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Introduction

A quick note before we begin: we remain abroad for another week, and given our travel schedule, this report will continue in an abbreviated format. We appreciate your understanding.

Our last report, The Rotation is On!, focused on the developing leadership rotation that we expected to emerge as quarter-end positioning gave way to fresh capital allocation decisions. This has been a central theme in our recent work, and the market continues to validate that thesis.

One of the largest challenges for investors remains the extreme crowding in the Semiconductor complex. We cautioned that semis were likely to see further downside—and even highlighted a tactical short opportunity for more aggressive traders—as capital rotated into lagging sectors. At the same time, we identified Software as a primary beneficiary of that rotation. Thus far, that framework has played out almost exactly as expected.

Financials were another area we highlighted as being well positioned to play catch-up. After weeks of relative underperformance, the sector has finally broken out of its malaise and is now on the verge of retesting its all-time highs, further reinforcing the rotational backdrop we have been outlining.

We also highlighted Healthcare (XLV) as another beneficiary of the rotational trade. That view has played out as expected, with the sector breaking out to fresh all-time highs last week. New all-time highs are one of the strongest confirmations of an existing uptrend—particularly for a sector that spent nearly two years consolidating before finally breaking higher.

If you followed our roadmap, it was raining alpha last week. As crowded Semiconductor positioning unraveled, the sectors we identified as rotational beneficiaries delivered exactly the type of relative outperformance we were expecting.

Software (IGV) led the charge, outperforming Semiconductors (SMH) by roughly 900 bps. Financials and Healthcare also handily outperformed the broader indexes, providing further evidence that market leadership is expanding beyond the narrow group of momentum favorites.

Below is an excerpt from our June 28 report, where we outlined our bearish view on Semiconductors (SMH)—a view that has since played out as expected.

That bearish outlook was followed by our recommendation to reposition into Software (IGV), which has since outperformed:

Futures found some relief on Friday while the cash markets were closed, helped in part by constructive headlines surrounding the Iran situation. That followed Thursday's weaker-than-expected—and somewhat unconventional—employment report, which took some of the steam out of the recent rise in Treasury yields and provided an additional tailwind for the ongoing rotation into rate-sensitive sectors.

The broader takeaway is that the labor market remains stable, but increasingly uneven beneath the surface. Softer payroll growth should also reduce inflationary pressure at the margin, supporting the view that the Fed has greater flexibility should labor conditions continue to soften.

That helped pull forward some of the expected easing embedded in 2026 Fed funds futures, but not enough to fully remove the market-implied probability of additional cuts this year.

Despite continued weakness in Big Tech, the Dow Jones quietly broke out to another all-time high on Thursday following the softer-than-expected payroll report. It's yet another confirmation that market leadership is broadening and the rotational trade remains firmly intact.

Now let's see what the charts have to say.