Equity market rotation will continue for the foreseable future, says Wells Fargo's Ohsung Kwon
Speakers
Ohsung Kwon
— Chief Equity Strategist, Wells Fargo
Summary
Ohsung Kwon, Chief Equity Strategist at Wells Fargo, argues that the equity market rotation will continue, favoring small caps and commodities over mega-cap tech. He cites fiscal tailwinds, a changing rate reaction function, and hyperscaler debt issuance as drivers. He also favors energy and materials, copper, and gold, with gold supported by an ongoing debasement cycle.
- Kwon expects equity rotation to continue for the foreseeable future.
- He favors Russell 2000/small caps over the Magnificent Seven/mega-cap tech.
- Hyperscaler debt issuance and rising duration risk are changing mega-cap rate sensitivity.
- Wells Fargo double-upgraded Energy and Materials from underweight to overweight.
- He likes the metals side, including copper, and still likes gold.
- Gold is supported by a debasement cycle driven by fiscal deficits, debt-to-GDP, and inflation.
- He discusses a potential manufacturing upcycle as a tailwind for small caps and commodities.
Ideas
Rotation to small caps will continue.
He expects the equity market rotation to continue for the foreseeable future, driven by fiscal tailwinds for the first time in three years and a changing reaction function in which higher rates are seen as cyclical rather than restrictive. For the past three years, higher rates favored the Mag Seven over the Russell 2000, but that is changing as hyperscalers issue large amounts of debt, lengthen duration, and face declining free-cash-flow conversion. Small caps can work with steady rates and are supported by the potential manufacturing upcycle.
Rotation to small caps will continue.
He expects the equity market rotation to continue for the foreseeable future, driven by fiscal tailwinds for the first time in three years and a changing reaction function in which higher rates are seen as cyclical rather than restrictive. For the past three years, higher rates favored the Mag Seven over the Russell 2000, but that is changing as hyperscalers issue large amounts of debt, lengthen duration, and face declining free-cash-flow conversion. Small caps can work with steady rates and are supported by the potential manufacturing upcycle.
Overweight energy, materials, copper on commodities.
He likes the commodity side and Wells Fargo double-upgraded both Energy and Materials from underweight to overweight in November. Within materials, he favors the metals side, including copper, as the potential manufacturing upcycle supports commodity demand.
Gold benefits from continuing debasement cycle.
He still likes gold because the debasement cycle that started in 2022 is likely to continue. Fiscal deficit, debt-to-GDP and inflation are all likely to remain negative drivers for fiat currencies; historically, in debasement cycles, the S&P 500 underperforms gold, which is happening now and could continue.
