Below is an assessment of the performance of some of the most important sectors and asset classes relative to each other with an interpretation of what underlying market dynamics may be signaling about the future direction of risk-taking by investors. The below charts are all price ratios which show the underlying trend of the numerator relative to the denominator. A rising price ratio means the numerator is outperforming (up more/down less) the denominator. A falling price ratio means underperformance.

LEADERS: FEW LEADERS AMONG U.S. EQUITIES

Technology (XLK) – Lack Of Trade War Reaction A Positive

The volatility in global trade war developments has cooled the growth stock rally that has led the market since Trump rolled back reciprocal tariffs. The fact that the market reacted pretty tamely to the starts & stops on tariffs could actually be a good thing for tech. This type of volatility has typically pushed investors away from growth & tech. A lack of interest in reacting could mean fewer investors looking to migrate away.

Consumer Discretionary (XLY) – The End Of The Trend

The longer-term trend here still looks like it’s heading upward, but short-term momentum appears to have fizzled. Retail sales and spending have remained surprisingly resilient throughout the current cycle, but the steady rise in credit stress suggests we shouldn’t count on that indefinitely. If growth stocks have begun the process of falling back out of favor, the uptrend might be nearing its end.

Industrials (XLI) – The Inflation Issue

This sector underperformed slightly last week, but the impressive run for this sector dating back well into Q1 continues. The one thing I’d watch here is inflation. That looks to be pretty contained on the goods side, which is a positive for this sector, but sticky inflation on the services side can still impact the spending habits of consumers.

Treasury Inflation Protected Securities (SPIP) – Falling Away From The Spotlight

Inflation has taken a bit of a step out of the spotlight lately with all of the recent trade war machinations. We still don’t have a really good sense of where inflation might head given that it will be heavily dependent on tariffs. TIPS have been doing better in recent weeks in anticipation of potential trouble ahead, but still not to the point of signaling a major shift.

Junk Debt (JNK) – Bond Traders Writing Off Risk

With the exception of the period heading into Liberation Day, junk bonds have been the class of the fixed income market. Spreads have come way down from where they were pre-Liberation Day, which means investors have largely written off any possibility of short-term risk. Given the uncertain nature of tariffs, I don’t think spreads should be this low and that makes risk/reward poor.

European Banks (EUFN) – Near-Term Peak

For as well as U.S. financials have done this year, especially relative to the S&P 500, European financials have done even better. If the U.S. economy stages a reasonable comeback in Q2, which is looking more likely than not, and the trade war can remain somewhat subdued, there’s a possibility that a near-term peak in this ratio might be in order. Still, the economic outlook for the Eurozone is looking marginally better and could continue to help.

Emerging Markets Debt (EMB) – Favorable Outlook

Emerging markets debt has two things going for it - the general preference of bond investors to push lower down the credit quality ladder to reach for yield and a falling dollar that’s at its lowest level since 2022. This ratio is approaching its peak from earlier this year, but it looks like it’s running into a little short-term resistance. Overall, I think the outlook for this group is still looking favorable.

LAGGARDS: DEREGULATION COULD BE TRUMP’S NEXT STEP AFTER THE TARIFF FIASCO

Communication Services (XLC) – Tech-Adjacent Lean Gives Way To Balance

This sector has been largely directionless for a while, even throughout the Liberation Day pivot to defense and the subsequent tariff pause risk asset rally. That kind of consistency may be attractive to a certain group of investors, but it makes it more challenging to figure out which environments it could lead in. It used to be magnificent 7 adjacent for a while, but now it’s behaving more like a balance between growth and conservative stocks.

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Utilities (XLU) – Shouldn’t Be Underestimated

While some signals remain mixed, utilities is the one sector that’s consistently signaled risk-on conditions over the past several weeks. That’s largely proven to be correct, although it’s interesting to note that utilities is still the best-performing S&P 500 sector year-to-date. With tariff volatility still high (at least in terms of how the landscape is shifting rapidly from week to week), I don’t think we should underestimate the persistent longer-term strength from this group.

Real Estate (XLRE) – Inconsistent Performance

Rate sensitive real estate is continuing to struggle with interest rates failing to move lower even after the easing of tariffs. REITs have worked fairly well as a risk-off asset throughout this cycle, but rate volatility and some counterintuitive behavior have caused some inconsistent performance this year. The hard data on housing is still holding up, but the commercial side is still experiencing its share of struggles.

Consumer Staples (XLP) – Consistently Lower Lows

Staples have struggled to gain any consistent momentum for about 2½ years as every rally has been met with lower lows. The bounce over the past couple of weeks has been encouraging and there’s definitely enough uncertainty to warrant a broader shift to defense by investors. On the other hand, if the market realizes that the Trump tariff volatility is little more than posturing (and the lack of a move in the VIX last week suggests it does), staples might struggle to run here.

