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Fading hype(rscalers) for bottlenecks
Source: Bloomberg, Sherwood
What happened last week?
Global markets
From Friday 19 to Friday 26 June 2026, global equity markets endured a sharp but differentiated sell-off, driven by a sudden reassessment of AI-related valuations against a backdrop of a hawkish Federal Reserve pivot. The MSCI ACWI retreated 2.2%, with damage concentrated almost entirely in growth and technology. The week was defined less by what broke than by what held: healthcare, financials, consumer staples, and small-cap stocks all delivered positive or near-flat returns, pointing to a broadening of the market even as its most celebrated sub-sector came under pressure.
The trigger was a loss of confidence in the sustainability of AI capex at current valuations. High-profile talent departures from Alphabet raised uncomfortable questions about competitive moats within Big Tech, while the structural concern was broader: combined hyperscaler capex now exceeds $450 billion in 2026, yet investors find it increasingly difficult to identify a proportionate return. This fed directly into rate anxiety — the Fed had already shifted its tone at its June meeting, signalling a possible rate increase by year-end, and May PCE data offered no comfort, with core at 3.4% YoY and headline at 4.1%.
US
The divergence within US equities was stark. The Nasdaq 100 fell 4.2% and the S&P 500 declined 1.9%, but the Russell 2000 rose 1.0% and the equal-weighted S&P gained 1.6%. The S&P 500 Value index was essentially flat while Growth shed 3.7%, underscoring the sharpest style divergence of the year so far — a configuration rarely seen outside genuine regime shifts. The technology sector dropped 5.1%, semiconductors shed 7.7%, and the Magnificent Seven fell 5.9%. The beneficiaries were strikingly defensive: healthcare surged 7.9%, insurance rose 5.3%, regional banks gained 4.9%, and consumer staples added 2.5%. The anticipated delay to OpenAI's public debut reinforced concerns about the market's ability to absorb lofty AI valuations, making capital-light defensive businesses relatively more attractive. Micron's blowout fiscal third-quarter earnings provided a partial counternarrative late in the week, but were insufficient to reverse the trend for the semiconductor complex.
Europe
European equities were not spared, though the continent's more defensive index composition cushioned the blow. The STOXX Europe 600 declined 0.9% in local currency terms, with the DAX off 1.9% and the CAC 40 losing 1.1%; the FTSE MIB underperformed with a fall of 3.3%. The UK ended the period in positive territory. European semiconductor names — STMicroelectronics, Infineon, ASMI, and ASML — all suffered significant declines as the chip sell-off rippled through the region, while defence stocks also reversed sharply amid renewed uncertainty around the Middle East ceasefire. The outperformers mirrored the US rotation: staples gained 6.0% and healthcare added 5.8%. The ECB's latest consumer survey, which showed eurozone inflation expectations falling to 3.5% for the year ahead, offered a supportive backdrop for domestically oriented names, and Swiss equities rose 2.0% on the strength of their defensive weighting.
Rest of the world
Asia was the epicentre of the week's volatility. The MSCI EM index fell 4.6%, driven by the region's heavy concentration in semiconductors and technology. The South Korean KOSPI lost over 6% as AI and memory-linked shares reversed sharply; SK Hynix briefly overtook Samsung Electronics as the country's largest company by market capitalisation before both came under heavy selling pressure later in the week, with leveraged single-stock ETFs amplifying intraday moves to the point of triggering trading halts. The TAIEX fell 5.1% on Taiwan's deep semiconductor exposure, while the TOPIX declined 3.6% and MSCI China dropped 5.9%, the latter reflecting a combination of the global tech sell-off and domestic headwinds. Brazil rose 2.5%, its commodity-heavy composition proving advantageous in a week that rewarded defensives and resources. The AI trade remains structurally intact — Micron's results confirmed as much — but the market is no longer willing to grant it unconditional valuation support.
Our view on equity
Equity asset class
We maintain equity exposure at the upper end of our neutral allocation range.
Earnings
After a strong Q1 earnings season and upward guidance revisions, 2026 earnings expectations have been revised higher across all major regions and are now running at double-digit growth rates. Operating margins have reached all-time highs and continue to accelerate.
Valuation
Although equity prices have reached new record highs, forward P/E multiples have edged lower because EPS growth has outpaced share price gains. Valuations remain above historical averages in the S&P 500 and Nikkei, while the STOXX Europe 600 and Asia ex-Japan look relatively more attractive.
Risks
The main risk to this constructive view is a renewed rise in rates and inflation expectations, which could compress multiples and pressure valuations.
Disclaimer
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