LIVE MARKETS-Sector divergence suggests U.S. rally broadening, but not all-encompassing - Saxo

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SECTOR DIVERGENCE SUGGESTS US RALLY BROADENING, BUT NOT ALL-ENCOMPASSING - SAXO

Europe's STOXX 600 .STOXX is slightly underwater as of Monday morning trading, but U.S. futures are up about 0.5%, which would see the main indices soar to fresh records.

The question on everyone's lips - can this U.S. stock market rally persist?

Saxo’s chief investment strategist Charu Chanana says the rally is broadening, but zooming into sector performance, it is not yet all-encompassing.

She names some of the factors fuelling the rally as geopolitical relief, trade optimism, expectations for more Fed cuts, and AI enthusiasm.

"Much of the rally’s credibility hinges on whether it’s broad-based or narrowly driven by a handful of mega-cap names. Encouragingly, market breadth has improved," she wrote in a note.

Indeed, it's not just a tech story anymore, but a "diversified rally", says Chanana, with sectors like industrials, communication services and utilities posting gains of 9%-12% and outperforming.

"However, some key pockets of the market are still lagging. Consumer discretionary stocks have fallen over 3% year-to-date, while healthcare and energy are also underperforming the broader market."

Such a divergence raises the possibility that while the rally is broadening, it is not yet all-encompassing.

So what will be the catalysts behind whether this rally sustains or fades through July?

Chanana lists U.S. tax policy, trade negotiations, Q2 earnings season, geopolitics and economic data among them.

Discussions around the Fed's leadership and independence might also move the dial.

"Staying diversified across quality cyclicals, AI infrastructure, and sectors that benefit from disinflation and dollar weakness may be the most balanced approach for investors navigating this high-stakes summer," she says.

(Lucy Raitano)

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