Rudi's View | 4:21 PM
Is today's extreme polarisation simply the result of changing financial markets?
By Rudi Filapek-Vandyck, Editor
Every once in a while a deep-dive research effort lands in the FNArena inbox that deserves to be highlighted.
This week’s focus on the finer details behind share market moves throughout the year past by global investment strategists at Morgan Stanley is one such fine example.
The research is global, but the observations made are equally noteworthy for investors in Australian shares.
Key observations include:
-the momentum trade is back, and with great dominance
-Quality companies are, simply put, out-of-fashion
-all roads lead to AI, including for energy and mining
It pays to be an AI beneficiary in 2026 because such market sectors and segments have been enjoying notable upgrades in earnings forecasts.
As again witnessed during the current quarterly result season in the US, the world’s big spenders on AI infrastructure, be they Microsoft, Meta, Alphabet or Amazon, are still growing at robust speed and management at these companies is in no mood to hold back on building the platform for future AI fortunes.
Analysts are yet again upgrading their spending forecasts for the year(s) ahead.
The direct result of this dynamic is that beneficiaries are expected to benefit more, and longer. Hence, a sheer uninterrupted trend of constant upgrades to forecasts.
This up-trend in earnings is what underpins positive momentum and, judging from Morgan Stanley’s research, investors are by no means holding back either in chasing exposure.
The result is there for everyone to see: extreme momentum, and loyalty, to one side of the market… and to that particular theme only.
It’s probably a sign of the increasing impact of shorter-term strategies in equity markets that shares with positive momentum simply keep on keeping on.
And those that do not have such momentum, well, they do the opposite.
The danger with such extreme all-in momentum trend moves is, of course, that at some point valuations are stretched out too far and who’s to say underlying fundamentals can or will catch up?
The strategists point out price-to-sales ratios, which is a proxy for how investors are valuing operating leverage, have approached historical highs for manufacturers of semiconductors (“chips”) and memory hardware — two obvious beneficiaries of ongoing strong investments in AI infrastructure.
One look at share prices of SK Hynix and Samsung in Korea, or of Intel and Texas Instruments in the US, immediately reveals the popularity of such stocks in 2026.
Locally in Australia, SEMI, the global X semiconductor ETF has gone parabolic since March and I have been told it is one of the most traded items on trading platforms, so Australian investors and traders are certainly not adverse to joining the trend either.
On Morgan Stanley’s data analysis, this strong emphasis on continuing the same trend is creating an ever-larger gap between Winners and Laggards across countries and sectors.
Over the past nine months, top performers inside the S&P500 have outperformed the index by 23 percentage points over the twelve months to May 1st this year. This represents the 98th percentile of outcomes since 1988.
For the MSCI ACWI ex USA index (global equities) the relative outperformance is larger; 31 percentage points, ranking at the 96th percentile since 1995.
In contrast, Quality stocks, determined by the highest level of earnings stability, are underperforming significantly.
There’s literally a global fragmentation taking place and all roads bend to and end with AI, including energy and mining companies which, by the way, remain less excessively priced as the aforementioned beneficiaries.
From that perspective, those beneficiaries appear to be less risky and relatively better value, but maybe this also reflects the fact many operators suffer from inflation, cyclones, wet weather and other impediments, as also witnessed in recent quarterly updates in Australia?
Morgan Stanley reports market leadership is increasingly shifting towards energy and metals, in addition to semiconductors. All three segments are significantly over-represented in lists of outperformers relative to their index representation.
Goes without saying, the longer these momentum trades continue, the higher the risk of over-crowding and of increasing market fragility overall if and when momentum switches to greener pastures.
Regarding the AI capex cycle itself, Morgan Stanley is not too worried:
“(…) it does not appear obvious to us that the current dynamics have reached the excesses of the late-1990s momentum cycle, which ultimately preceded a sharp and sustained compression in valuation multiples”.
The non-performance of Quality stocks has equally grabbed the attention of other market observers in the US, such as John Authers at Bloomberg whose data equally show the strong continuation of positively trending stocks while Quality (strong balance sheets, etc) has very few friends left.
Unsurprisingly, Authers has looked at stocks with the highest trading volumes and these are the ones that are trending strongly and leaving all others behind in admiration or frustration (pick your pick).
It can be dangerous to stand in front of this kind of rallies, Authers admits, but at the same time the risk is obvious when the trend ends or bends.
Share markets have always been dominated by narratives, of course, whether it is the return of high inflation, another bubble waiting to burst, this time is different, or a new commodities super cycle.
Maybe the real question is whether today’s extreme polarisation is not so much a temporary phenomenon, but rather the result of markets increasingly being determined by shorter-term participation, rather than by longer-term oriented investment strategies.
Your answer to this question is as valid as mine, but I wonder whether it is the latter, which would also explain the significant pick-up in volatility following earnings results and other market updates.
If this is the case, we all need to start paying attention.
(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)
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