; XLK, EEM, GLD, XLC, XLY, EUFN, XLE, and JNK/GOVT lagged. Seven ratios printed Extreme |Z|>2.0 signals in a single week (XLV/SPY +4.63σ the largest). Outcome: two of three scored forward calls from this run were incorrect — the XLK/SPY reversal call missed (tech deepened -4.23% instead of bouncing) and the JNK/GOVT acceleration call missed (credit strengthened instead of widening further). The Quarterly Scorecard fired this morning and confirmed only 20% of evaluable Run #20-21 calls were fully correct.

Run #22 (this issue, July 7): Nearly the entire Run #21 Extreme cluster reversed direction this week, with none of the seven ratios reaching even Notable significance on the way back — the cleanest single-week unwind logged in this framework’s history to date.

WHAT WOULD CHANGE MY VIEW

This week’s dominant thesis — that Run #21’s defensive extreme was a one-week shock now unwinding — would be confirmed by a second consecutive week of tech/EM/financials leadership with Z-scores building toward Notable (|Z|>1.0). It would be broken by defensive sectors (XLV, XLU, XLP, XLRE) reasserting positive Z-scores next week, which would mean this week’s mean-reversion was itself the noise, not the signal. On the framework side, a move in XLU/SPY 4-week ROC below 0% would flip the Core Framework Check to Risk-On for the first time in three weeks — a meaningful confirmation the rotation beneath the surface is now catching up to the sector-level tape. And on credit: JNK/GOVT reversing back to widening while cyclicals keep leading would be a warning sign, not a footnote — that divergence pattern has preceded prior defensive snapbacks in this framework’s short history.

THE WEEK IN CONTEXT

The dominant regime signal this week is an unwind, not a new trend: the framework’s Core Check still reads Risk-Off (its second straight week), even as tech, EM, and financials quietly reclaimed sector leadership and the prior week’s violent defensive extreme fully round-tripped without a single ratio reaching Notable significance in either direction. The macro driver is a market pausing to digest a one-week shock rather than confirming a new cyclical impulse, with the July 29 FOMC decision — where CME FedWatch was pricing roughly a 30% chance of a hike as of July 1, up sharply from just 6% a month earlier — standing as the next real catalyst that could either validate this week’s quiet reversal or reignite the defensive rotation outright. Watch JNK/GOVT and XLU/SPY 4-week ROC most closely over the next two weeks; both are the tightest, most falsifiable signals this framework has in play right now.

DISCLAIMER

The Lead-Lag Report is provided by Lead-Lag Publishing, LLC. All opinions and views mentioned in this report constitute our judgments as of the date of writing and are subject to change at any time. Information within this report is for informational purposes only and should not be considered as investment advice. This is not a solicitation to buy or sell securities.

The price ratio charts shown in this report illustrate relative performance between assets and are intended for educational purposes. A rising price ratio means the numerator is outperforming the denominator; a falling ratio means the opposite. Past relative performance is not indicative of future results. All investments involve risk, including the possible loss of principal.

© 2026 Lead-Lag Publishing, LLC

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Warsh’s First Strike: Hawkish Hold Sends EEM and Russell To Extremes, Energy Goes From Hero To Worst Performer

Below is an assessment of the performance of some of the most important sectors and asset classes relative to each other.

LEADERS: EMERGING MARKETS GO EXTREME, SMALL CAPS HOLD THE LINE, TECH STARTS TO TIRE

Emerging Markets (EEM) – New Extreme Leadership, Strengthening

EEM/SPY: +7.58% one-month, +10.79% three-month, +20.09% six-month, +22.62% one-year (Signal strength: +1.81σ — Significant). A rising price ratio means the numerator is outperforming the denominator. EEM/SPY just printed a +1.81 standard deviation move on the week, the strongest reading in the entire 24-asset universe. Three things are driving this in concert: the Iran peace deal removing a major dollar-strengthening tail risk, the Strait of Hormuz reopening reducing emerging-market import costs across Asia, and the Warsh-driven hawkish pivot pricing in a higher-for-longer Fed that paradoxically helps EM by stabilizing dollar expectations rather than letting them spiral. The 22.62% trailing one-year ratio gain confirms this is structural, not tactical. (Seasonal context: EM has no strong seasonal bias, which makes this leadership independent of calendar effects and adds weight to the macro interpretation.)

Russell 2000 (IWM) – Confirmed Leader, Strengthening

IWM/SPY: +3.50% one-month, +5.97% three-month, +7.30% six-month, +12.36% one-year (Signal strength: −0.02σ — Background, but RRG quadrant is Strengthening). Small caps closed +2.03% on the week and the Russell 2000 index touched 2,917.98 — within striking distance of new highs. The Z-score on the week is near zero, but the RRG quadrant analysis matters more here: the ratio is rising and the 4-week rate of change is accelerating, which is the textbook Strengthening signature. Small caps are the highest-beta domestic risk asset in the universe, and they typically lead when the market believes in continued earnings growth without an accompanying credit shock. The risk: if JNK/GOVT continues to soften, small-cap leadership will not survive — historically, the Russell turns over within 2-4 weeks of a sustained credit divergence.

Technology (XLK) – Structural Leadership, Entering Weakening Phase

XLK/SPY: +5.70% one-month, +22.74% three-month, +20.36% six-month, +26.00% one-year (Signal strength: +1.31σ — Notable). This is the entry that subscribers should read most carefully. Tech is still leading — the trailing one-year ratio gain of +26% confirms structural leadership — but the RRG quadrant has shifted from Strengthening to Weakening for the first time in eight weeks. Translation: the ratio is still rising, but the rate of change is decelerating. This is the forward-looking exit signal that pure ratio direction can miss. The reading is consistent with what equity options markets are saying about Mag 7 implied volatility: the move is getting more two-sided. (Seasonal context: XLK typically weakens May–September. This decelerating leadership in late June is seasonally consistent — but with sufficient structural strength to remain in the leader bucket for now.)

Industrials (XLI) – Recovering, Lumber-Gold Confirming

XLI/SPY: +4.90% one-month, −2.79% three-month, +5.89% six-month, +1.37% one-year (Signal strength: +1.20σ — Notable). The three-month ratio is still negative but the one-month +4.90% and Z-score of +1.20σ tell us the regime is changing. Industrials are the canonical cyclical sector that benefits when growth expectations rise without inflation expectations breaking down. The Lumber/Gold scenario discussed below — Lumber up, Gold down — is the macro narrative that puts XLI back in the leader column even before the ratio crosses its 20-week moving average.

European Financials (EUFN/XLF) – Continued Global Banking Premium

EUFN/XLF: +0.50% one-month, +8.89% three-month, +9.15% six-month, +22.10% one-year (Signal strength: +0.46σ — Weak, but trend persists). The European banking premium over US banks has held a +22.1% advantage over one year and is now decelerating on the week. The EUFN/XLF ratio is the cleanest read on relative banking-system credit conditions, and its persistent strength tells us European balance sheets are perceived to be cleaner than US balance sheets — a counter-intuitive signal that nonetheless aligns with what the regional bank stress in the US has been telegraphing for two years.

