Economic Update: Rotation, Recovery and a More Nuanced Policy Landscape

Recent market moves have been far more about rotation than deterioration. The ASX 200 has only pulled back around 4% from its peak and the S&P 500 just 3% before its sharp rally late last week, hardly the stuff of genuine risk‑off positioning. Instead, what we are seeing is the market responding to a new phase in the investment cycle: one where the extraordinary investment in AI by the US hyperscalers is reshaping industry dynamics, supporting near‑term growth, but also challenging some of the very companies that led the last decade of tech disruption.

This surge in AI capex now approaches 2% of US GDP and is underpinning a broader industrial recovery. Last week’s ISM numbers made that clear. As that recovery builds, it naturally supports cyclical sectors, and in the Australian market, commodities remain the cleanest way to express that theme. For resource companies, AI represents a productivity tailwind rather than a competitive threat, unlike what we’re seeing across parts of the software universe where the business models themselves risk being disrupted. The result is that value continues to outperform, and should continue to do so while the global cyclical upswing remains intact. Still, investors should be ready to step back into some of the better quality growth names that have experienced significant de‑rating.

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