Equities
Based on 40 years of history and some 12,000 IPOs, the evidence suggests that the coming IPO wave may dampen forward market returns, mute further multiple expansion, and possibly interrupt sector trends. That said, even monster-sized IPOs are unlikely to trigger a sustained bear market: only about 20% of mega-IPOs coincide with market peaks. The bigger risk is AI leadership rotation as new listings dilute scarcity premia in existing winners.
The US High Quality (USHQ) portfolio outperformed its benchmark through May, returning 3.88%, while its SPY benchmark returned 2.25%. On a trailing three-month basis, the USHQ portfolio’s performance was weaker than the benchmark, with USHQ underperforming by approx. 86bps.
The US economy is moving back toward Expansion, supported by strong investment, improving earnings, and record margins. We are taking profits on our tactical Software long after achieving our target and rotating into Materials, where commodity strength and earnings momentum continue to support the sector.
MacroQuant recommends a slight underweight position in equities, favors a below-benchmark duration stance in fixed-income portfolios, is very positive on the US dollar, downgrades gold to underweight, upgrades copper to overweight, and remains very bullish on oil.
The AI bubble is a different type of bubble. It is primarily an earnings bubble rather than a valuation bubble. Like all bubbles, the AI bubble will burst. For now, however, our AI demand indicators do not suggest that this is imminent.
In Romania, large fiscal and current account deficits, high inflation, negative real rates, an overvalued exchange rate, and deteriorating growth point to budding currency devaluation. Investors should short the Romanian currency versus the euro and underweight Romanian local bonds, equities, and sovereign credit.
Tech, and increasingly the market, is moving from a cash-return regime to a reinvestment regime. After the GFC, investors rewarded companies that returned cash to investors. In the AI cycle, they are rewarding companies that put that cash back to work. This is not just a story of falling free cash flow; it is the mirror image of a market rewarding reinvestment. Tech has defined both regimes, revealing the old cash-flow “stars” as sector bets masquerading as alpha.