Head of European Equity Strategy on Market Structure and Rotation (with Tom Mackenzie, Guy Johnson)

Gerry Fowler argues the recent tech volatility is almost entirely due to market structure (leveraged ETFs, call options), not fundamentals. He sees opportunities to rotate into other cyclicals, pharma, and US exporters. He expects Europe to go sideways, with half the market doing well (AI capex, pharma) and the other half stagnating.

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Gerry Fowler 8.5

Head of European Equity Strategy on Market Structure and Rotation (with Tom Mackenzie, Guy Johnson)

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He sees the AI capex story as structural and expects the supply chain to benefit from upward earnings revisions, suggesting a cautiously positive medium-term view.

Tom Mackenzie

Asks if the tech selloff is a healthy correction around valuations or fundamentals.
Gerry Fowler

This is almost entirely due to market structure (leveraged ETFs, call option buying, margin usage). Fundamentals haven't changed. This is the new normal; volatility within single stocks is at record highs.
Guy Johnson

Asks how to invest with this level of volatility.
Gerry Fowler

For the medium term, focus on fundamentals. Hyperscaler capex continues to be revised higher. There are opportunities to broaden into other US cyclicals due to a destocking phase ending. Pharma is worth buying; it's cheap and not well invested.
Tom Mackenzie

Asks about the defense sector, which has stalled after being an easy trade.
Gerry Fowler

We downgraded defense to neutral. The NATO 5% spending target was priced in, so there are no more upgrades to drive momentum. To get back, we need to see delivery and accelerated money coming in.
Guy Johnson

Asks how to outperform in a market that chases the next shiny thing.
Gerry Fowler

In Europe, follow earnings revisions. The marginal price setters are hedge funds who chase new news, which is reflected in earnings momentum. Be cognizant of positioning and crowding. Being crowded and losing earnings momentum is a real problem.
Tom Mackenzie

Asks if we can still get upside in the AI capex trade while hedge fund money moves into new trades.
Gerry Fowler

Our view is that Europe is going sideways. In that move, half the market (AI capex beneficiaries, pharma) will do well, while the other half (domestic exposures) stagnates. It's more about rotation.

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