Post-midterm election market dynamics reveal a significant defensive shift among active investors, with beta-adjusted net exposure reaching historically low levels. Lou Miller, Goldman Sachs’ global head of custom baskets, observes that the AI data center trade has undergone a sharp correction, with valuations dropping nearly 50% from June highs as concerns over ROI and capital market limits weigh on the sector. This reset creates a lower bar for future surprises, shifting the AI narrative toward healthcare, where cyclical and secular drivers are expected to accelerate growth. Traditional defensive sectors like Staples currently offer poor value compared to high-yield bonds, making high-quality "compounders" within the S&P 500—excluding the volatile AI complex—a more attractive play. Investors should monitor employment data and the December FOMC decision as the market anticipates a "relaxed" year-end rally.
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