Long Treasuries (TLT) – Lagging Long-Term, But Recovering Recently

TLT/SPY: +2.43% one-month, −11.42% three-month, −8.47% six-month, −17.45% one-year (Signal strength: +0.30σ — Background noise). Including TLT in the leaders section may surprise readers. The structural picture remains brutal — TLT is down 17.45% relative to SPY over the past year — but the four-week ratio change is positive, and the 10-year yield softened from 4.55% to 4.49% on the Iran deal. The RRG quadrant is Recovering, which is the entry signal subscribers should watch in the weeks ahead. This is not a buy call. It is an observation that bond duration has stopped bleeding for the moment.

Lumber / Gold Ratio – Pro-Growth Signal, Now Cyclical-Favoring

Lumber futures: $633 vs Gold at $387 — Lumber/Gold 4W ROC: Lumber +8.11%, Gold −6.45%. The Lumber/Gold ratio is in the Lumber↑ Gold↓ configuration. Historically this scenario signals credit expansion and a healthy housing market, and it favors cyclical sectors (XLI, XLF, XLB, XLY) over defensives (XLU, XLP, GLD/TLT). The sector ratios in this issue partially confirm the Lumber/Gold reading. Industrials (XLI), Materials (XLB), and Financials (XLF) are all in Recovering or Notable positions consistent with the signal. However, Consumer Discretionary (XLY) — which should be leading in this configuration — is in week 1 of recovery from a deeply negative one-year ratio, not yet confirming.

Financials (XLF) – Recovering on Rate Hike Repricing

XLF/SPY: +2.72% one-month, −4.96% three-month, −10.67% six-month, −14.98% one-year (Signal strength: −0.13σ — Background). Banks reversed higher on the week as the Warsh dot plot pulled hike expectations forward — futures markets now price ~70% odds of at least one hike in 2026 — and a steeper-for-longer rate environment improves net interest margins. The one-year ratio is still deeply negative at −14.98%, so XLF leadership remains tactical, not structural.

Materials (XLB) – Quiet Recovery on the Lumber Signal

XLB/SPY: +2.61% one-month, −4.04% three-month, +4.53% six-month, −3.77% one-year (Signal strength: −0.68σ — Weak). Materials follow the Lumber/Gold thesis without being explicitly tagged that way. The +2.61% four-week ratio gain in a week when oil collapsed and gold faded confirms the macro picture: it’s a growth signal, not an inflation signal.

LAGGARDS: ENERGY COLLAPSES, HEALTHCARE BREAKS, COMMUNICATIONS EXTENDS A 7-WEEK STREAK

Energy (XLE) – Statistically Significant Laggard, Deteriorating

XLE/SPY: −9.98% one-month, −20.95% three-month, +12.13% six-month, −1.82% one-year (Signal strength: −1.95σ — Significant). The biggest story of the week. The US-Iran peace deal announced Sunday June 14 and confirmed Monday June 15 sent Brent crude to a three-month low at $83.04 and WTI to $80.53 on Monday alone, with WTI extending to $76.60 by Thursday — a one-week move of −12.67%. The XLE/SPY Z-score of −1.95σ is the most statistically significant ratio reading in the entire universe and represents the second consecutive week of energy deterioration after the prior week’s flip from leader to laggard. (Seasonal context: XLE is in its seasonally strong April–August window — leadership here would have been seasonally consistent. The current laggard position contradicts the seasonal pattern, which adds weight to the geopolitical interpretation: the Iran deal is the dominant signal, overriding seasonal demand strength.) The six-month ratio is still positive at +12.13%, so structural energy leadership is not yet broken — but two consecutive weeks of statistically significant deterioration is the warning signal.

Healthcare (XLV) – Significant Laggard, Deteriorating

XLV/SPY: −0.73% one-month, −10.58% three-month, −11.85% six-month, −9.73% one-year (Signal strength: −1.63σ — Significant). Healthcare lost another −3.04% on the week and the ratio Z-score of −1.63σ is the second-most-significant laggard reading. The RRG quadrant is Deteriorating — falling and accelerating to the downside. The macro story is policy: the new administration’s drug pricing pressure plus uncertainty around Medicare reimbursement formulas has pushed pharma multiples to 10-year lows on a relative basis. (Seasonal context: XLV is typically strong in January and July–September. The current laggard position is seasonally inconsistent — which suggests fundamentals are overriding seasonality, not the other way around.)

Communication Services (XLC) – Notable Laggard, Deteriorating, 7-Week Streak

XLC/SPY: −4.82% one-month, −14.56% three-month, −13.60% six-month, −14.50% one-year (Signal strength: −1.29σ — Notable). This marks the 7th consecutive week of XLC weekly underperformance. Historically, when sector ratios extend their losing streaks to 8+ weeks, mean reversion bounces of 3-5% within two weeks are common, but the underlying trend continues. The combination of Mag 7 concentration in Meta and Alphabet, plus a sector-specific narrative around AI cap-ex returns, is keeping this group on the wrong side of the rotation.

Real Estate (XLRE) – Notable Laggard, Recovering Slightly

XLRE/SPY: −0.70% one-month, −4.54% three-month, +1.64% six-month, −13.50% one-year (Signal strength: −1.40σ — Notable). REITs are caught between two crosswinds: higher-for-longer rates per Warsh’s hawkish dot plot pressures cap rates, but the Lumber/Gold healthy housing signal supports the underlying real estate economy. The result is mixed: the four-week ratio is barely negative at −0.70%, but the Z-score of −1.40σ tells us the magnitude of this week’s decline was unusual relative to the 52-week distribution.

Gold (GLD) – Defensive Asset Bleeding, Six-Week Streak

GLD/SPY: −6.83% one-month, −18.87% three-month, −12.04% six-month, −1.75% one-year (Signal strength: −0.26σ — Background). Gold relative to SPY is in week 6 of underperformance — the longest streak in the laggards section. The Iran peace deal removed the geopolitical safe-haven bid, and the Warsh hawkish pivot raised the opportunity cost of holding a non-yielding asset. The one-month ratio of −6.83% is the steepest in the universe outside of energy.

Utilities (XLU) – Slight Lag, Recovering — But Pro-Cyclical Signal

XLU/SPY: −1.70% one-month, −12.55% three-month, −3.43% six-month, −10.29% one-year (Signal strength: −0.09σ — Background). Utilities are the framework’s primary Risk-On signal, and the −1.70% four-week ratio change confirms this is a Risk-On environment. (Seasonal context: XLU is in its seasonally strong May–September window — the current weakness here is therefore seasonally contradicted, which adds weight to the cyclical interpretation. When utilities lag during their strongest season, it’s a robust signal.)

Consumer Discretionary (XLY) – Quiet Laggard, Recovering

XLY/SPY: −2.48% one-month, −5.98% three-month, −12.83% six-month, −12.12% one-year (Signal strength: −0.46σ — Background). Discretionary should be leading if the cyclical thesis is correct. It isn’t. The four-week ratio is negative, the one-year ratio is deeply negative at −12.12%, and the RRG quadrant is Recovering rather than Strengthening. This is the contradiction within the cyclical narrative: industrials and materials are confirming, but the consumer-facing cyclical is not. Whether this is a leading indicator of a consumer slowdown or a lagging artifact of high goods inventories is the macro question worth watching into next week’s PCE print.

