Iran escalation meets AI fatigue. Rotation is the trade.

Transcript

Tom Buddy, if you're still all-in on AI, last session might have you rethinking — Goldman Sachs is telling clients to rotate OUT of the AI trade and into names like Eli Lilly and Fortinet. We're breaking it down.

Marie Good morning. This is Investment Flash, London Edition, Tuesday May twenty-sixth. I'm Marie, joined by Gerald and Tom. And Tom, you're right — the rotation signal is everywhere today. Let's start with Goldman's call.

Tom Goldman singles out three stocks with low AI correlation and strong earnings revisions: Eli Lilly, Fortinet, and Chewy. Fortinet just hit all-time highs — up seventy-two percent year to date. No way that's just an AI rotation play.

Gerald Yeah, but at thirty-nine times forward P-E, Fortinet is exactly the kind of multiple that makes me nervous. That's a lot of good news already priced in, Tom.

Tom Oh here we go — Gerald, every time I mention a stock with a P-E over twenty, you break into a cold sweat. Look, Fortinet's earnings beat was strong, and cybersecurity isn't going away.

Gerald Analysts upgrading a stock after it's already up seventy-two percent is basically a free retirement plan. I'm just saying, the valuation asks you to be perfect.

Tom Ha — fair enough, but Fortinet's earnings were solid. Still, I hear you on the multiple.

Marie Ha — fair, Gerald. But Tom, Gerald has a point on Fortinet. Still, the non-AI rotation is real, and Lilly and Chewy are cleaner. Lilly at twenty-four times forward — reasonable for pharma with a new weight-loss cycle. And Chewy down thirty-eight percent year to date — that's a mean-reversion entry if pet spending picks up.

Tom Exactly — Lilly checks all the boxes. And Chewy near its fifty-two week low, that's my kind of setup. The rotation catalyst is the AI trade stalling.

Gerald Chewy I can get behind at these levels, but I'd still want to see a catalyst beyond just 'not AI'. Maybe a revenue inflection.

Marie But see, that's the whole point — the rotation IS the catalyst. When you have an increasingly concentrated market driven by one factor, anything outside that factor gets a bid when the factor stalls. Goldman is front-running that shift.

Marie Alright, moving from sector rotation to geopolitics. The US struck Iranian missile sites, and the Strait of Hormuz blockade could push global oil inventories below one hundred days of demand — that's from Nikkei Asia.

Gerald Yeah, and just yesterday we were talking about oil plunging on Iran deal hopes. Today, it's strikes. The market can't make up its mind. But that inventory threshold — one hundred days — is a level that historically supports much higher oil prices.

Tom That's what I'm looking at! Energy stocks are up thirty percent year to date but off their highs. If this drags on, oil pops, and the Energy Select ETF is a direct play.

Gerald What gets me is the complacency. The US Oil Fund is down five point six percent on the week despite these strikes. Gold is off one percent. It's like the market has already decided it's a quick skirmish.

Tom Totally.

Marie One hundred percent.

Gerald That's the whole story.

Marie But hold on — I'm going to push back here. Gold isn't bidding. That's the safe haven that should be screaming. If the smart money is pricing a swift de-escalation, then chasing energy and gold now could be a trap. A deal sends them tumbling.

Tom Yeah, the disconnect is wide, Marie. But even if a deal happens, the supply scare supports energy in the near term. I'd still buy the Energy Select ETF on this dip.

Gerald I'd rather buy the Gold ETF here. Nineteen percent below its fifty-two week high, and if the market is wrong about Iran — gold screams. It's a better hedge than chasing oil.

Marie Fair enough. But the bear case is real: de-escalation, oil down, gold down. It's a binary trade right now.

Marie Speaking of binary, let's talk rates. BlackRock's Saigal says there are 'sufficient factors' to justify a Fed rate cut under new chair Kevin Warsh. That's a contrarian bet against a hawkish consensus.

Gerald Kevin Warsh cutting rates? Historically, he's a hawk. But the long-duration Treasury ETF is at its fifty-two week low. A single dovish surprise and you get a violent short squeeze. That's the trade.

