BNY’s Bob Savage highlights that both retail and institutional investors took advantage of weakness in US equities during April, but notes that the momentum behind these purchases has since faded. He points out that exposure to energy and technology sectors is currently elevated, with institutional holdings in these sectors over 20% above the 10-year average in the US, and even higher in emerging markets [1].
Savage identifies the upcoming June quarter-end and half-year-end rebalancing as a critical event for equities, especially in the US. He warns of the risk of a significant unwind in energy and IT trades during this period, raising questions about whether the typical 'buy-the-dip' response will persist if a catalyst triggers a market retracement [1].
Looking ahead to the second half of the year, Savage suggests that the equity market is transitioning into a new phase where liquidity, earnings growth, IPO supply, and central bank policy will play a more decisive role than geopolitical headlines. He emphasizes that the durability of the buy-the-dip mentality may be tested by factors such as higher-for-longer interest rates, persistent inflation, or earnings disappointments [1].
BNY expects increased sector rotation and wider performance dispersion, with market fundamentals becoming more important as the market shifts from momentum-driven gains to a more selective and valuation-sensitive environment [1].
CONCLUSION
BNY sees the upcoming June rebalancing as a potential catalyst for increased volatility and sector rotation in US equities, particularly given outsized exposure to energy and technology. Investors may need to focus more on fundamentals as the market transitions away from momentum-driven gains. The persistence of the buy-the-dip mentality could be challenged by macroeconomic headwinds.