BNY’s Bob Savage notes that April’s 10% S&P 500 surge, the strongest in 33 years, reversed a prior defensive rotation from big tech into Energy, Materials and Industrials and into cash. He argues this “putting money to work” signal complicates Federal Reserve (Fed) perceptions as financial conditions shape United States (US) demand. Investors now weigh war clarity, AI-driven growth and energy inflation before deploying more cash in Q2.

Equity gains test Fed perceptions

"The last six months of U.S. equity trading have seen a significant sector rotation out of big tech into Energy, Materials and Industrials. The shift to cash (measured by our CAST index) was also notable. Investors were defensive in this barbelled approach."

"This all changed in April with the U.S.–Iran ceasefire, and the reversal into month-end was significant. The S&P 500 returned 10% in April, the best result since the peak COVID-era rush back to risk. The cash-and-leverage dynamic will test the bond-equity correlation going into May."

"April’s best monthly S&P 500 gain in 33 years has sent a strong “putting money to work” signal, one that will complicate views about the Fed. Financial conditions have become a significant part of how consumer sentiment and demand work in the U.S. The K-shaped economy arguments fall apart if stocks fall sharply."

"Clarity on the war’s end, confidence that AI investment will sustain growth, and a coherent read on energy-driven inflation are the key conditions for investors to put money to work in Q2. The subtle difference between April and May is about “buying the dip” vs. “chasing the tape.” Value and momentum factors will be clashing across global asset classes."

"As markets transition into May, the key challenge will be reconciling easy financial conditions with still-elevated risk appetite following April’s sharp rally. Investors are increasingly focused on whether higher rates and sustained energy shocks will begin to meaningfully erode growth, particularly as central banks shift toward data dependency and offer less forward guidance."

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