Equities: Rotation risks build into June rebalancing – BNY

BNY’s Bob Savage notes that both retail and institutional investors bought the April weakness in US equities, but momentum has faded and exposure to energy and technology is elevated. He highlights June quarter-end and half-year-end rebalancing as a key driver, with liquidity, earnings growth, IPO supply and central bank policy likely to shape the next phase of the equity rally.

Rebalancing, liquidity and earnings drivers

"The June quarter-end and half-year-end rebalancing is key to understanding the current environment in equities, particularly in the U.S. Institutional holdings in energy and IT are outsized – over 20% above the 10-year average in the U.S. and even more in emerging markets."

"There is a risk for June in U.S. equities from a larger unwind of the energy and IT trades. The question is whether the “buy-the-dip” reaction function will be the same should there be a catalyst for a retracement."

"As equities move into the second half of the year, the market appears to be entering a new phase where liquidity, earnings delivery and policy expectations matter more than geopolitical headlines."

"The key question is whether the buy-the-dip mentality remains intact if markets face a more meaningful correction driven by higher-for-longer interest rates, persistent inflation, or earnings disappointments."

"We expect greater sector rotation and wider performance dispersion, with fundamentals becoming increasingly important as the market transitions from momentum-driven gains toward a more selective and valuation-sensitive environment."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)