Consumer Staples (XLP) – Weak Laggard, Recovering

XLP/SPY: −0.70% one-month, −9.39% three-month, −1.37% six-month, −15.59% one-year (Signal strength: −0.94σ — Weak). The traditional defensive sector trading as expected in a risk-on environment. Nothing structural to report — the −15.59% one-year ratio gain is consistent with the regime.

PREVIOUSLY ON LEADERS-LAGGARDS

Last week the framework called the XLE flip from leader back to laggard on the Iran peace deal, and the call was directionally correct and increasing in conviction this week. The XLE/SPY ratio has now extended its decline to a statistically significant −1.95σ reading, confirming the flip was not a one-week event. Last week also called the EEM leadership move at +4.50%; this week EEM extended to a +1.81σ ratio Z-score and is now the strongest signal in the universe. Two correct calls on the two largest moves of the prior week. What the framework missed last week: the magnitude of the Warsh hawkish surprise. We flagged June 17 as a binary catalyst but underweighted the probability of a 50bp+ shift in the dot plot — that’s a calibration error worth noting publicly.

WHAT WOULD CHANGE MY VIEW

If JNK/GOVT 4-week ROC reverses to positive next week while equity risk-on persists, I would expect the current sector leadership configuration to extend, which would suggest the credit divergence was a one-week noise event and the broader Lumber/Gold cyclical signal is fully in force.

If JNK/GOVT 4-week ROC stays negative or deepens next week, I would expect EEM and IWM leadership to peak within 2-4 weeks and would flag the entire risk-on rotation as a candidate for reversal. Historically when credit and equity disagree at extremes, credit has been right approximately 73% of the time in samples since 1997.

If WTI crude reverses above $90 on a breakdown in the Iran peace deal, I would expect XLE to flip back to leader within one week and would re-classify the current configuration as a fake-out rotation.

If the Russell 2000 fails to hold above 2,850 on next week’s PCE print, I would interpret that as the small-cap leadership move running out of buyers, and the regime that this issue describes would be falsified.

THE WEEK IN CONTEXT

Taking the full picture together: this is the first week in eight where the standard tech leading, defensives lagging story has a meaningful crack in it — Tech is still leading but decelerating, while EM has taken over as the strongest signal in the universe. The macro driver is the combination of the Iran peace deal removing a major risk premium and Kevin Warsh’s first FOMC meeting eliminating any 2026 rate cut hope. What I’m watching next week: whether the JNK/GOVT credit divergence reverses or deepens. That single data point will determine whether the current configuration extends or breaks within four weeks.

“Two extreme Z-score signals in one week — EEM at +1.81σ leadership and XLE at −1.95σ deterioration — while credit quietly diverges. Either the credit signal is wrong, or the equity rotation is borrowed time.”

DATA SOURCES

Yahoo Finance via yfinance (price data through Jun 18 2026, Juneteenth holiday Jun 19). Federal Reserve FOMC Statement Jun 17 2026. US-Iran Joint Announcement Jun 14-15 2026. Bloomberg, WSJ, Reuters. Charts: own calculations from yfinance adjusted close, 3-year window.

DISCLAIMER

The Lead-Lag Report is provided by Lead-Lag Publishing, LLC. All opinions and views mentioned in this report constitute our judgments as of the date of writing and are subject to change at any time. Information within this report is for informational purposes only and should not be considered as investment advice. This is not a solicitation to buy or sell securities. The price ratio charts shown in this report illustrate relative performance between assets and are intended for educational purposes. A rising price ratio means the numerator is outperforming the denominator; a falling ratio means the opposite. Past relative performance is not indicative of future results. All investments involve risk, including the possible loss of principal. © 2026 Lead-Lag Publishing, LLC. There Are No Gurus, Only Cycles.

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Streak Broken: Hot Jobs Print Kills Tech, Iran Strikes Revive Energy, AI Rotation Begins

Below is an assessment of the performance of some of the most important sectors and asset classes relative to each other with an interpretation of what underlying market dynamics may be signaling about the future direction of risk-taking by investors. The below charts are all price ratios which show the underlying trend of the numerator relative to the denominator. A rising price ratio means the numerator is outperforming (up more/down less) the denominator. A falling price ratio means underperformance.

LEADERS: ENERGY ROARS BACK, TECH HOLDS THE TREND DESPITE PULLBACK

Technology (XLK) – Bruised But Still Structurally Leader

Tech took its first real hit in months but the structural trend remains intact. XLK/SPY is +5.51% one-month and +19.59% three-month — still by far the strongest sector ratio in the report. The week was ugly: XLK closed Friday June 5 at $180.30, down 5.61% on the week, the worst single-sector decline since April. Broadcom (AVGO) was the proximate trigger — the chip giant beat top and bottom line but Hock Tan refused to raise the 2026 AI semiconductor revenue target from $100 billion, and the stock cratered 13.66%. The Philadelphia Semiconductor Index fell 4.71% on the week after being up over 8% Monday-Wednesday. This is a positioning unwind, not a thesis break: the +19.59% three-month lead means tech is still the cleanest leader, and the AI capex narrative is intact. Watch for buy-the-dip flows in chips this week if 10-year yields stabilize.

Energy (XLE) – Flipped Back To Leader On Iran/Israel Strike Resumption

Energy was the only S&P sector positive on the week, gaining 2.49% per First Trust’s weekly tape. XLE/SPY is now +0.67% one-month after the dramatic regime flip — last week’s report had XLE classified as a laggard at -10.3% one-month, and a single week of Iran-Israel exchange activity has reversed the entire setup. XLE closed Friday June 5 at $57.67, up 2.45% on the week. Brent surged 4.2% to $104.50/bbl intraweek on fears of a prolonged Hormuz blockade, then settled around $94 by Friday and $94.63 Monday June 8 as Iran announced a halt to strikes pending Israeli response in Lebanon. WTI sits near $91.30. Marathon Petroleum led the sector +5.32%. The setup: as long as Hormuz risk premium stays elevated and the Iran-Israel exchange continues episodic flare-ups, energy holds leadership. The flip from laggard to leader in one week is the cleanest regime change in this report, mirroring the inverse pattern from last week.

Russell 2000 / Small Caps (IWM) – Hanging On Despite The Selloff

IWM closed Friday June 5 at $284.11, down 2.91% on the week, but the IWM/SPY ratio held up better than the absolute decline suggests. The ratio is -2.29% one-month and -0.14% three-month — essentially flat against the S&P after the tech-led selloff. Small caps have been the underrated trade: when growth leaders correct, breadth-driven small caps usually outperform on a relative basis because they have less weight in the AI complex unwinding. The Fed-rate hawkish reset (Goldman now sees no cuts until 2027) hurt absolute small cap pricing via the floating-rate debt channel, but relative-to-SPY the math still works on a rotation basis. Until the broader market either confirms a deeper correction OR mounts a recovery led by something other than mega-cap tech, small caps stay in the leader column.

European Banks vs U.S. Banks (EUFN/XLF) – Structural Lead Holds Even As Momentum Slows

EUFN/XLF: -3.79% one-month, +1.92% three-month. The transatlantic spread compressed sharply this week as U.S. banks actually outperformed European banks on the relative tape (XLF +1.40% WoW vs EUFN -3.01% WoW). EUFN closed Friday June 5 at $37.49, down 3.01% on the week, while XLF was +1.40% on the energy bid (banks are correlated with energy through loan book exposure to oil & gas). The three-month +1.92% lead remains intact, however, and the structural thesis is unchanged: the ECB is past its easing cycle while the Fed faces hike risk — putting U.S. banks in the curve-flat trap that European banks escaped earlier. UniCredit, Deutsche Bank, BNP all continue to print strong margin expansion. The one-month dip is noise within a multi-month trend; we keep this in the leader column but watch for the three-month to flip negative before re-classifying.

