Rolling Rotations and an Ugly Unwind of the Debasement Trade…
Executive Summary:
Momentum pushing winners and losers to extremes: The market is experiencing a notable rotation out of high-flying AI "receivers" and mega-cap tech into value, small-caps, and equal-weight indices, which may present an opportune entry point for beaten-down AI "spenders".
‘Debasement Trade’ relegated to the basement: A surging U.S. dollar has temporarily derailed the "debasement trade," punishing commodities, gold, and nuclear sectors, though an emerging geopolitical focus on economic statecraft and supply chain resilience supports a long-term bullish outlook for real assets.
Earnings have outpaced price in 2026: Current S&P 500 valuations are supported by aggressive upward revisions to 2026 and 2027 earnings estimates, making upcoming Q2 earnings reports and June employment data critical tests for sustaining the market's trajectory.
Full Commentary:
It’s been an interesting month to say the least, one where if you’ve been positioned in the right places, you don’t want to see it come to an end. However, if you’re in some of the wrong places, it's been an unrelenting downward spiral like a snowball gaining momentum as it rolls down a hill. What I’m referring to is the bifurcation between the winners and losers playing out in markets over the past month. Let’s take last week, for example, where there is a clear rotation into value and out of growth, with the Dow managing to inch higher by +0.6% even as the S&P 500 slipped by -2%, and the Nasdaq was clocked for a -4.6% loss (the Mag Seven group fell by -6% in its worst weekly performance of the year). The Nasdaq very quietly posted its fifth straight daily decline and has lost more ground against its 50-day trendline after being pounded by -6.2% so far in June (trimming the year-to-date advance to +8.8%). The S&P 500 was down a little over -3% for the month coming into today, yet the Small Cap Russell 2000 is up nearly 2.5% on the month.
The scuttlebutt across Wall St. is how poorly the share prices of the AI ‘spenders’ are performing relative to the AI ‘receivers’ (semiconductors, memory, data center infrastructure component makers, heavy equipment…). A basket of five hyperscalers is on track for its worst month on record, dating back to Meta's IPO in 2012 (see chart below). Yet, while the U.S. stock market is struggling to make new all-time highs without the Mag7, it isn’t cratering either, like many would have suspected given this drawdown in the MegaCap Tech space. The hyperscalers, in particular, are down roughly -17% since the end of May.
However, I do find myself leaning the other way at the moment in thinking that it's time to fade the performance of the AI ‘receivers’ and add to the beaten down AI ‘spenders’. Furthermore, Nasdaq seasonality turns notably stronger from here, with the index historically delivering one of its more favorable periods of the year. If seasonal patterns hold, they could provide an additional tailwind for a short-term catch-up in tech.
In terms of other areas that are working, you have Health Care, REITs, Utilities, Financials, and Consumer Staples, which have either been holding up or showing signs of breaking out. It was only a week ago today that the Semiconductor ETF (SMH) was ripping to new all-time highs, but in less than a week, it has corrected more than -10% (keep in mind it's still up nearly 70% on the year). The rotation out of the former high-flying chips and AI hardware names was most evident in the performance of the S&P 500 equal-weight index, which finished with a +1.6% advance last week, and the +350-basis-point outperformance gap versus the cap-weight index was the largest since 2020 and the second-biggest spread in more than two decades. Seeing the equal-weight index outperform like this is not really all that unusual in the most concentrated S&P 500 index of all time – but what is strange is how the small-cap Russell 2000 has broken out to new all-time highs, even with the threat of Fed tightening (now seen as a toss-up for September), since these stocks thrive on liquidity and low interest rates the most.
Generally speaking, the price tag for the artificial-intelligence buildout is coming under closer scrutiny, and as such, there are some sober second thoughts taking place over all the ROI and TAM assumptions. I, for one, think AI is going to be a game-changer for society and unlock possibilities that were previously considered to only be possible in fiction novels. But that doesn’t mean there won’t be reality checks along the way – checks on optimization, efficiency, value engineering, needs vs. wants…I think we’re hitting a period of reevaluation on many of these points at the moment. With token costs spiking and revenue-generating use cases lagging, I’m hearing and reading a lot of chatter from companies talking about leveraging less robust and cheaper, yet adequate, Chinese ‘Open Source’ models at the expense of high-end US ‘Frontier Models’. Make of this what you will, I think it's too early and inconclusive to derive much from it other than companies prudently reassessing and adopting as we progress through the evolution of this AI renaissance.
Back to markets, but pivoting away from stocks to commodities, where Brent crude slipped below $72 per barrel to close out last week and WTI is flirting with $69, both levels that hadn’t been seen since before the Iran conflict started. It really has been breathtaking to observe the decimation that has played out in commodities markets over the past two months, where the S&P GSCI commodity index has plunged more than -21% from its early May peak.
