BBVA Global Markets Quantitative Investment Strategies & Index Solutions
News | 18 Marzo 2025
QIS Thematics: Greed and Fear
- “Be greedy when others are fearful” is probably one of the most famous Warren Buffett quotes, and somewhat reminiscent of current market dynamics. US equities had delivered a strong >20% return in each of the last two years, most if not all driven by AI / Magnificent 7 stocks. Positioning, as a result, became extremely overweight AI, so much so that if an investment manager was underweight AI, they underperformed peers. The year-to-date correction has now finally made positioning cleaner in several of the secular growth themes. All the AI stocks have been down >20% since the start of the year. We are by no means trying to pick the bottom of the market; nonetheless, several of the secular growth themes are now starting to look reasonably priced.
- Rise in hedging demand: Over the last six months, we have also seen risk appetite fade and the demand for protection rise. We have noticed the VIX drifting higher on average, with the equity skew making new post-COVID highs. We see this as a sign of capitulation, with investors already well protected for the downside but not enough for the upside. Historically, a rise in the skew to extreme levels tends to be a strong driver of future returns in equity markets, although timing is key. Tariff risk remains for sectors with a global supply chain like autos, commodity producers, and consumer-focused stocks in particular. With positioning cleaner now, we expect long-term earnings growth to be rewarded again.
- Looking ahead: With positioning now cleaner on the consensus trades of the past two years, we believe investors should consider some of the long-term themes highlighted in this publication. Here, we launch a multi-factor ranking of our thematics based on price momentum, valuations, quality, growth, earnings momentum and technical factors. Currently, our scorecard suggests a high ranking for the infrastructure, and health and wellness themes based on strong technical and quality scores, respectively. In addition, we remain constructive on the AI and VR theme and, after the valuation reset, we see the current entry point as attractive for long-term allocation.