Wall Street has developed an extraordinary talent for turning reasonably good economic news into a thoroughly miserable investment experience. Corporate earnings are growing, the broader American equity market continues to hold up surprisingly well, and the economy has yet to produce the sort of deterioration normally associated with a serious bear market. Yet beneath that apparently respectable exterior, some of the most popular institutional trades have been taken apart with a ferocity that would normally suggest something considerably more sinister was unfolding.
Nick Savone at Morgan Stanley, in his latest Global Reflections, thinks investors are allowing the punishment inflicted upon their favourite positions to obscure a more constructive underlying picture.
• Morgan Stanley’s Nick Savone sees a more constructive market beneath the wreckage of the AI momentum trade, although the punishment inflicted on crowded institutional positions has been extraordinary.
• Technology momentum has experienced nearly as many violent daily moves in ten months as it did throughout the entire dot-com collapse, leaving hedge funds scrambling to reduce exposure while the broader equity market holds together.
• Strong corporate earnings are no longer guaranteeing positive stock-price reactions, with investors increasingly questioning the returns on AI investment rather than simply celebrating the scale of capital expenditure.
• Gold’s extraordinary failure to rally alongside falling yields, mounting French sovereign stress and the rotation toward quality suggest that the market’s next opportunity may emerge somewhere very different from its former leadership.