One week / one topic: Breathless

What happened?

The long‑flagged crowding in Tech momentum stocks is now unwinding, with the factor down sharply over recent sessions.

This correction is broader than a simple long unwind, reflecting two‑way de‑grossing (long weakness and short squeezes) alongside elevated bubble signals and high cross‑factor correlations.

Of course, this is a central market theme as investors keep grappling with an observable acceleration in AI-linked investments, stock outperformance and overall mindshare.

The AI narrative continues to dominate and has driven extremely narrow market breadth (below), but this is probably not enough in and of itself to flash a clear bearish signal for equities.

Somewhat frustratingly, price action remains rational despite very rapid moves.

We will only know with hindsight if this is correct or not, but markets are clearly picking winning and losers – and not just bidding higher anything that is AI-adjacent. (I know, Allbirds…)

Meanwhile, government bond yields keep rising, as credible inflation concerns are fueled by perceived fiscal profligacy on the demand side and clogged-up oil flows on the supply side.

And so, can stocks keep ignoring rising bond yields?

Do narrow breath and cracks recently appearing in the AI momentum theme increase the chances of an abrupt reversal?

Our observations

• Fundamentals: 10yr real yields remain at very elevated levels across developed market issuers.

  Investors are expecting growth and policy repricing, and remain relaxed about long-term inflationary pressures. Can it last?

• Price action: Dispersion across the equity complex is noticeably very high.

  Perhaps this is a sign of markets becoming more efficient over time, and investors more able to differentiate than before. But this could also be a sign of fragility…

• Investor beliefs: AI is taking up more and more mindspace, but – once you leave Sand Hill Road – it is not all unicorns and rainbows.

  The rebellion against AI is gaining steam… So be careful what you wish for.

So what?

Times like these are a good stress test for one’s investment philosophy. (That said, I think we could all use a break after a decade littered with epochal systemic shocks)

While the ultimate outcome of the AI arms race remains unknowable – I do find myself using these tools more and more, however – we can perhaps say a bit more about the other side of the ledger.

Put simply, government bonds remain utterly unloved and historically cheap.

While on the latter I have limited confidence that one can do much more than point at a chart of real yields and say: “They are high vs their past!”, this is precisely why you are better served by thinking about such matters before the fact.

Of course, there are very solid reasons to be worried about runaway debt levels, fiscal incontinence, structurally lower demand, currency debasement, competing alternatives… should I continue?

When you look at the price, however, there is motive to believe that you are being compensated for all this – at least partially.

And so – with teeth appropriately clenched – we can still think that the odds are on our side and hold steady.

Mood music: The Police – Every Breath You Take

By popular demand, here is the One week / One topic playlist

The information provided should not be considered a recommendation to purchase or sell any particular security.