Danske Research Team observes that equities fell on Friday, led by Europe, as renewed concerns around Iran and stalled talks weighed on sentiment and drove a defensive rotation. They contrast this with last week’s strong move out of energy into cyclicals, especially IT, and argue investors should focus on the strong economy and extreme earnings growth in the IT sector rather than headline-driven micro-timing.

Defensive rotation versus tech optimism

"Equity markets moved lower on Friday, although with the US closed and a few European markets also shut, the price action was primarily driven by Europe. The setback was dominated by renewed concerns around Iran, not least as Vice President Vance did not travel to Switzerland to continue talks with Iran aimed at securing a final peace agreement and an end to the conflict around Iran and the Strait of Hormuz. Oil moved higher, and we saw a broader defensive rotation."

"This should be seen in the context of last week's massive rotation in the opposite direction, out of energy and into cyclicals, not least IT stocks. That raises the key question for investors: should one position for the micro-timing of every positive or negative headline around geopolitics, or should the focus remain on the underlying strong economy and the extreme earnings growth in the IT sector?"

"We lean towards the latter. Looking ahead, will there be more bumps on the road in relation to Iran? Yes, very likely. That is part of Trump's built-in strategy in what he calls The Art of the Deal. The relevant question for investors is therefore whether the focus should be on the end goal, or on trying to micro-time whether markets move up or down on any given day."

"This morning, Asian markets are mixed, but Japan, South Korea and Taiwan are all higher. In other words, the three large, tech-heavy Asian equity markets are trading higher this morning. European and US futures are lower."

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