The Strait is open. What's next for markets?

Key takeaways

• Improving macro conditions help reduce inflation risks
• Equity leadership broadens beyond technology
• Index reconstitution could reshape market benchmarks

The dominant theme this week was a tug of war between improving macroeconomic conditions and weakness in parts of the technology sector.

On the macro front, developments were broadly positive. Shipping activity through the Strait of Hormuz continued to recover following the recent U.S.-Iran agreement, with transit volumes reaching roughly two-thirds of pre-conflict levels by midweek.

As supply disruptions eased, commodity prices moved sharply lower. The decline in oil and broader commodity prices is important because it removes one of the biggest inflation risks investors have been grappling with in recent months.

That improvement was reflected across fixed income markets. Sovereign bond yields declined globally, with particularly strong moves in UK gilts after government officials reaffirmed their commitment to the country's fiscal framework. In the U.S., comments from Federal Reserve Vice Chair John Williams supporting a patient approach to monetary policy also reinforced our expectation that the Fed is likely to remain on hold.

Taken together, easing inflation pressures and a more stable geopolitical backdrop represent a constructive development for financial markets.

Despite the improving macro picture, equity markets finished the week lower.

Through Thursday's close, major equity indices were down roughly 2% on the week. However, the headline numbers masked an important shift beneath the surface.

Technology and semiconductor stocks, which have driven much of this year's market gains, came under pressure. At the same time, investors rotated toward more rate-sensitive and cyclical sectors, which generally outperformed.

Rather than signalling broad market weakness, this rotation suggests investors are broadening their exposure as inflation concerns moderate and interest rate expectations stabilize.

Investor attention also remained focused on the post-IPO performance of SpaceX.

Shares ended Thursday trading close to where they opened following the IPO, but trading patterns have revealed a clear divergence between retail and institutional investors. Retail participation has been driven largely by outright buying and bullish options positioning, while institutional investors have tended to focus on managing exposure through hedging strategies.

Looking ahead, investors will also be watching the annual Russell U.S. Index reconstitution, which takes effect after Friday's close.

This year's rebalance is expected to be one of the most significant in recent years. Several technology companies are set to move from the Russell 2000 into the Russell 1000, while a number of mega-cap growth companies will transition into value indices.

Those changes will reshape benchmark composition and are likely to drive meaningful portfolio repositioning among investors.