Iran deal triggers "major rotation": AI crowded trades loosen, cyclical stocks and emerging markets see catch-up rally

The implementation of the Iran agreement is reshaping the market landscape. As risks from the "energy shock/tail-end inflation" are greatly compressed, the previously dominant "semiconductor-energy barbell strategy" is shifting from core positions to a source of funds. A sweeping "major rotation" covering cyclical stocks, value stocks, and emerging markets is accelerating.

Nomura strategist Charlie McElligott points out that the market impact of the Iran agreement is unfolding along the previously anticipated path: lower energy prices are easing inflation expectations, driving central banks to repricing toward dovish stances, which in turn loosens financial conditions and weakens the dollar, creating catch-up opportunities for cyclical stocks, value stocks, and emerging market equities that have long been underweighted.

Data has preliminarily confirmed this logic—S&P 500 equal-weighted indices have outperformed market-cap weighted indices, and the "other 490 stocks" are starting to share the sunshine of market gains.

Meanwhile, structural signals within the market are becoming clearer: both technology and energy sectors were the worst performing sectors in the S&P 500 yesterday, "short-term reversal" factors strengthened, "long-term momentum" factors weakened, non-US markets outperformed US stocks, large-cap tech stocks underperformed, and cyclical stocks relative to defensive stocks soared over 2 standard deviations in the past week.

Barbell Strategy Comes to an End, Becomes a "Source of Funds"

In recent months, the "50% semiconductor + 50% energy" barbell combination has provided investors with an excellent risk-return profile, simultaneously hedging the crowded AI theme and oil price shocks driven by Iran conflict. However, McElligott clearly states that the "highlight" of this strategy is now over.

He notes that as the Iran agreement is implemented, this combination is more likely to serve as a "source of funds" under the current market environment—that is, investors reduce their semiconductor and energy holdings and reallocate funds to assets more sensitive to economic conditions. He describes this change as the strategy's natural "maturation" rather than a sudden reversal of trend.

Additionally, the "SpaceX mania" (the market saw massive speculative buying of SPCX call options, and some investors even bought downside hedges through skew trades) and "mega-scale cloud computing companies shorting via lendable stock/increasing shares to self-hedge" dynamics are further draining momentum from the previous "AI constraint + crude oil hedge barbell" strategy.

Rotation Logic: Repricing Driven by Compressed Tail-End Inflation

McElligott outlines the core transmission chain behind this rotation: the Iran agreement moderates energy prices, directly compressing tail-end inflation risk, making inflation easier to frame as a "temporary" phenomenon—thus giving central banks room to reprice toward a dovish direction.

Against this backdrop, global markets long lagging the US—especially energy importing countries—are seeing their growth prospects reignited, triggering a "relief rally." Financial conditions are easing as rates fall and the dollar weakens, and cyclical stocks, value stocks, and emerging market equities that have long been underweighted are facing short-squeeze upward pressure.

Nomura QIS CTA model's real-time data shows that trend reversals are occurring simultaneously across bonds, commodities, FX, and short-term rates/money markets, with only directional equity index futures yet to show any obvious reversal.

Respect Position Cleaning; Inflation Bets May Have a Reset Window

As Fed's new chair Walsh hosts his first meeting, McElligott believes the result is fully anticipated by the market: policy rates and the dot plot median (this year) remain unchanged, and the FOMC will remove "easing" bias wording from its statement, consistent with recent hawkish data signals.

He notes that the Iran agreement actually gives the Fed a narrative basis for arguing for policy easing in the medium term—the tail-end of inflation is cut, making "transitory inflation" more convincing. In his view, the most "dovish" path for Walsh through 2026 is to simply keep rates unchanged.

In conclusion, McElligott advises that many market participants he spoke with believe there will still be opportunities to re-enter inflation/hawkish trades (as well as precious metals longs) in the near future, as pro-cyclical forces often create chances for "overdone dovish corrections". But he emphasizes the importance of respecting the process of position cleaning right now. Attempting to prematurely rebuild inflation hedges before the rotation is complete faces considerable resistance.

Risk Warning and DisclaimerThe market carries risks and investments must be approached cautiously. This article does not constitute personal investment advice, nor does it consider the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, viewpoints, or conclusions in this article suit their particular situation. Investment decisions made based on this article are at your own risk.