My 2014 study showed that utilities do better than other stocks in the weeks leading up to vol spikes, providing an early warning smart money is getting ready for a move to defense.[1] Friday’s sell-off (Oct. 10, 2025) confirmed in dramatic fashion.
The chart above — a plot of the XLU/SPY ratio over time — showed utilities pressing higher compared to the broader market, indicating that risk-averse flows had started weeks ago. That ratio’s tendency to tilt higher was exactly the sort of defensive signal we’ve see in the past prior to surprise equity drops.
Friday was brutal. The S&P 500 dropped 2.7 percent, the Nasdaq fell 3.6 percent and the Dow almost 1.9 percent, shedding nearly $2 trillion in market value — its worst one-day decline since April.[2{ XLU dipped just a few tenths of percentage point.
Put another way, the market gave us a warning: defensive leadership was not random — it was deliberate. The fact that utilities were as calm as they were amidst the rest of the chaos was perhaps the most telling alarm.
Tariff Optimism vs. Market Reality
Over the weekend, President Trump tried to calm nervous markets by posting on Truth Social: “Don’t worry about China, it will all be fine! We want to help China!” His message came on the heels of a week that included an escalation over tariffs, including talk of 100 percent tariffs on goods from China — the kind of story that led headlines.
But the domestic market divergences we are seeing began well before trade noise spiked. The rotation into defensives, the credit-market duress and the carnage in regional banks were already there to set the stage. Trump’s happy talk may provide a sentiment tweak over the near-term, but it doesn’t even graze the structural risks now embedded in the system.
The bond markets confirmed this: Friday the yield on the 10-year Treasury fell from 4.14 percent to 4.06 percent, as investors sought safety. Gold soared, defensive sectors were strong and volatility spiked.
To put it another way: The headlines are noise; the price action is signal. The credit impulses and regional-bank stress won’t suddenly vanish even if trade rhetoric changes. Savvy investors should concern themselves much more with sector rotation and credit spreads than media soundbites.
Regional Banks and Private Credit: Coming Apart From the Inside
The carnage Friday was particularly brutal for regional banks. The SPDR Regional Banking ETF (KRE) fell 4 percent on the day, notching its eighth declin in ten days and a combined two-week loss of more than 6 percent. The collapse is not due to tariffs. It’s symptomatic of deposit-cost pressure, soft loan demand and heavy exposure to commercial real estate — particularly offices that are still under refinancing stress.
Rising costs of funds and feeble revenue that is not keeping up are putting the squeeze on many smaller banks. Margins are getting squeezed, and some are stretched with long-duration assets that diminished in value when rates jumped. Even if the Fed does shift toward aggressive easing, those legacy liabilities and tightening credit demand may be unavoidable.
At the same time, we have seen this chasm emerge between private credit stress and public equity optimism. The private credit market, which includes more than $2 trillion of assets (as an estimate), experienced a breakout year in 2021–22, frequently under covenant-light or payment-in-kind agreements. As those loans mature — or refinance at far higher rates and with volatile corporate earnings — they are poorly positioned. Rolling defaults are expected to rise until the 2026–27 time frame.
This stress has not been fully priced in by public equities. So we have a divergence: credit markets are marking down risk, while indices are being lifted by a narrow group of winners. The sell-off that began Friday may be the beginning of stocks catching down to credit reality.
Importantly, none of these stress points — regional bank weakness, repricing in private credit or margin compression — is related to tariff headlines. They come from cyclical and structural reasons: high financing costs, a lack of liquidity and the hangover from exuberant capital allocation. It’s becoming increasingly lopsided between the headlines we are getting, and what you’re seeing with market internals.
Utilities’ Ongoing Message: Risk-Off Intact
Utilities still led the way even after the dust settled from Friday. That persistence matters enormously. And when the most risk-averse sector is leading, I believe that tells us risk-off keeps running through investors’ mind.
Conclusion: Prioritize Signals Over Narratives
It was not a sudden spasm but the penalty of weeks of internal rotations. Smart money is worried about something. Trump’s weekend calming words amount to too little, too late to reverse those signals in my view.
Investing success relies on respecting probabilities more than narratives. Right now, defense is favored. Utilities’ strength is not a contrarian bet — it’s the market talking. Shifting exposure now offers investors the opportunity to control volatility, rather than be whipsawed by it.
The takeaway is clear: risk-off remains, and whipsawed risk is real.
Footnotes
Michael A. Gayed, Lead-Lag Report: “Utilities’ Strength Signals Short-Term Volatility Ahead” (September 28, 2025).
Reuters, “Wall Street Suffers Biggest One-Day Fall Since April,” October 10, 2025.
Investopedia, “Market Summary: Utilities Show Resilience Amid Sell-Off,” October 10, 2025.
Ibid.
Michael A. Gayed, ATAC Credit Rotation Index (‘JOJO’) methodology note, Lead-Lag Publishing LLC, September 2025.
Truth Social post by Donald J. Trump, October 11, 2025.
Bloomberg Markets data, U.S. Treasury yields, October 10, 2025.
CNBC, “Regional Bank Stocks Extend Decline as KRE Falls 4%,” October 10, 2025.
PineBridge Investments, “Private Credit: Underpricing of Risk in Legacy Loans,” October 2025.
Gayed, Lead-Lag Report, September 28, 2025.
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