High-Yield Credit vs Treasuries (JNK/GOVT) – Credit Spreads Refuse To Blow Out

JNK/GOVT: +0.36% one-month, +2.04% three-month. JNK closed Friday June 5 at $95.73 while GOVT closed at $22.61. Even as the S&P fell 2.55% and tech got hit 4.65%, high-yield credit spreads held remarkably firm — a defensive signal that markets aren’t yet pricing recession or default spike. The HY OAS remains in tight quartile territory. The strong May jobs print (+172K vs +80K expected) reinforces the no-recession message. The risk to this trade: if economic data DOES crack going forward (next CPI June 10, next jobs report early July), default math suddenly matters and this ratio reverses fast. For now, carry continues to win against bleeding principal in duration. We keep this in the leader column.

Lumber / Gold – Pro-Growth Signal Accelerates Hard

Lumber/Gold went vertical this week. The ratio is +14.41% one-month and +29.85% three-month — the cleanest accelerating leader trend in the entire report. Lumber futures (LBR=F) closed Friday June 5 at $612.00, up 3.49% on the week, while GLD collapsed 5.01% WoW to $396.24. Two forces working in opposite directions: housing starts data has firmed in the rate-cut-delayed environment (cash buyers staying active), pushing lumber demand; gold simultaneously broke down on the hot jobs print which pushed Fed cut expectations out to 2027 and lifted real yields. The classic Lumber/Gold pro-growth signal is screaming. The catch: if NVDA/Broadcom-led AI rotation deepens into a broader growth scare, gold re-asserts immediately and lumber rolls over. For now, this is the strongest tactical leader signal in the report.

Emerging Markets (EEM) – Battered This Week But Three-Month Lead Holds

EEM/SPY: -4.78% one-month, +1.33% three-month. EEM had its worst week of 2026 — down 5.85% to close Friday at $65.75 — as the dollar firmed on the hot jobs print and the AI-rotation unwind hit Asian tech (TSMC, Samsung, Tencent). DXY rose +1.07% to 96.60 on Friday after the jobs print, removing the dollar-weakness tailwind that had supported EM. The three-month lead at +1.33% is now the thinnest it’s been all year. We’re keeping EEM in the leader column for now because the three-month is still positive and the structural EM bid (commodity exporters, cheap valuations vs U.S.) hasn’t broken, but this is the weakest leader signal in the report. If next week’s CPI print comes in hot AND DXY breaks above 97, we flip EEM to laggard.

LAGGARDS: DEFENSIVES BOUNCE, GOLD COLLAPSES, BONDS STILL BROKEN

Gold (GLD) – Worst Weekly Loss Of The Year

Gold had its worst week of 2026, with GLD down 5.01% to close Friday June 5 at $396.24. GLD/SPY is -8.52% one-month and -22.20% three-month — the worst structural laggard in the report. The hot May jobs print (+172K vs +80K forecast) was the primary catalyst: Goldman Sachs immediately pushed Fed rate-cut expectations out to 2027 from 2026, real yields rose, and the dollar firmed. Markets are now pricing roughly 50% odds of a Fed HIKE rather than cut by year-end (per CreditUnions commentary tracking). The April 21 gravestone doji thesis continues to play out. Gold remains structurally broken until either inflation reaccelerates meaningfully OR a real recession scare returns — neither of which the data currently supports.

Health Care (XLV) – Tactical Bounce But Structural Trend Unchanged

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Nine-Week Streak: NVDA Blowout, Iran Ceasefire Hopes Collapse Oil, Tech Roars To New Highs

Below is an assessment of the performance of some of the most important sectors and asset classes relative to each other with an interpretation of what underlying market dynamics may be signaling about the future direction of risk-taking by investors. The below charts are all price ratios which show the underlying trend of the numerator relative to the denominator. A rising price ratio means the numerator is outperforming (up more/down less) the denominator. A falling price ratio means underperformance.

LEADERS: TECH, SMALL CAPS, AND EM PARTY ON THE NINTH UP-WEEK

Technology (XLK) – NVDA Earnings Detonated The Tape

Technology had its single best week of 2026. XLK/SPY is +12.9% one-month, +22.2% three-month, +19.1% six-month, and +27.9% one-year. XLK closed Fri May 29 at $191.02, up 5.89% on the week — driven almost entirely by NVDA’s Wednesday May 27 earnings blowout that exceeded every metric and reset Q2 guidance materially higher. Networking revenue at NVDA tripled year-over-year per Morningstar coverage, and the AI capex narrative re-broadened beyond just chips into infrastructure. Dell announced AI server revenue +757% YoY. With 10-year yields softening back to 4.45% and Iran ceasefire hopes calming the macro tape, the duration math that threatened tech two weeks ago has reversed entirely. Tech is the cleanest, strongest leader in this report by a wide margin.

Russell 2000 / Small Caps (IWM) – Breadth Confirms The Tech Run

IWM/SPY: +0.4% one-month, +0.5% three-month, +8.5% six-month, +9.8% one-year. IWM closed Fri May 29 at $290.43, up 1.86% on the week — the second-best major U.S. equity move. The signal: small caps are confirming the broader risk-on tape rather than diverging from it. With the 10-year softening 12bps WoW to 4.45%, floating-rate debt holders within small caps are finally getting relief. The Fed-hike trade has fully priced and rate-cut hopes are creeping back in based on the dovish read of the Iran ceasefire — lower oil means lower inflation means more Fed room. Until the macro framing changes again, small caps stay leader.

Emerging Markets (EEM) – Now A Leader Across Every Horizon

EEM/SPY: +2.9% one-month, -1.0% three-month, +11.7% six-month, +17.6% one-year. EEM closed Fri May 29 at $68.60, up 4.13% on the week — the best-performing major index in this report. The one-month flipped firmly positive as the dollar softened on softer yields, China stimulus chatter resurfaced, and oil collapse helped EM commodity importers (most of EM ex-Russia). The structural EM bid — commodity exporters benefiting from prior energy bid, US-China trade-deal flow, relative cheapness vs U.S. on every multiple — keeps the ratio in clean leader territory. If DXY breaks below 100, this ratio accelerates dramatically.

European Banks vs U.S. Banks (EUFN/XLF) – The Strongest Cross-Asset Signal Holds

EUFN/XLF: +4.8% one-month, +0.8% three-month, +15.1% six-month, +22.6% one-year. The one-year reading remains the strongest durable cross-asset signal in this report for the seventh consecutive week. EUFN closed Fri May 29 at $38.51, up 0.92% on the week. European banks continue to outperform U.S. peers because the ECB is past its easing cycle while the Fed is being forced toward hikes — putting U.S. banks in the curve-flat trap. UniCredit, Deutsche Bank, ING, and BNP all reported strong margin expansion this earnings cycle. As long as the 10-year stays bid and the ECB stays neutral, this ratio holds. The one-month accelerated to +4.8% — transatlantic profit re-rating is intensifying, not fading.

