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Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
John J. Hardy
Chief Macro Strategist
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Market Sell-Off: Who Picked Up the Slack?
Charu Chanana
Chief Investment Strategist
Key points:
- US Tech Under Pressure: On January 27, US tech stocks faced significant pressure, with the Nasdaq and S&P 500 technology stocks experiencing sharp declines due to concerns over China's AI advancements.
- Defensives and Value Plays Outperformed Growth: Defensive sectors like consumer staples, healthcare and financials demonstrated resilience, providing stability in the face of market volatility. Value stocks outperformed growth stocks, highlighting the importance of diversification into defensive and income-generating sectors.
- Safe Havens: Fixed income markets, particularly long-term Treasuries and investment-grade bonds, served as reliable safe havens amid the equity market turbulence.
US tech was in the crosshairs on January 27, with the Nasdaq plunging and information technology stocks in the S&P 500 tumbling 5.6%. The trigger came from concerns over China’s deepening AI ambitions with its DeepSeek app providing a less expensive open-source alternative to OpenAI, which posed a potential challenge to US tech dominance. This spilled over into the broader S&P 500, which slid 1.5%, while growth-focused plays like S&P Growth index (-3.6%) were also hit hard.
But not all markets and segments felt the same pain. Resilience came from defensive sectors, value stocks, and even some regional equity markets that declined far less than their US counterparts.
The Sectors That Thrived
Defensive sectors came to the rescue, demonstrating their resilience in times of uncertainty. Here’s who picked up the slack:
- Consumer Staples (+2.8%): Staples surged as investors sought safe havens. Household names like Procter & Gamble and Coca-Cola tend to benefit from their status as essentials, making the sector a key refuge during market turmoil.
- Healthcare (+2.2%): With its predictable demand and lower sensitivity to economic cycles, healthcare provided a cushion. Biotech and pharma names were in focus as risk-averse investors shifted allocations.
- Financials (+1.1%): Banks, insurance, and other financials rose as the bond market’s relative calm supported their outlook.
- Real Estate (+1.0%): The sector benefited from falling bond yields, which make REITs more attractive for income-focused investors.
Fixed Income and Gold: The Other Safe Havens
While equities juggled gains and losses, the fixed-income market proved a reliable anchor:
- Long-term Treasuries (+1.2%): Yields on 20+ year Treasury bonds fell as investors sought safety, pushing prices higher.
- Investment Grade Bonds (+0.7%): Corporate bonds outperformed their high-yield counterparts as investors prioritized credit quality over risk. High-yield bonds, however, barely moved, rising just 0.1%, as credit risks remain a concern in uncertain markets.
Surprisingly, gold (-1.1%), often a go-to safe haven, underperformed likely as a result of stretched positioning which brings a lack of speculative short sellers in the market.
Style Factors: Value Outpaces Growth
While tech-led growth stocks faltered, value stocks emerged as a relative bright spot. The S&P 500 Value Index rose 1.0%, in stark contrast to the S&P 500 Growth Index, which plummeted 3.6%.
- Growth’s Struggles: The tech-heavy growth segment bore the brunt of profit-taking as Nvidia and other mega-cap names faced selling pressure.
- Value’s Resilience: Companies in sectors like consumer staples and financials, which tend to dominate the value universe, gained traction as investors rotated into defensive and income-generating plays.
- Mid and Small Caps: S&P mid-cap index fell 1.1%, and S&P small-cap index slipped 0.3%, reflecting caution in the broader market as investors shied away from riskier segments.
Regional Resilience
While US markets struggled, several regional markets outside the US fared much better:
- Hong Kong Hang Seng (+0.7%): Hong Kong equities edged higher, buoyed by optimism over China’s AI growth at the expense of US tech slowdown and further stimulus measures from China.
- Euro Stoxx 600 (-0.1%): European markets showed resilience, with gains in financials and consumer staples offsetting losses elsewhere. Europe’s higher exposure to value stocks likely played a role.
A Reminder of Balance
The market’s moves yesterday underscored the value of diversification. Defensive sectors and high-quality bonds played their part in stabilizing portfolios amid a risk-off day. However, emerging markets and commodities, often viewed as growth stories, couldn’t capitalize on the rotation out of U.S. tech given the renewed trade tensions following hints of new tariffs from former President Trump weighed on market sentiment.
For investors, the key takeaway is clear: while growth assets can shine in bull markets, it’s the steady, defensive players that prove their worth when the tide turns.
Portfolio Implications
- Stay Balanced with Defensive Sectors: Sectors like consumer staples and healthcare may offer stability in volatile periods.
- Value over Growth: The resilience of value stocks underscores the importance of diversifying beyond growth-heavy plays like tech.
- Consider Regional Diversification: Markets like Japan and Europe, with their balanced exposures, declined far less than the US. This reinforces the case for international diversification.
- Bonds Remain Critical: Treasuries and investment-grade bonds proved invaluable during the selloff, stabilizing portfolios when equities fell.
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