The debasement trade that was all the rage in the opening months of the year has been relegated to ‘the basement’. Gold is off -11.5% this month and silver is down -23%. Themes I continue to have a constructive outlook on – where very little has fundamentally changed in the last month – have been crushed in June, like Nuclear (URA -13.5%), Copper Miners (COPX -14%), and Clean Energy (ICLN -16%). Gold miners (GDX) are down nearly -16% and are now at a level that fundamentally screens out with superior cash flow, valuation, and ROIs than most companies in the S&P 500 today. Without question, the 7% rally in the dollar from its trough at the end of January is definitely contributing to the sell-off in the commodity space, but I continue to think investors need to have exposure to commodities to protect against the secular forces of financial repression. Not to mention an era where globalization is being walked back, nationalism and resource security are on the rise, and fiscal prudence has been deprioritized behind national security and buying votes (populism has arrived).
On this front, Treasury Secretary Scott Bessent delivered a speech to the Economic Club of New York titled “Economic Statecraft,” which I think anyone following markets or interested in the changing ‘World Order’ should watch. If you do listen to it, I encourage you to do so with an open mind and leave any biases you may have at the door. I don’t say this to judge or scold you, we all have them (opinions and biases), but at this moment, this is one of the most powerful men on the planet, and he is at the heart of the policy decision making process in Washington D.C. What he says has meaning and carries more weight than me, you, and likely anyone else you listen to. Whether you agree or disagree with what he lays out matters less than your understanding of what this administration's policies are striving to achieve.
Link to “Economic Statecraft, Tariffs and the Dollar” via YouTube
With the help of my AI assistant, I’ve attempted to summarize his remarks below on the five core principles guiding the administration's approach to global economics and national security with timestamps from the video:
The Shift to Economic Statecraft
Secretary Bessent opened by challenging the long-held assumption that unconditional access to the American market would automatically lead to a convergence of global interests. He argued that this approach has led to vulnerabilities, as "strategic industries migrate abroad" and "critical supply chains concentrate in jurisdictions that do not share our interests" [07:44].
He defined his new strategy as "the disciplined use of America's economic power in the service of our sovereignty" [05:54].
The Five Core Principles
1. Economic Security Begins with National Capacity
The U.S. must be able to "build, invent, finance, and scale the industries that will define the next century," specifically naming semiconductors, AI, quantum computing, advanced manufacturing, and critical minerals [09:51].
A nation dependent on adversaries for critical inputs, he stated, "is not truly sovereign" [09:28].
2. Openness Matched by Reciprocity
"No economic relationship can remain healthy if one side opens its market while the other closes its own" [11:46].
Countries cannot "ask American firms to invest, hire, and innovate, and then require those firms to localize intellectual property" or "satisfy indigenous innovation requirements" [12:57].
3. Writing the Rules of the Next Economy
He argued that the U.S. must lead in setting standards for the digital and modern economy, warning that "if authoritarian or mercantilist systems write those standards for their own advantage, the global economy will become more coercive and less favorable to American interests" [15:16].
4. Financial Leadership as an Instrument of Statecraft
Bessent highlighted the importance of the U.S. dollar and the financial system, noting that while the U.S. welcomes partners, "they cannot participate in the dollar-based financial system while serving as conduits for the evasion of sanctions, illicit finance, or strategic leakage" [13:14].
5. Serving the American People
The ultimate goal, he argued, is to connect "national power with household prosperity" [17:55]. He envisioned an economy where "working families are not merely consumers of what the world produces, but participants in what America builds" [18:01].
I’ve become apprehensive about wading into politics in this missive as I repeatedly manage to strike a nerve with a reader (or two) when I do, but I’m not going to shy away when I think it’s something worth sharing. While I think Secretary Bessent is a mouthpiece for the President from time to time and as a result is forced to deliver some cringeworthy messages, I think he is one of the sharpest and most versed historical minds to sit in that post. He sees the global economic playing field as well as anyone, and the key insight from this speech is important: he strongly emphasized that supply chain resilience must be prioritized over simply finding the lowest cost. Bessent repeatedly posed the question: "Can this supply chain survive a crisis? Can it withstand coercion?" [10:39]. Redundancy and resilience in the US economy and supply chains is now a priority over low cost and efficiency.
Back to the dollar, where positioning and sentiment have shifted significantly from late January, as has the technical setup with the RSI round tripping from 35 to 78 – a 13-month high last week. I suspect the bulk of this move has already occurred, and I don’t expect it to be a headwind for the commodity or dollar-sensitive asset classes for the next several months. In a deeper risk off environment, I expect it to catch a bid, otherwise I think the ‘debasement’ trade will be pulled back off the shelf and do well in the second half of the year.
