Key Highlights

• The melt-up in global equities continues with the focus on trade deals and tame inflation…
• But investors worry about value, bond yields, fragmentation of finance, and lower growth outlooks
• High cash holdings and ongoing price momentum set up for another FOMO moment with a focus on AGI, robotics and quantum computing growth technology

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Globalization meets fragmentation in 2025, driving down all positions

EXHIBIT #1: IFLOW GLOBAL CUMULATIVE CROSS-BORDER FLOWS FROM PEAK IN Q1 2020

_Source: BNY

Value normally beats growth as a driver of money flows ahead of earnings season and following a significant market correction. This was not the case in May, however, and so far it’s not happening in June either. Many investors are nervous and have adopted a wait-and-see attitude. Adding to expectations of future trouble, the World Bank this week joined the IMF in cutting its 2025 growth forecasts from 2.8% to 2.3% − paring the outlook to lows last seen in 2008. In contrast, the rally in global shares is ongoing, with forecasts for the S&P 500 now up to 6,600, or 10% above 2024, up from 0% back in April. Bullish investors point to trade agreements between the U.S. and China, India and the U.K., which will lead to easier financial conditions, lower front-end rates, as most G10 central banks ease, tame U.S. CPI, with stocks back to neutral positioning but near historic highs, and low volatility across asset classes. Those with a more bearish outlook, however, push back on value and the steeper U.S. yield curve making leverage expensive, along with worries about U.S. taxes and tariffs remaining in place regardless of any deals.

Our take 

In reducing its 2025 growth forecast, the World Bank cited “uncertainty” as a key factor, highlighting tariffs and other policy shifts. It also noted that fragmentation factors were on the rise around the world. Our iFlow data show an increased home bias among investors as they pull away from cross-border opportunities and bring money home. In fact, globalization peaked just before Covid disrupted U.S. markets in early March 2020. The reversal of cross-border investments is ongoing, with flows turning negative in 2025. The negative trend accelerated in Q2. The U.S. exceptionalism stocks and bonds experienced in 2023 and 2024 was the result of technological innovations and the FOMC’s efforts to fight inflation. In 2025, by contrast, we are seeing fragmentation concerns linked to global political tensions, less global foreign direct investment (FDI), ongoing trade tensions, and less policy coordination.

Forward look 

Money flows continue to play a key role in supporting growth, and volatility is anathema to returns. The risks of ongoing trade tensions despite the deals made at the July deadline are keeping investors from fully embracing the current market trends. Furthermore, passive investment strategies are predominant, with liquidity becoming the most important driver. Any changes to taxes, tariffs or yields will increase fragility. Investors will be looking at returns at Q2 ends, with some taking significant actions. The biggest concern for U.S. public equity may be in the private equity space as positions in the less liquid, unmarked investments are used by many endowments and pensions, which then means more equity supply and more competition for public companies.

May was about momentum – will June be about value?

EXHIBIT #2: U.S. EQUITY FACTOR ETF INDEXED RETURNS

_{Source: BNY, Bloomberg (MTUM, GARP, VLUE)} 

EXHIBIT #3: IFLOW IT SECTOR FLOWS AND HOLDINGS

_Source: BNY

Our take 

We highlighted the fact that retail investors were buying the dip in April in our report “Retail Doesn’t Always Win.” The May price action, however, looked more like a catch up to flat rather than a fear-of-missing-out rally. The iFlow data show a clear return to normal positioning across global markets, and digging into sectors, only Energy and Real Estate still have consistent short positions. The market drivers moving forward are less obvious. The factors driving flows are all working, with momentum the clear leader but one that is losing steam. Looking at growth as the next key puts the focus back on technology as the key explanation for the current melt-up in prices. Value, like other factors, has bounced back from April but significantly less than most cycle watchers expected.

Forward look 

The lack of divergence in factors and the current flat positioning for investors across most markets makes Q2 rebalancing less of an event, but one that still has significant long-tail risks. Balancing growth against value in the technology sector may be a difficult exercise for stock-pickers, but one that should pay off in the quarters ahead. Contrasting the current sector growth favorites (artificial general intelligence (AGI) versus robotics and quantum computing) with the overall sector helps to cut through the confusion between beta and alpha into the rest of 2025.

Robotics more than AGI or quantum computing should lead technology

EXHIBIT #4: INDEXED RETURNS OF IT SECTOR AGAINST ROBOTICS AND AGI BASKETS

_{Source: BNY, Bloomberg}

Our take 

The current focus on technology leading all stock gains matters and shows up in our flows. Anecdotally, we also see that investors are clinging to the AGI, robotics and quantum computing arguments for growth factors over value. In this connection, we created a robotics basket using the largest players in the industry – ABB, Fanuc, Tesla and Yaskawa Electric. The international connections in the robotics space are important to note, too, with Japan and Sweden important players, and China rising fast. Private equity plays a notable role as well, with Boston Dynamics a key player. Two risks are not yet part of the narrative: liquidity shifts by private equity and industry growth not living up to the hype. The AGI basket also includes private companies, such as OpenAI, which is in capital raising mode, and Primoria AI, with its emotional intelligence push. The biggest public companies are Alphabet, with its DeepMind work, Microsoft and its Azure platform, and Meta, with its new investment push. Robotics and AGI have clearly outperformed the overall technology sector since its bottom in April.

Forward look 

The biggest fears as we head into the end of Q2 revolve around a sell-off linked to valuation. The period through July 10 is the confessional phase for companies ahead of earnings. With a number of companies not giving guidance on Q1 calls, the pressure to do so now is higher. The half-year mark adds to the pressure for investors to rethink portfolios and drivers. Similar to year-end, many may cut the winners and buy the laggards, with value as the key factor. Valuations of technology shares vs. the S&P 500 are notably stretched. There are many tools for thinking about value, but the duration of the tech sector vs. the S&P 500 captures the current clash between rates and returns. The duration of a stock is simply one divided by its dividend – how long it would take for just owning the stock for its payout rather than its appreciation to pay off. Using current dividends, the U.S. technology sector needs 137 years with a P/E of 28.5 to break even, while in the case of the S&P 500, it’s 75.2 years. The Global X Robotics and AI ETF has a duration of 769 years, while for Fanuc it’s just 42.4 years. There is a spread in value metrics and market focus that should change in the weeks ahead given the ongoing shifts in rates, trade expectations and cash.

Bottom line

The melt-up in global equities continues, with a focus on trade deals and tame inflation, though investors remain concerned about valuations, bond yields, financial fragmentation, and diminished growth outlooks. High cash holdings and ongoing price momentum create the conditions for another FOMO moment, particularly in growth technology sectors like AGI, robotics and quantum computing. Despite traditional expectations for value to outperform following a market correction, growth continued to dominate in May and June. The role of money flows in supporting growth remains crucial, with passive investment strategies dominating due to liquidity. Any changes in taxes, tariffs or yields could heighten market fragility, prompting investors to reassess their positions as Q2 ends.

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