Treasuries Look Interesting

Even though the S&P 500 was little changed on the week, we’re still seeing a fairly healthy risk-on shift fueled by Powell’s Jackson Hole commentary. That shift, however, is marked by the return of cyclicals & small-caps, a move away from mega-caps & tech and the sharp underperformance of defensives, including utilities and consumer staples.

The U.S. equity markets have been fueled by anticipation of rate cuts (an 88% chance of at least two cuts by year-end, according to the Fed Funds futures market), but it’s unclear how much that momentum can keep fueling market gains. We’ve already started to see valuation concerns creeping back into the tech sector and we might be getting into “sell the news” territory on rate cuts. What’s more concerning is that we’ve only seen modest signs of labor market weakness and an inflation rate that’s creeping higher again. That’s not the kind of environment where you see the market pricing in a strong chance of three rate cuts by year-end, but that’s where we’re at. All of this is to say that the market might be reaching a point of over-optimism that skews risks to the downside.