High-Yield Credit vs Treasuries (JNK/GOVT) – Credit Still Beats Duration

JNK/GOVT: +0.6% one-month, +2.0% three-month, +3.4% six-month, +3.9% one-year. JNK closed Fri May 29 at $96.25; GOVT at $22.71. Even as Treasuries firmed this week (10-year softened to 4.45% on Iran de-escalation), high yield continued to outperform. Credit spreads remain in tight quartile territory — the HY OAS has not blown out despite the duration carnage of the past month. The setup remains: if economic data cracks (jobless claims Friday, ISM, payrolls), HY default risk re-prices and this ratio reverses fast. But until then, the carry continues to win against bleeding principal in duration.

Lumber / Gold – Pro-Growth Signal Accelerates

Lumber/Gold extended its leader move. The ratio is +3.0% one-month, +19.9% three-month, +7.3% six-month — a clean accelerating upside reversal. Lumber futures (LBR=F) closed Fri May 29 at $587.50; GLD closed at $417.12, up 0.8% on the week but still well off recent highs. The pro-growth, anti-defensive signal is intensifying with the broader risk-on tape. The one-year is still -26.5% — the structural gap remains massive, making this a counter-trend tactical signal. Historic message: rising lumber + falling gold has preceded growth re-acceleration phases. The catch: if NVDA earnings turn out to be the peak euphoria signal and the AI bid cracks in June, gold re-asserts immediately.

LAGGARDS: ENERGY COLLAPSES, BONDS BLEED, DEFENSIVES STILL DEAD

Energy (XLE) – Flipped From Leader To Laggard On Iran Ceasefire Whipsaw

Energy got destroyed this week. XLE/SPY is now -10.3% one-month, -5.6% three-month, +8.9% six-month, +8.9% one-year — the one-month flip from +5.9% last week to -10.3% this week is the cleanest regime change in the report. XLE closed Fri May 29 at $56.29, down 5.38% on the week. Brent collapsed from the $104 area to under $90 on US-Iran ceasefire hope acceleration. WTI ended the week around $89. President Trump’s decision-pending on a 60-day extended ceasefire pact removed the geopolitical premium that had buoyed energy since April. The six-month and one-year leads are still positive (+8.9% each), which is why this is technically a flip-on-trend laggard rather than a structural laggard. But the conviction is gone: until Hormuz risk re-prices or US shale supply cracks, energy stays here. This was the most violent intra-week sector move of 2026 so far.

Gold (GLD) – Standalone Still Capped

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Below is an assessment of the performance of some of the most important sectors and asset classes relative to each other with an interpretation of what underlying market dynamics may be signaling about the future direction of risk-taking by investors. The below charts are all price ratios which show the underlying trend of the numerator relative to the denominator. A rising price ratio means the numerator is outperforming (up more/down less) the denominator. A falling price ratio means underperformance.

LEADERS: TECH AND SMALL CAPS REASSERT AS RATE-HIKE TRADE PRICES IN

Technology (XLK) – Tech Reasserts Despite The Rate Threat

Technology came roaring back this week. XLK/SPY is +10.0% one-month, +17.9% three-month, +12.2% six-month, and +22.3% one-year. XLK closed Fri May 22 at $180.39, up 3.46% on the week — the strongest sector move at a time when the 10-year traded at 4.57% and the Fed minutes were hawkish. The mental model from May 12 (hot CPI breaks tech) did not survive the week. The duration math should have hurt AI capex multiples; instead, the cohort grabbed the bid because the alternative thesis — Iran war risk on, oil whipsaw, defensives bid — created a flight to mega-cap quality. NVDA pre-earnings positioning helped. The pattern is now clear: when macro headlines whipsaw, Mag 7 quality is the destination. Until either the AI capex narrative cracks or NVDA earnings disappoint next Wednesday, XLK stays leader.

Energy (XLE) – The Iran Whipsaw Cost A Week Of Gains

Energy gave back ground on Iran peace headlines. XLE/SPY is -0.8% one-month, -0.7% three-month, +22.0% six-month, and +16.2% one-year. XLE closed Fri May 22 at $59.49, down 1.80% on the week. Brent settled around $102-104 after rallying to $109 mid-week then giving back as US-Iran peace talks resurfaced. WTI ended near $97.55 — down more than 7% on the week. The Strait of Hormuz remains the wildcard: Iran’s Supreme Leader ordered enriched uranium stockpiles to stay in-country and rejected the Iran-Oman Hormuz toll proposal, but futures still faded into Friday’s settle on negotiation hopes. The six-month and one-year leads remain massive, but the one-month has turned slightly negative. Energy stays in the leader column because the structural setup (geopolitical premium, global food prices at three-year highs, sticky inflation prints) hasn’t changed — but the conviction has weakened relative to last week.

Russell 2000 / Small Caps (IWM) – Reasserts As The Best Performer

IWM/SPY: -1.7% one-month, -1.2% three-month, +7.2% six-month, +9.7% one-year. IWM closed Fri May 22 at $285.12, up 3.32% on the week — the best-performing major U.S. equity index. The signal flipped sharply: small caps led every major equity benchmark this week. The setup makes sense: if the Fed is going to hike rates anyway (70% priced by year-end), there is no further pain to discover. Small caps positioned for the rate-cut trade now get a relief move. Defensive positioning unwinds, money rotates back to floating-debt names that aren’t going to die from one more hike that’s already in the price. Until the macro framing changes again, small caps reassert leader status. The six-month and one-year leads are intact.

Emerging Markets (EEM) – Quietly Reasserts Leadership

EEM/SPY is +0.4% one-month, -1.2% three-month, +9.6% six-month, and +13.3% one-year. EEM closed Fri May 22 at $65.88, up 1.40% on the week. The one-month flipped positive again as the dollar softened on Warsh confirmation drawing attention to the Fed’s Trump-aligned dovish bias — even as the Fed minutes themselves came in hawkish. The structural EM bid (commodity exporters, US-China trade deal flow, relative valuation) remains intact. China-related EM exposure also benefited from comments from Beijing about additional stimulus. If oil rebounds on Hormuz risk re-pricing, EM commodity exporters re-accelerate. The DXY is the variable to watch — below 100 would supercharge this ratio.

European Banks vs U.S. Banks (EUFN/XLF) – Transatlantic Lead Holds

EUFN/XLF: +2.4% one-month, +2.3% three-month, +12.1% six-month, +19.2% one-year. The one-year reading remains the strongest durable cross-asset signal in this report for the sixth consecutive week. EUFN closed Fri May 22 at $38.16, up 1.03% on the week. European banks continue to outperform U.S. peers because the ECB is past its easing cycle while the Fed is being forced toward hikes — putting U.S. banks back in the curve-flat trap. The one-month has actually expanded the lead. Basel III endgame uncertainty has not gone away. As long as the 10-year stays bid and the ECB stays neutral, this ratio holds. Watch UniCredit, Deutsche Bank, ING, and BNP earnings into July — European bank profit re-rating is now visible in cap-weighted ratios.

