What Happened Last Week
- Equity Sentiment Falls: S&P 500 hits new all-time highs but small-caps and retail darlings suffer big losses.
- International Outperformance: The string of international equity outperformance continues as investors flock to cheaper foreign shares.
- Defensive Equity Rotation: Defensive domestics and lower beta internationals outperformed as investor positioning continues to come under pressure in 2025.
What We’re Watching This Week
- Europe: Details of the developing German coalition and peace talks in Ukraine will keep the market focused on European equities.
- Earnings: AI is back in focus as NVDA reports; another look at the consumer from national retailers this week following Walmart’s poor 2025 guidance.
- Inflation: Updates from the U.S., Europe, and Japan will inform the trajectory of global monetary policy.
Investment Management Team’s Views
Last week’s four days of trading felt like a post-election reckoning despite the S&P 500 hitting all-time highs last Wednesday and only declining 1.6% week over week. Small-caps had their worst day since the Fed’s hawkish December meeting, and the widely followed Russell 2000 Index closed below its 200-day trend line for the first time since November 2023. Retail darlings such as Palantir (PLTR) and the AI theme as a whole, as well as the recently popular domestic banking sector, experienced steep losses. To us, these are all clear indicators of an unwind of recent winners. Investors flocked to value and defensive stocks in the U.S. market. Utilities, healthcare, and staples were all up on the week, while growth stocks, consumer discretionary, and communication services led losses. Bonds provided little shelter for investors as yields fell only modestly across the curve.
Last week’s safety trade turned out to be international stocks. Emerging markets experienced strong gains from an earnings-induced rally in Chinese stocks. Developed markets were down only modestly as optimism built around a resolution to the war in Ukraine and a market-friendly outcome from this past weekend’s German elections. We think it’s notable that international equities shrugged off tariff threats on autos, semis, and medicine and weak PMIs in Europe. The current international equity rally is occurring without a weakening in the U.S. dollar. This atypical development tells us equity and macro investors are focusing on different catalysts in this very noisy market environment.
Markets are set up for another busy week. Europe will remain in focus for global investors as markets digest the recent results of the German national elections and continued developments out of Ukraine. In the U.S., AI earnings are back in focus with NVIDIA (NVDA) reporting mid-week in addition to another look at retailer earnings following Walmart’s worse-than-expected earnings guidance last week. Lastly, we get inflation updates out of the U.S., Europe, and Japan throughout the week, as well as U.S. consumer confidence on Tuesday.