A softer dollar just might be the prescription to put a little tailwind behind gold, where it looks as though we’re getting some subtle hints of capitulation in the space. Last week, we had several Wall St. shops taking a hatchet to their gold price forecasts – Deutsche Bank cut its September price forecast by -22% to $4,300 per ounce, and by -17% for year-end to $4,800 per ounce. Goldman Sachs also dropped its year-end call to $4,900 per ounce from $5,400 per ounce. What has undermined gold is what has undercut bonds – an ever-rising real interest rate, ostensibly due to the boom in AI-related corporate credit demand. At 2.3% for the 10-year TIP (up +40 basis points since mid-April and flirting with three-year highs), I question why the Fed would have to take any action to move incrementally any more hawkish, as this move in real rates represents an exogenous tightening in financial conditions, compounded by the super-firm U.S. dollar. The inflation nowcast models I follow suggest disinflation is on its way; all the Fed has to do is wait for it.
What is sure to help keep alive the debate about inflation trends going forward is how long firms might be able to withstand margin compression. Apple led the way last week when they announced a 20% price increase on MacBooks and iPads as a result of skyrocketing memory prices, saying that it had “shielded our customers from these increases so far,” but that they could no longer do so. That said, not every company has Apple's scope to push through rising costs to customers. There might be many that want to, but they might not be able to. Still, as one important source of inflation fades, with oil prices back around pre-crisis levels, inflation concerns will not go fully away.
While the Fed has investors thinking about tightening, that is not the case in the world’s second-largest economy, where the PBOC recently took steps to ease monetary policy through the back door – having set the interest rate on its new overnight liquidity tool at 1.25%, which was below market expectations. The move was coupled with a 300-billion-yuan liquidity injection via overnight reverse repo agreements in the open market. All signs of the central bank seeking to alleviate any potential funding stresses (though talk of more aggressive policy stimulus measures is making the rounds, which would be highly constructive for Asian assets, generally speaking). If the PBOC and the Politburo follow up this easing with additional support, it could provide the jolt to global liquidity that isn’t coming from the Fed.
I’m going to close up this week’s note with a thought on equity markets, where the potential character change we’re seeing within markets could be foreshadowing nothing more than ongoing rotation or a more prolonged check on the cash-burning pursuit of AI dominance. What continues to keep me in the bullish camp and hesitant to adopt the ‘equity market bubble’ narrative is the earnings picture. The S&P 500’s year-to-date gain of +7.4 percent can be more than entirely explained by 2026 and 2027 earnings estimates that are +9.7 and +11.1 percent higher than at the start of 2026. It is rare to see estimates increase by this much, which explains why equity valuations have actually decreased this year. According to FactSet, the S&P 500 started the year with a 22.2x forward 12-month P/E multiple and slipped to 20.1x as of last week.
Relative to history, a 20x forward P/E multiple is rich, but relative to the last 5 years, it sits right at the average. Analysts can argue about what is an appropriate multiple all day long, and I don’t care to litigate that argument in this missive. What I want to share is some simple back-of-the-envelope math where, if one were to use the 2027 consensus EPS estimate for the S&P 500 of $397/share and a reasonable forward PE ratio (20x, the 5-year average), one gets an S&P 500 value of 7,948, +8.1 percent higher than today. I don’t think that is an unreasonable expectation for the S&P 500 to get to. When it gets there, and the path it takes is a completely different discussion, but for those who like targets, here’s one with some data behind it.
Where I do have some doubt and skepticism is on earnings actually meeting what has become a high bar. But for now, I think investors have to give corporate America the benefit of the doubt and see where Q2 2026 numbers come in. If they deliver, then equities should continue to press higher; if they disappoint, then we’ll likely see a deeper rerating, with the P/E multiple continuing to fall. Only this time it will be a combination of both price and earnings falling together. In a nutshell, earnings have accounted for the entire S&P 500 gain this year. In fact, during the last 12 months, the S&P 500 has rallied by 18% with no increase in the forward P/E multiple, which now stands at 20x.
In the coming holiday-shortened week ahead, the obvious key will be Thursday’s employment data for June. The consensus is at +113k for headline nonfarm payrolls. Nobody is above +160k or below +25k. Something tells me that this time, it won’t just be bonds that despise a strong number, but also equities, given the implications for a money market pushing the Fed to raise rates sooner rather than later. No change in the workweek or the 4.3% unemployment rate is expected, and the wage figure is seen coming in rather benign, at +0.3% MoM. We also get ADP employment and ISM manufacturing for June on Wednesday, the JOLTS data (for May) come out on Tuesday, and all these second-tier indicators have frequently moved the markets in the past.
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