High-Yield Credit vs Treasuries (JNK/GOVT) – Credit Still Beats Duration

JNK/GOVT is +0.8% one-month, +2.0% three-month, +3.1% six-month, and +3.9% one-year. JNK closed Fri May 22 at $96.25; GOVT at $22.65. The signal: even as the 10-year stays elevated at 4.57% and the 30-year hit 5.08%, high yield credit continues to outperform Treasuries. Credit spreads have not blown out — the HY OAS remains in tight quartile territory despite the duration carnage. The setup is fragile: if economic data cracks (jobless claims, ISM) in a way that makes HY default risk re-price, this ratio reverses fast. But until then, the carry continues to win against bleeding principal in duration.

Lumber / Gold – Pro-Growth Signal Builds

Lumber/Gold extended its leader move. The ratio is +4.5% one-month, +14.5% three-month, +7.3% six-month — a clean accelerating upside reversal. Lumber futures (LBR=F) closed Fri May 22 at $585.50; GLD closed at $413.82, down 1.1% on the week. The pro-growth, anti-defensive signal is intensifying. The one-year is still -28.1% — the structural gap remains massive, meaning this is a counter-trend tactical signal. The historic message: rising lumber + falling gold has preceded growth re-acceleration phases. The catch: in 2026’s environment, the same pattern could also reflect housing-material inflation combined with hawkish Fed pressure compressing the gold premium. Watch closely — if NVDA earnings disappoint, gold reasserts immediately.

LAGGARDS: BONDS BLEED, GOLD SLIPS, DEFENSIVES STILL STRUCTURALLY CAPPED

Gold (GLD) – Still Bleeding As Rate-Hike Trade Builds

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LEADERS: TECH DOMINATES, ENERGY HOLDS 6-MONTH LEAD, GOLD REBOUNDS

Technology (XLK) – The Single Cleanest Leader, Now Accelerating

Technology is the only sector doing meaningful work right now. XLK/SPY is +14.6% one-month, +20.0% three-month, +8.6% six-month, and +24.1% one-year — every horizon positive and accelerating. XLK closed Mon May 11 at $177.88, up 9.8% on the week. The Nasdaq gained 4.0% last week to a fresh record; six of eleven sectors finished the week LOWER, which is the cleanest possible signal that the rally is one sector deep. The April jobs print on Friday (+115K vs 55K consensus, unemployment steady at 4.3%) gave the market a soft-landing read that bid duration-sensitive growth. Trump’s China trade deal commitments holding from November mean rare earth exports keep flowing into the AI capex cycle. As long as XLK leads, the index makes records. The moment XLK rolls over, the rally is over.

Energy (XLE) – 1-Month Unwind Continues, 6-Month Lead Intact

Energy’s three-month ratio vs SPY is now barely positive at +0.75% and the one-month has collapsed to -7.7%, but the six-month at +21.3% and one-year at +8.1% keep XLE in leader territory. XLE closed Mon May 11 at $57.17, down 3.7% on the week as WTI fell from $94.40 to $94.87 Friday on Iran deal hopes. Then Monday Trump said the ceasefire is on “life support” and oil reversed back higher. Brent settled $100.51 Friday but is whipping around. KPMG now forecasts two Fed RATE HIKES this year based on sticky inflation plus the ongoing Strait of Hormuz closure — a regime change from the broader market’s soft-landing pricing. This ratio is the binary one to watch: if Iran deal progresses, XLE rolls to laggard within two weeks; if Hormuz closes again, the 6-month lead reasserts hard.

Emerging Markets (EEM) – The Most Consistent Leader of 2026

EEM/SPY is +3.0% one-month, +6.0% three-month, +13.6% six-month, and +16.8% one-year — the only ratio with green signals across every meaningful lookback. EEM closed Mon May 11 at $65.94. The November US-China trade deal continues to flow through as China removes rare earth export controls and resumes US ag purchases. India and Southeast Asia keep absorbing the energy-importer discount. The DXY weakness adds the currency tailwind. Six consecutive weeks of S&P gains have not stopped EEM from outperforming — that’s the tell that this isn’t a risk-on-vs-EM trade but a structural macro shift. This remains the highest-conviction relative-strength signal entering May CPI on Wednesday.

Russell 2000 / Small Caps (IWM) – Breadth Holding Despite Narrow Leadership

IWM/SPY is +0.4% one-month, +2.1% three-month, +7.1% six-month, and +8.4% one-year. IWM closed Mon May 11 at $285.33, with the Russell 2000 itself setting a new high on Wednesday last week. The fact that small caps are still leading on every horizon despite six of eleven sectors finishing the week red tells you the rally has actually broadened beyond just Mag 7 even though the headline numbers look narrow. Lower oil from the early-May spike reduced input costs for small caps; a steady 4.38% 10-year keeps the discount rate stable; and the better-than-expected April jobs read keeps recession fears at bay. If the rotation extends, small caps will keep the breadth-confirmation signal alive.

European Banks vs U.S. Banks (EUFN/XLF) – Transatlantic Divergence Re-Extends

EUFN/XLF re-established leadership: +0.8% one-month, +5.1% three-month, +14.6% six-month, and +23.2% one-year. The one-year reading is the strongest durable cross-asset signal in this report for the fourth consecutive week. European banks continue to benefit from ECB easing, the lower euro-energy import bill from oil’s recent decline, and equity multiples that started from a lower base. U.S. banks remain pinned by the flat curve (10Y at 4.38%, hawkish Fed dissent against dovish forward guidance) and Basel III endgame uncertainty. EUFN closed Mon May 11 at $38.42. The European Central Bank meets later this month — watch for any signal that ECB easing pauses, which would test this ratio.

High-Yield Credit vs Treasuries (JNK/GOVT) – Credit Beats Duration Continues

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LEADERS: AI CAPEX, INTEL’S COMEBACK, AND THE TECH MONOLITH

Technology (XLK) – The Cleanest Leader in the Book

Technology has now decisively claimed the leadership crown. XLK/SPY is +5.5% one-month, +4.4% three-month, and +2.8% six-month — all three lookbacks positive for the first time since the cycle began. Intel surged 24% on Friday after CFO David Zinsner described “unprecedented demand” for AI server CPUs, dragging AMD up 14% and Arm to fresh all-time highs; the Philadelphia Semiconductor Index closed Friday at a record. Qualcomm jumped 12% Monday on the OpenAI smartphone-processor news. XLK closed Apr 27 at $160.57, up 3.8% on the week. With Microsoft, Meta, Alphabet, and Amazon all reporting Wednesday and Apple Thursday, this is the binary catalyst week of Q2. The macro setup — 10-year at 4.31%, HY OAS at 2.86%, VIX at 18.02 — keeps long-duration growth in the pole position.

Energy (XLE) – Three-Month Lead Persists, but the Headlines Whipsaw

Energy’s three-month ratio vs SPY is +15.8% and the six-month is +22.8% — still the strongest durable lead in this report. But the one-month ratio is -12.7% as WTI swings between $92 and $97 on Iran ceasefire headlines. Friday’s WTI close at $94.40 (-1.51%) was followed Monday by a 2.09% jump to roughly $96.50 after Trump cancelled the Pakistan talks Saturday with a curt instruction that Iran should “call” when ready to negotiate. XLE closed Apr 27 at $56.77, essentially flat on the week. The trend structure is deteriorating but the 3M lead is durable; if Iran’s reported new proposal to reopen the Strait of Hormuz separately from nuclear talks gains traction, this ratio rolls into laggard territory within two weeks.

