Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / Defensive Sectors Are Quietly Leading the Rally
Transcript
- Lucas: So the headline numbers this week are eye-popping. The Russell 2000 up six point two percent in five days, NASDAQ up two point seven. Growth is clearly having a moment. But if you look under the hood, there's a quieter story that I think is actually more telling about where we are in this cycle. Luna: You're talking about the defensives, right? Because I was scanning the sector heatmaps and utilities and healthcare are not just holding up — they're leading. Lucas: Exactly. The S&P 500 utilities sector is up over three percent in the same five-day window. And healthcare is right there with it. That's not nothing when growth names like CrowdStrike are up nine percent and Cloudflare nearly seven. Defensives are supposed to lag in a risk-on rally, but they're not lagging. They're participating. Luna: So what gives? Are investors hedging, or is this a genuine rotation into quality? Lucas: I think it's both. And that's what makes it interesting. You've got the Fed funds effective rate sitting at three point six four percent, flat for weeks. GDP growth just ticked up to two percent annualized from half a percent last quarter. The economy is stable but not booming. So you have this Goldilocks backdrop where growth stocks can run because rates aren't rising, but there's still enough uncertainty — trade tensions with China, AI displacement fears that even the Pope weighed in on — that investors want some ballast. Luna: That Pope headline was something. But it does signal that the AI narrative has a long-term question mark baked in. And defensives don't have that exposure. Lucas: Right. A utility company's cash flow doesn't depend on whether the next large language model replaces customer service agents. It depends on regulated rate bases and power demand. And actually, that's another angle: data centers need massive amounts of electricity. So utilities are getting a growth tailwind from AI infrastructure buildout, but without the valuation risk of a software stock trading at fifty times earnings. Luna: So it's like the defensive label is partially outdated for some of these names. They have a growth component now. Lucas: Precisely. Take a look at the S&P 500 equal-weight utilities index. It's up nearly fifteen percent year-to-date. That's not a hiding trade. That's a re-rating. The market is pricing in higher long-run earnings power because electricity demand is structurally higher. And you're getting a dividend yield on top of it. Luna: So who is buying these? Is it retail piling in, or is this institutional? Lucas: Institutional flows have been steady into utility ETFs for about six weeks now. I think it's a mix. You have pension funds and insurance companies that need yield and stability, so utilities are a natural fit. And then you have hedge funds that are long growth but want to hedge drawdown risk — they buy utilities as a portfolio ballast. The net effect is that the sector is getting bid up from both sides. Luna: And healthcare — is that the same story? Because healthcare has a lot of sub-sectors. Biotech is basically growth, but pharma and managed care are more defensive. Lucas: Yeah, healthcare is a broader story. The defensive part — large-cap pharma, health insurers — those are up because they have pricing power and stable demand. But you also have med-tech and biotech catching a bid on innovation stories. So healthcare as a sector is getting a double boost. The S&P 500 healthcare sector is up about two and a half percent in the last five days, which is right in line with the broad market, but with lower volatility. Luna: Lower volatility is key. Because if you look at the VIX, it's been hovering in the mid-teens. Not complacent, but not panicked either. So investors are willing to take risk, but they're hedging it. Lucas: Exactly. And I think that's the right read for May 2026. The market is giving you a signal: we're comfortable with the macro, but we're not throwing caution to the wind. The fact that both the Russell 2000 and utilities can rally simultaneously tells you that money is rotating within risk appetite, not abandoning it. Luna: So what does that mean for positioning? If I'm a listener with a diversified portfolio, do I overweight defensives now, or is it too late? Lucas: I don't think it's too late, but I wouldn't chase the recent move. The better approach is to look at relative valuations. Utilities are trading at about eighteen times forward earnings, which is above their ten-year average of sixteen. So they're not cheap. But healthcare is around seventeen times, which is closer to its average. So if you want defensive exposure, healthcare might offer a better entry point right now. Luna: And within healthcare, any sub-sector you'd highlight? Lucas: Managed care has been under pressure because of regulatory headlines around Medicare Advantage. But the fundamentals are solid — aging demographics, stable membership growth. If you can handle some headline risk, that's where the value is. Large-cap pharma also has decent pipelines and high dividends. Luna: So the through-line here is that the rally has breadth. It's not just a narrow tech trade. Defensives are confirming the uptrend. Lucas: That's exactly the takeaway. When both cyclicals and defensives are rising together, it's a sign of a healthy bull market. The question is whether this can sustain. If the Fed stays on hold and GDP continues to grind higher, then defensives can keep their bid. But if we get a sharp acceleration in growth, you might see a rotation out of utilities into more cyclical names. So the next jobs report or CPI print will be important. Luna: And on that note — and I know this is a little off the beaten path, but it connects — we get to do these deep dives because of a small group of listeners who support the show through buy me a coffee dot com slash fexingo. It's what keeps Bull Market Conversations ad-free and allows us to spend time on angles like this one, instead of chasing the hottest ticker of the day. Lucas: Yeah, it's true. And we're grateful for every person who chips in. It makes a real difference in how much research we can do and how many episodes we can produce. So if you find value in these conversations and want to help keep them going, that's the way to do it. And no pressure — we'll keep making the show either way. Luna: Absolutely. Okay, back to the markets. So defensives are leading, but what about the sectors that are lagging? Energy has been dead money for months. Is that a contrarian play? Lucas: Energy is interesting. Oil prices have been range-bound, and the sector is out of favor. But energy companies have actually improved their balance sheets a lot. Free cash flow yields are high. It's not a growth story, but it could be a value play if oil breaks out. I'd keep it as a small tactical position, not a core holding. Luna: Fair. And real estate? REITs have had a good run, but with rates flat, the income story is still intact. Lucas: Real estate is a yield play, and with the ten-year Treasury around four point two percent, REITs still offer a spread. Data center REITs in particular have that AI tailwind we talked about. So that sub-sector could continue to outperform. But broad real estate is more rate-sensitive, so if the Fed ever hints at a hike, those would sell off quickly. Luna: Right. So the bottom line for today: the rally is broad, defensives are pulling their weight, and the market is in a sweet spot of moderate growth and stable rates. But keep an eye on inflation data because that's the one thing that could break the spell. Lucas: Couldn't agree more. And if you want to keep following these rotations with us, we'll be back tomorrow with another episode. Thanks for listening.