Tom Gerald, man, you've been waiting for that bond rally for two years. Remember March? The long-duration Treasury ETF is down another eight percent since then.

Marie Oh, that's brutal.

Gerald Ha — fair. But look, the trade gets better the more it's punished. At these levels, I'd rather buy the long-duration Treasury ETF than chase equities at highs.

Marie But timing matters. If Warsh holds tight, bonds keep falling. I'd use the intermediate Treasury ETF, near its fifty-two week low. Less volatile, but still catches the rally if he cuts.

Tom Quick one: Singapore banks. The FT says the regulator wants faster account openings for wealthy clients. That should boost fee income for DBS Group, trading at a reasonable fourteen point eight times forward P-E.

Gerald Yeah, DBS near its fifty-two week high, but the valuation is not stretched. If wealth inflows accelerate, that's a steady compounder. Not exciting, but I'll take it.

Marie And then there's Japan. Topix at an all-time high, Nikkei up three percent last session — all on Iran deal hopes. The Japan ETF is up twelve point six percent year to date.

Tom Oh, I love a good Nikkei surge. If the Iran deal happens, lower oil costs are a massive tailwind for Japan's import-heavy economy. I'd chase the Japan ETF here.

Marie Of course you do, Tom.

Tom Hey, momentum is real! But Gerald's probably going to rain on my parade.

Gerald Look mate, chasing at all-time highs when the Japan ETF is only three percent below its fifty-two week high? That's not a lot of upside unless the deal is perfect. I'd wait for a pullback.

Marie And not all emerging markets are rallying. A Japanese consumer goods firm warns of 'vicious' stagflation in Indonesia. The Indonesia ETF is down thirty percent year to date, near its fifty-two week low.

Gerald Stagflation is a margin-crushing machine. The Indonesia ETF has short momentum written all over it. No reason to bottom-fish there.

Marie But here's the twist: Macquarie says the yuan could hit five per dollar on a carry-trade unwind. That's the most original take today. Chinese firms holding over a trillion dollars — if they repatriate, it could rocket the China large-cap ETF.

Tom For real? Five per dollar is a level we haven't seen in more than a decade. The China large-cap ETF down ten percent year to date, near its fifty-two week low — the asymmetric upside is huge if even a fraction of that carry unwinds.

Gerald It's highly speculative, but the potential is there. If the yuan strengthens, Chinese equities could see massive short-covering. Fits the mean-reversion theme.

Marie It's not just China — a stronger yuan ripples across emerging markets and commodities. That's the common thread we think is missing: the dollar. If the dollar weakens, all these trades — oil, gold, EM — work.

Marie Alright, so our view: today's signals scream rotation. Goldman says non-AI, Iran says energy, BlackRock says bonds, Macquarie says yuan. The market is going from single-factor AI to multi-factor.

Tom But the bear case: if Iran de-escalates, oil and gold get crushed. AI earnings revisions are still strong — Nvidia's forward P-E is seventeen, not bubbly. And Warsh might never cut.

Gerald Exactly. The dollar is the linchpin. If the dollar strengthens on safe-haven flows, the rotation thesis falls apart. We're watching the dollar index like a hawk.

Marie Nailed it.

Tom Right.

Gerald That's the whole story.

Tom The cleanest expression is the dispersion trade. Straddles on the US Oil Fund and Gold ETF heading into the next Iran negotiations — that captures the binary risk.

Gerald Yeah, active management and options over passive beta. This is a stock-picker's market.

Marie But not every buy signal is actionable. Fortinet at thirty-nine times earnings? Be careful. Some of these need a pullback.

Tom Even I'm not buying everything, Gerald. And I'm the momentum guy.

Gerald That's growth, Tom. Growth.

Marie As always, none of this is investment advice. Do your own research.

Tom If you're just finding us, hit follow on Spotify — or check investmentflash.com for the full digest with charts and sources.

Gerald We're back at nine a.m. New York time for the New York Edition. See you then.