The “broadening out” trade accelerates as non-US and value lead. Market breadth is expanding significantly beyond the mega-cap tech trade. Non-US equities (particularly in Europe and Japan) are outperforming year-to-date, driven by more attractive relative valuations (Figure 1). Simultaneously, cyclical and value stocks are consistently beating growth across US indices as investors rotate into sectors like energy, industrials, and materials.

Strong earnings fundamentals are supporting elevated valuations. Fourth-quarter earnings have been robust, with the S&P 500 tracking toward 14% growth and comfortably beating consensus estimates. While the information technology and communication services sectors continue to lead the pack in absolute growth, the market is beginning to intensely scrutinize rising AI capital expenditures to assess whether they are translating into proportional revenue gains. (Figure 2.)

AI disruption fears trigger a sharp equity and credit rotation. The debate over AI “economic diffusion” is creating a new paradigm of clear winners and losers. While “physical AI” plays such as semiconductors, power, and utilities continue to rally, software stocks and private credit markets (namely, business development companies [BDCs] providing financing to small and mid-sized companies) are facing significant valuation pressure. Investors are aggressively pricing in the risk that autonomous AI agents will disrupt traditional “software as a service” SaaS) “per-seat” business models, which in turn threatens the underlying software loans heavily concentrated in BDC portfolios. (Figure 3.)

This is a summary of our Monthly Market Insights. The full report is available to clients upon request.