Leaders-Laggards

If China’s DeepSeek is the real deal, it could completely upend what we think we know about the AI market. Even though bond yields have dropped substantially over the past couple weeks, the group is still underperforming stocks, suggesting there hasn’t been a big flight to safety move over the recent past. As value and defensive issues slowly come back to life, so do international stocks.

Even a modest improvement for the U.S. inflation outlook was enough to trigger a sharp reversal for cyclicals. Utilities have been steadily picking up speed again over the past several weeks, successfully picking up the risk-off tone of the markets even before the major averages started dipping. Small-caps got a nice little bounce last week, as would be expected in a cyclical revival, but not enough that it should inspire confidence about another leg higher for equities.

Utilities are starting to outperform again relative to the S&P 500 and that’s generally one of the better signs for risk-off behavior. The rebound in healthcare is particularly notable for me. Investors are continuing to move away from retail stocks as the Fed looks to keep conditions tighter for longer. As volatility increases and geopolitical risks start heating up, we could finally begin to see the divergence between Treasuries and stocks.