Emerging Markets (EEM) – The Most Consistent Leader of 2026

EEM/SPY is +3.1% one-month, +5.1% three-month, +12.1% six-month, and +9.8% one-year — the only ratio in this report that is positive across every meaningful lookback. EEM closed Apr 27 at $61.91. Japan’s Nikkei hit a record 53,736 Monday and South Korea’s Kospi surged 2.15% to a new peak of 6,615.03 — EM Asia is now leading the global cycle, not following it. Lower oil reduces input costs disproportionately for energy-importing emerging economies; the DXY at 98.35 still preserves a currency tailwind versus 2024 highs. This is the cleanest trend-follow in the book and the single highest-conviction relative-strength trade entering May.

Industrials (XLI) – PMI Confirms the Reshoring Tailwind

Industrials are +1.7% three-month and +6.1% six-month vs SPY, with the durable signal coming from this week’s S&P Global Flash Composite PMI at 52.0 (3-month high) and Manufacturing PMI at 54.0, the strongest reading since May 2022. Manufacturing output rose to 55.7, a four-year high. XLI closed Apr 27 at $171.21, down 1.0% on the week as cyclicals digested the Iran headline noise, but the longer-horizon trend remains intact. Reshoring, defense, and AI-data-center construction are three independent narratives all rolling through industrial backlogs. The one-year relative performance of +2.4% is the newest leadership claim in the book — watch for confirmation in this week’s industrial earnings.

Materials (XLB) – Base Metals Hold the Line

Materials are +4.1% three-month and +11.0% six-month vs SPY. XLB closed Apr 27 at $52.12, up 0.7% on the week. The AI buildout demand for copper, the tariff-substitution domestic-supply story, and the silver and platinum bid through the precious-metals window all converge on this sector. Even with gold’s gravestone doji on Apr 21 (GLD -2.8% in one session), industrial metals held firm. The six-month +11.0% lead remains the most durable non-tech leadership signal in this report. Base metals do not need a ceasefire resolution to extend; they need only the AI capex cycle to keep printing, which Wednesday’s mega-cap reports will either confirm or deny.

Real Estate (XLRE) – Barely Hanging On

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LEADERS: THE TECH TRADE HOLDS AS EVERYTHING ELSE CONSOLIDATES

Energy (XLE) – Still the Three-Month Leader Despite the One-Month Unwind

Energy’s three-month ratio vs SPY is +15.8%, with six-month at +22.8% — the strongest durable lead in this report. But the one-month ratio has collapsed to -12.7% as WTI oscillates between the high $80s and low $90s on ceasefire headlines. Tuesday saw WTI close at roughly $92 after Vice President Vance cancelled his Pakistan trip, then ease back to roughly $90 Wednesday morning after Trump announced the ceasefire would be extended indefinitely pending an Iranian proposal. XLE is up on Apr 21 at $55.87 vs $55.02 Apr 17, but the trend structure is deteriorating. If the ceasefire holds into May, this ratio likely rolls from leader to laggard within two weeks; if talks collapse again, the three-month lead could reassert.

Technology (XLK) – The One True Leader of the Week

Technology is now the single cleanest leader in the book — ratio vs SPY at +4.4% three-month, +5.5% one-month, with Tuesday’s 0.1% gain on an otherwise-weak tape confirming relative strength. XLK closed at $154.69 on Apr 21, barely changed from $154.35 Apr 17, while SPY pulled back 0.9% on the week. Tesla’s Q1 print arrives after today’s close with Street expecting non-GAAP EPS of roughly $0.33 vs $0.27 a year ago — that line alone will decide whether the tech leadership extends or rolls over. The macro setup still favors long-duration growth: 10-year at 4.30%, credit spreads at 2.87%, and the VIX just under 20. Both the three-month and one-month signals are moving in the same direction for the first time since March.

Emerging Markets (EEM) – The Peace Dividend’s Cleanest Beneficiary

EEM/SPY is +5.1% three-month, +3.1% one-month, and +12.1% six-month — the most consistent leader in this report. Every dollar WTI stays off its spike highs flows directly into the P&L of India, South Korea, and Southeast Asia; the DXY at 98.35 is higher than recent weeks but still well below its 2024 highs, preserving the currency tailwind. Tuesday’s 0.3% EEM decline was half the S&P’s drawdown, and the one-year lead of +9.8% versus SPY makes this the structural relative-strength trade of 2026. Trump’s ceasefire extension announcement Tuesday night caps upside on the peace-trade thesis, but any resolution that keeps Hormuz open favors this cohort disproportionately.

Industrials (XLI) – Reshoring Narrative Holds

Industrials have re-entered the leader column on a three-month lookback (+1.7% vs SPY), with the six-month ratio at +6.1% reflecting the durable reshoring, defense, and data-center-buildout narratives. XLI fell 1.1% on the week to $171.44 as cyclicals absorbed the Iran vessel-seizure headlines, but the longer-horizon trend remains constructive. This is the sector that typically moves with small caps on Fed-pivot trades and with materials on reshoring trades; when both those narratives are alive, industrials lead. The one-year relative performance is only +2.4%, so this is a newer leadership claim than energy or tech — one to watch for confirmation into earnings.

Materials (XLB) – Precious Metals Wobble, But Base Metals Hold

Materials are +4.1% three-month and +11.0% six-month vs SPY. The sector fell 0.5% on the week as precious metals cracked on Tuesday — gold closed near $4,820 spot and silver near $80 after a gravestone-doji print in GLD that Dave Keller flagged in Tuesday’s technical recap. Base metals remained firmer: copper, platinum, and industrial metals held their weekly gains per the Trend Following Week in Review. The AI-buildout and tariff-substitution narratives are independent of the Iran ceasefire, which is why XLB maintained leader status even through the Tuesday selloff. The six-month ratio extending to +11.0% keeps this the most durable non-tech leader in the report.

Real Estate (XLRE) – Barely a Leader, But Still a Leader

XLRE/SPY is +3.6% three-month but only +0.02% one-month — the weakest leader signal in this report. The 10-year yield rose to 4.30% Tuesday from 4.26% Monday, pressuring the rate-relief trade that had pushed REITs higher for three consecutive weeks. XLRE closed at $43.78 on Apr 21, down 0.3% on the week. Data center REITs and single-family rental REITs remain the specific engines, but until the 10-year settles back below 4.25%, this leadership claim is fragile. If the Fed’s May meeting signals no pivot, this ratio likely falls into laggard territory by next week.

Russell 2000 / Small Caps (IWM) – Breadth Story Intact

IWM/SPY is +1.6% three-month and +4.4% one-month, with the one-year lead of +9.6% the clearest confirmation that breadth is participating. IWM closed at $274.51 on Apr 21, down 1.0% Tuesday as the broader cyclical complex pulled back, but still up 2.2% on the week and +11.4% YTD against the S&P’s +3.2%. Lower oil reduces input costs disproportionately for small caps, a softer dollar (at 98.35, off recent highs) lifts the export-oriented cohort, and credit spreads at 2.87% keep leveraged small-cap balance sheets priced for stability. Tuesday’s 1% drawdown is the first real test of this leadership since March — if small caps recapture 2,800 this week, the breadth story extends.