Health Care (XLV) – A Dereg Winner

The healthcare sector looks like it’s reverted back to its old form, which is to say that it’s steadily lagging the S&P 500 again. Even in the environment over the past month or two where defensive sectors and themes have shown at least some life at times, healthcare seems to be the one area that’s consistently stuck in the mud. In a deregulation push, however, I could see this sector doing quite well.

Energy (XLE) – Supply/Demand Imbalance

The mood around energy stocks has been pretty dour despite the threat of short-term supply shortages due to geopolitical risks. Traders had been hoping that another production cut from OPEC would support oil prices. Instead, they got an announced production increase, which means further supply/demand imbalances.

Financials (XLF) – Banking On More Resilience

In isolation, banks benefit from higher rates because it means they can enjoy higher net interest income margins. Recently, however, it looks like the market is giving more weight to the idea of a slower lending cycle ahead. Banks should still be positioned to do well based on rates and the resilience in places, such as the residential mortgage market, but any kind of cyclical slowdown likely causes trouble.

Materials (XLB) – Core Commodities Slowing

The commodities market is beginning to show some weakness in demand. Materials stocks are heading lower as are industrial metal prices and lumber prices. The manufacturing sector has actually held up fairly well despite worries about tariffs and how it can impact the global growth cycle. Lower commodity prices, however, suggest there’s a lack of demand happening from businesses and consumers.

Small-Caps (VSMAX) – A Fundamental Disconnect

With so much struggle to push through tariffs and other economic policies, I think deregulation may become the ultimate calling card that finally works. If that happens, it could be the catalyst that finally shifts small-caps into gear. The fact that U.S. stocks are re-approaching highs, yet this ratio is still moving lower, means there’s some fundamental disconnect that suggests much of the economy is still in trouble.

Dividend Stocks (SDY) – Ups & Downs With A Lack Of Progress

Dividend stocks have been consistently struggling to maintain any sense of outperformance and have been giving back short-term gains. This ratio seems to do a fairly good job of reflecting the start & stop nature of both forward economic expectations, the direction of the Fed and trade war developments. The lack of clarity has meant a lot of ups and downs with not much steady progress.

Bonds (GOVT) – Safety Perception Starting To Break Down

Even with tariff risk seeming to ease here from its most aggressive levels, long-term Treasury yields have yet to follow. Does this mean there’s a structural breakdown at play due to Asian governments dumping Treasuries or some lingering effect from the Moody’s downgrade? It’s certainly possible, but I don’t think we can discount the possibility that Treasuries aren’t being viewed with the same safety as they were even a few months ago.

Long Bonds (VLGSX) – Treasury Yields Not Returning Lower

The Treasury yield curve continues to steepen here, which has been a firm negative for long-term notes. I’m still concerned that yields on the long end haven’t been returning to their pre-Liberation Day levels even though the volatility surrounding tariffs seems to have eased. We started to see a bit of a Treasury move higher when equities began discounting some of last week’s tariff developments, but there’s something worth watching about the lack of reaction in bonds.

Europe, Australasia, and the Far East (EFA) – Longer-Term Conditions Still Favorable

After a strong run to start the year, international stocks have mostly been able to hold on to outperformance, although the uptrend appears to be over for now. The market seems to view the Trump tariffs as potentially more damaging to the U.S. economy than those of its trade partners. With other nations also trimming interest rates and representing much better value, foreign stocks could have longer-term conditions working it their favor.

Emerging Markets (EEM) – The Latin America Boost

Emerging markets have mostly moved sideways relative to the S&P 500 over the past few months, but the short-term trend has been moving lower. Chinese stocks have held up well this year despite the tariff-related turmoil, but it’s Latin America that’s really come through. Brazil, Chile, Colombia and Mexico are all up more than 20% year-to-date.

U.S Dollar ($USD) – Any Strength Is Purely Short-Term

After a brief pop, the dollar has given up most of its short-term gains and is back to challenging multi-year lows. I think this chart pattern is pretty telling. It suggests that any dollar strength is purely short-term in nature and the longer-term sentiment is still to the downside. The anti-American trade may pick up again with Trump taking a decidedly more hawkish tone on trade at the end of last week.

Lumber (LUMBER) – Gold Back To Rallying Again

Gold prices are back in rally mode and threatening to touch previous all-time highs again. Given how precious metals have consistently been a sturdy risk-off signal in the absence of Treasuries being that asset, I don’t think we can ignore what this ratio is telling us. It has consistently been risk-off and seems to indicate a resilient fearfulness over the uncertain nature of the current economic path.

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