Barclays says Powell and Nvidia will test the rotation trade

Investing.com -- Barclays said the recent shift in equity markets away from technology leaders toward laggards and defensives now faces two critical tests: Federal Reserve Chair Jerome Powell’s Jackson Hole speech and Nvidia’s upcoming results.

In its weekly commentary note, Barclays stated that “risk-on sentiment in global equities took a breather this week after defying the odds of a negative seasonality thus far in August.”

Laggards and defensives gained ground, while “momentum winners gave back some of their gains.”

European equities initially benefited from Ukraine peace talks, which lifted Barclays’ ceasefire basket and short-cycle industrials. But the bank cautioned that the trade “is fading already, as progress towards a peaceful long term resolution to the conflict remains uncertain.”

Still, the latest PMI data offered encouragement, with EU manufacturing activity moving into expansionary territory for the first time in more than three years.

Barclays said this “should validate the recent strength witnessed within the short-cycle space and EU Banks.”

The dovish pricing of U.S. rates also supported rotation, with small caps and European equities outperforming.

“Markets continue to price c.2x cuts from the Fed by year-end,” Barclays wrote, though it warned that “if his [Powell’s] remarks turn out to be hawkish, this could challenge the prevailing Goldilocks narrative.”

At the same time, AI-linked enthusiasm has shown signs of fatigue. Barclays highlighted that “renewed question marks about the P&L gains from AI rollout to firms amid the massive capex spending” weighed on Big Tech.

The bank added that the trajectory of Nvidia (NASDAQ: NVDA) and the AI trade will be decisive: “The fate of the recent rotation may also hinge on the trajectory of the Nvidia/Big Tech names.”

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