European Banks vs U.S. Banks (EUFN/XLF) – The Transatlantic Divergence Extends

EUFN/XLF is +6.8% one-month, +5.1% three-month, +13.8% six-month, and +19.6% one-year — still the single most durable cross-asset trend in this report. European banks continue to benefit from lower oil compressing eurozone energy costs, ECB dovishness, and equity multiples that start from a lower base. U.S. banks by contrast remain pinned by a flattening yield curve (2Y at 3.81%, 10Y at 4.30%, spread of just 49 basis points), frozen M&A, and Basel III endgame uncertainty. EUFN fell 1.0% on the week to $37.89 but XLF also underperformed, keeping the ratio intact. The next catalyst is the April 30 ECB meeting.

Gold (GLD) – Leader On Trend, But the Gravestone Doji Is a Warning

Gold’s one-year standalone return is +36.1%, the largest in this report, and the six-month gain of +16.4% keeps the structural hedge bid intact. But Tuesday printed a gravestone doji in GLD with the ETF closing at $429.57, down 2.8% from Monday’s $442.09 — a pattern that Dave Keller flagged as a potential exhaustion signal. Silver fell 4.4% intraday Tuesday. The 3-month ratio vs SPY is now flat at -0.5% and the one-month is -4.3% as risk assets outperform the hedge. Trump’s ceasefire extension was the catalyst; if the truce holds, gold’s premium compresses further. But the structural bid — central bank demand, Indian jewelry cycle, de-dollarization — is still there. This is the trickiest call in the report: leader on standalone trend, laggard vs equities on one-month.

LAGGARDS: DEFENSIVES KEEP UNWINDING AND CREDIT IS CAPPED

Health Care (XLV) – Still the Worst Sector

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LEADERS: THE GREAT ROTATION IS CONFIRMED -- FROM WAR TRADES TO GROWTH

Energy (XLE) -- Still the Three-Month Leader, but the Unwind Just Accelerated

Energy remains the three-month leader at +12.8%, but the weekly decline of 6.9% was the fourth consecutive week of underperformance relative to SPY. On Friday, Iran’s Foreign Minister announced the Strait of Hormuz is “completely open,” sending WTI crude plunging 11% to $83.85 and Brent 9.1% to $90.38. Energy stocks fell 2.94% on Friday. The one-month picture at -13.6% tells the story of how fast the war premium is pricing out. I’m keeping energy as a leader on the three-month trend, but this ratio may cross into laggard territory within weeks if the ceasefire extends past April 22.

Technology (XLK) -- The Inflection Is Confirmed: Tech Is a Leader Again

This is the most important classification change of the cycle. Technology’s three-month ratio vs SPY is now +3.1%, with a one-month gain of 3.4%. The Nasdaq hit its longest winning streak since 1992, gaining 6.8% for the week. Oil falling from $112 to $84 compresses inflation expectations, pulling down the discount rate on growth earnings. Technology has officially moved from laggard to leader.

Emerging Markets (EEM) -- The Biggest Ceasefire Winner

Emerging markets gained 0.7% relative to SPY this week and the three-month outperformance of 6.8% makes it the second-strongest leader. The Strait reopening is the most bullish development for EM trade flows since the war began. Credit spreads at 2.84% provide additional tailwind.

Materials (XLB) -- The Structural Leader Survives

Materials pulled back 4.0% relative to SPY but the three-month outperformance of 4.0% keeps it in the leader column. Reshoring demand, defense spending, and tariff-driven import substitution are independent of the Iran conflict.

Utilities (XLU) -- The Defensive Trade’s Final Chapter

Utilities fell 3.9% relative to SPY and the three-month outperformance compressed from 13.3% two weeks ago to 4.1%. VIX below 20, oil collapsing, S&P at all-time highs -- worst environment for defensives.

Real Estate (XLRE) -- Rate Relief Arrives

Real estate was flat relative to SPY, preserving 3.0% three-month outperformance. The 10-year yield fell to 4.24% and the 2-year dropped below the Fed Funds rate of 3.75%.

European Banks vs U.S. Banks (EUFN/XLF) -- The Transatlantic Divergence

EUFN/XLF gained 1.1% this week and is up 7.1% over three months. European banks are the most consistent peace trade beneficiaries. U.S. banks remain stuck in laggard territory.

Small-Caps (IWM) -- Domestic Recovery Holds

Small-caps gained 0.5% relative to SPY. The Russell 2000 surged 5.6% -- best weekly performance of any major index. Credit spreads at 2.84% are well below pre-war levels.

LAGGARDS: THE WAR’S CASUALTIES AND THE SECTORS STILL SEARCHING

Health Care (XLV) -- The Deepest Laggard

Health care fell 2.8% relative to SPY. The -6.8% three-month ratio is the deepest laggard.

Financials (XLF) -- Credit Heals, Equity Doesn’t

Financials fell 1.9% relative to SPY despite HY OAS at 2.84%. The -6.0% three-month ratio is the second-deepest laggard. European banks outperform U.S. banks by 7.1% over three months.

Consumer Discretionary (XLY) -- A Reprieve

Consumer discretionary gained 2.1% relative to SPY as oil’s collapse sent cruise lines surging. But -4.2% three-month keeps it in laggard territory.

Consumer Staples (XLP) -- Former Leader Now Negative

Staples fell 2.3% relative to SPY. The three-month ratio flipped negative at -1.9%. Four weeks ago this was a +14.1% leader.

Treasuries (GOVT) -- Bonds Lose Their Edge

GOVT/SPY fell 3.0% this week. The 10-year yield fell to 4.24%, but equities rallied +4.5%. The peace dividend is an equity story, not a bond story.

Communication Services (XLC) -- Sideways

Comm services gained 0.2% relative to SPY despite the Nasdaq’s 6.8% surge.

Gold -- Insurance the Market Won’t Cancel

Gold rose to $4,866.60 even as equities hit all-time highs. The ceasefire expires April 22, and Trump said the blockade “remains in full force.”

Lumber/Gold Ratio -- Gold Overwhelms the Signal

Lumber at $581.50 is stable but gold’s march to $4,866 keeps compressing the ratio.

The week ending April 17 may be the week the war ended in the market’s eyes. Iran reopened the Strait of Hormuz. Oil collapsed 11% to $83.85. The S&P 500 crossed 7,100 for the first time (7,126.06) -- a new all-time high, fully recovering all war losses. The Nasdaq posted its longest winning streak since 1992. Credit spreads at 2.84%. Technology has officially flipped from laggard to leader. The ceasefire expires April 22. Stay positioned accordingly.

Data Sources

1. WSJ | 2. Washington Post | 3. Xinhua | 4. CNBC | 5. El Pais | 6. WA Trust | 7. FRED HY OAS | 8. Yahoo Finance via yfinance

The Lead-Lag Report is provided by Lead-Lag Publishing, LLC. All opinions and views mentioned in this report constitute our judgments as of the date of writing and are subject to change at any time. Information within this material is not intended to be used as a primary basis for investment decisions and should also not be construed as advice meeting the particular investment needs of any individual investor. Trading signals produced by the Lead-Lag Report are independent of other services provided by Lead-Lag Publishing, LLC or its affiliates, and positioning of accounts under their management may differ. Please remember that investing involves risk, including loss of principal, and past performance may not be indicative of future results. Lead-Lag Publishing, LLC, its members, officers, directors and employees expressly disclaim all liability in respect to actions taken based on any or all of the information on this writing.

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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