Akoner: This is the year of small caps and the average US stock

Key Concepts

• Rotation: A shift in investment strategy from one asset class or sector to another, in this case, from growth tech stocks to consumer-sensitive stocks and small caps.
• Steepening Curve: An increase in the difference between long-term and short-term interest rates, generally beneficial for banks.
• Net Interest Income (NII): The difference between the revenue a bank earns from its lending and investing activities and the expenses it pays out to depositors.
• Quantitative Tightening (QT): A contractionary monetary policy where a central bank reduces the amount of liquidity in the money supply.
• Financial Deregulation: The process of reducing government regulations on the financial industry.
• Rate Agnostic: Not significantly impacted by changes in interest rates.

Market Rotation and Investment Strategy – Insights from Conor Global Payments at eToro

Introduction

This discussion centers on current market dynamics, specifically a noticeable rotation occurring within risk assets, and potential investment strategies for 2026. The conversation highlights a shift away from large-cap growth stocks (particularly the “Magnificent Seven” – Mag-7) towards consumer-sensitive stocks, regional banks, and small-cap companies, driven by evolving macroeconomic conditions and anticipated policy changes.

I. Evidence of Market Rotation

The discussion begins with data indicating that Bank of America customers are selling equities and ETFs that have historically seen inflows. This is interpreted not as a broad flight from risk assets, but as a rotation within them. The speaker emphasizes that equal-weight indexes are currently outperforming market-cap-weighted indexes, signaling a broadening of market participation beyond the largest companies. This rotation is occurring despite the strong earnings growth of the Mag-7 companies.

II. Macroeconomic Drivers of the Rotation

Several macroeconomic factors are identified as driving this rotation:

• Ending Rate Cutting Cycle: The expectation that the Federal Reserve’s rate cutting cycle is nearing its end.
• Ending Quantitative Tightening (QT): The anticipated conclusion of the QT policy, which will increase bank reserves.
• Potential Financial Deregulation: The hope for financial deregulation, which would facilitate bank lending and economic activity.
• Steepening Yield Curve: The increasing difference between long-term and short-term interest rates, which benefits bank profitability. The speaker states, “given the fact that the curve is steepening, I would call it more like a rotation.”
• Favorable Macro Backdrop: The confluence of these factors creates a “very favorable” macroeconomic environment for risk assets.

III. Investment Strategy: Balancing Growth and Opportunity

The speaker advocates for a balanced approach, advising investors not to drastically reduce exposure to growth names (like the Mag-7) but to simultaneously capitalize on emerging opportunities in small-cap stocks and the average US stock. He stresses the importance of not “miss[ing] out on these important opportunities” presented by the current macro environment.

IV. PNC as a Specific Investment Pick

PNC (a regional bank) is presented as a specific investment recommendation for 2026. The rationale includes:

• Benefiting from Steepening Curve: PNC is positioned to benefit from the steepening yield curve.
• Strong Net Interest Income (NII) Growth: The bank is projected to experience $1 billion in NII growth.
• Recent Acquisition: A recent acquisition will contribute to growth.
• Diversified Balance Sheet: PNC’s balance sheet is described as “quite diversified” and “rate agnostic,” meaning it is less sensitive to interest rate fluctuations.
• Strong Consumer: The investment thesis relies on a continued strong US consumer.
• Capital Markets Activity: Expectation of continued strength in capital markets activity.

V. Addressing Headline Risk and Geopolitical Uncertainty

The discussion briefly addresses the risks posed by the Department of Justice investigation into Federal Reserve Chair Jay Powell and geopolitical uncertainties (specifically, oil price spikes due to issues in Iran and Venezuela). The recommended mitigation strategy is diversification, with commodities suggested as a good hedge against equity volatility. The speaker notes, “The past couple of years show that rates don’t help us really,” implying that traditional rate-based hedges may be less effective in the current environment.

VI. Notable Quotes

• “I think we say that it’s a rotation not necessarily broadly from risk assets, but within the risk assets.” – Conor Global Payments at eToro, describing the current market movement.
• “This year is going to be the year of small caps, the average US stock as well.” – Highlighting the potential for broader market participation.
• “All we need is financial deregulation to help the bank do its job in terms of intermediation.” – Emphasizing the importance of regulatory changes for bank performance.

VII. Logical Connections

The conversation flows logically from observing a market rotation (supported by Bank of America customer data) to identifying the underlying macroeconomic drivers (ending rate cuts, QT, deregulation, steepening curve). This analysis then informs a specific investment strategy (balancing growth with small-cap exposure) and a concrete stock pick (PNC). Finally, the discussion acknowledges and addresses potential risks (geopolitical uncertainty) with a diversification strategy.

Conclusion

The core takeaway is that the market is undergoing a rotation driven by shifting macroeconomic conditions. Investors should consider diversifying their portfolios to include consumer-sensitive stocks, regional banks like PNC, and small-cap companies, while maintaining some exposure to established growth names. Diversification into commodities is recommended to mitigate geopolitical risks. The overall outlook is cautiously optimistic, contingent on a continued strong US consumer and favorable policy changes.