Playing the Zenga game.

November 24th, 2025

Thoughts of the Week

It has been a remarkable year, primarily because of the polarization in returns among stocks and industries. In the US, everything related to AI, chips and data centers has been flying sky-high, while Consumer Staples (the likes of Procter & Gamble, Coca Cola and Colgate) have been left in the doldrums. In Europe, the shares of most defense companies have doubled and cement makers to Spanish banks have produced more than 50% of returns. But the Consumer Discretionary sector (autos, luxury etc.) is still negative for the year ! As we enter the last stretch of 2025, it is normal for investors and traders to feel nervous and especially until end of November, which we had highlighted as the time when bonuses and performance fees are calculated for many institutional players.

But liquidity in the system has also been deteriorating dangerously lately. The Fed has been reducing its balance sheet for a while now. Currently, the excess reserves in the banking system have been depleted to a point that the Fed was obliged last week to provide overnight liquidity to some banks that needed it. This whole drama is very similar to late 2018 when the same thing happened, and the equity market crashed. When liquidity gets tighter, it is harder and more expensive to find funding for the most leveraged trades, especially when these start correcting (Bitcoin, Japanese rates etc.) Speculators have to liquidate anything they can to meet their liquidity requirements and that is usually the most liquid, the most profitable positions and the most owned stocks (i.e. US Tech) .

The market action since late October reminds us of the Zenga game. The first who wish to take a piece out of the stack (i.e. their profits in our case) usually do it without much damage. These were some institutional investors who started reducing positions as the party was flaring up. The most prominent among them being Hedge Fund legend Pieter Thiel and Softbank who have sold by now all their Nvidia holdings, for example. Then when the first pieces are removed, more players decide to join the game and that is where it gets trickier, as every single move (sell order) makes the structure more vulnerable. And when the kid usually walks in the room and wants to remove a piece, it is when everything ends in tears. The kid in our case are both the retail investors who joined the party late, but most importantly the leveraged funds, that we mentioned in the previous paragraph. Hence, it is normal but also rather healthy that Nasdaq "crashed" by almost 10% in the last three weeks.

The US mega caps are fine as long as there are no any earnings' growth downgrades. Typically these are any stock's worst nightmare and no matter how high the absolute growth is (i.e. Nvidia slowing from a "whopping" 50% to a "just stunning" 25%) it always leads to, what we call, a de-rating. Or in other words, the multiple on earnings (P/E) that the investment community wants to apply to the stock comes down, even if earnings are still growing at a healthy pace. And this de-rating puts a natural ceiling on the stock price for some period.

If we take at face value Nvidia's last week's announcements, this is not happening anytime soon for the AI-related stocks. But we have to mention two important things. If investor sentiment sours more, the market might start speculating on this "growth slowdown theme" prematurely. This could happen if the big spenders (Microsoft, Amazon, Alphabet) start hinting of a slowdown on their spending plans, especially if this extravagance becomes a problem for their investors. Meta Platforms is the perfect example, where the company announced its 2026 capital spending at even higher levels than previously thought and its shares collapsed. When the "slower spending ahead" news hits the wires, the de-rating will start. The problem is that we do not know from what stock price levels this might happen. For the moment, we are more looking into opportunities, than deciding to get in the room where the Zenga game is played.

What caught our attention

US September non-farm payrolls rose by 119k, much better than expected. On the negative side, the previous two months were revised lower by about 35k. But this is a rather outdated piece of data, as October appears to be the month of higher layoffs according to recent private survey data. The unemployment rate rose to 4.4%, the highest level since 2021.

The minutes of the last FED meeting confirmed the view that a December rate cut is a coin-toss. As already demonstrated by Chairman Powell during his press conference back then, the committee is very divided as inflation is still at 3% and the wealth effect due to the AI rally is a tailwind for growth. Then, most parts of the non-AI economy are weakening and not to mention that AI-related efficiencies are already causing layoffs of white-collar personnel, which will cause unemployment move inevitably higher. Not an easy job to cut rates while all this is happening.

The Eurozone November Composite PMI eased marginally to 52.4 in line with expectations. Changes at the sector level were relatively small. The headline Manufacturing PMI declined by 0.3 points to 49.7 (consensus 50.1). The Services PMI edged up 0.1 point 53.1, exceeding consensus expectations of a small decline (to 52.8). The numbers still point to the case that the ECB is done with cutting rates for the foreseeable future.

Target and Home Depot, two of the largest US retailers cut their earnings guidance, after missing earnings expectations. Both companies mentioned that the average US consumer has become more cautious and willing to spend less. This is no surprise as according to the latest credit card data, delinquencies are running at multi-year highs even for the high income bracket and credit card balances have maxed out.

Ukrainian and US senior officials met in Geneva over the weekend to discuss a possible peace deal. Very few details have been announced, but the US Secretary, Mr. Rubio, sounded optimistic after the meeting. The 28-point plan which includes some of Ukraine's previous red lines had undergone some revamp during the Geneva negotiations and is now reportedly sent back to Putin and Trump for the final word. EU officials who visited our little town but had separate meetings, described the situation as "messy", as Trump initially talked about an end-of-November deadline and then tweeted that "this is not the final US offer", sparking confusion. Although we have been here before, it does look this time that the US will probably use the recent corruption scandals among his government officials to exert significant pressure on Zelensky and a deal could eventually happen in the coming weeks.

Markets reaction

Global equities corrected further, but Friday gave some solace as the US markets rebounded. As expected, Nasdaq was the worst performer with a 3% drop. The defensive sectors (Healthcare +1.8% and Staples +0.8%) provided protection during this turmoil, which confirms our stance for diversified portfolios and not bending to the momentum, fashionable themes only. Europe also fell about 3% as the region's darlings (defense, data centers, electrification) all suffered further set back. The Swiss SMI index ended flat for the week, also providing protection to portfolios.

The bond market was caught in a crossfire. The FED minutes poured cold shower on those expecting aggressive rate cuts (i.e. bond negative) while the unemployment rate moved further higher (i.e. bond positive, as long as inflation is in check). The end result is that the USD curve moved lower by 4.5bp, but the German curve barely budged. The highlight of the week was the mini-spike of credit spreads of US Tech companies, including the cash-rich mega caps.

Gold has lost some of its shine, as we wrote a few weeks ago. On the positive side, it has rebounded from the support levels close to 3900$, but has failed to gain momentum. It has been trading erratically in the 4000-4100$ area.

Bitcoin fell to a low of 80k, as leveraged trades were washed out. But the crypto currency managed to rebound to about 85k. It is now -8% in USD terms and -20% in EUR terms, on a year-to-date basis .

The dollar strengthened, with the EURUSD approaching 1.1500 again. A few months ago we had highlighted that the 1.1850 appears to be a very strong resistance for the EURUSD, and for the moment this have been confirmed. What happens next year is anybody's guess, but the rate differential between EUR and USD will play an important role.

Chart of the week:

Can 2026 bring a reversal of fortunes ?

The above chart shows the year-to-date returns of the US mega cap Tech names, where we can see that there is an extreme polarization between the suppliers and the clients of AI chips. The likes of AMD and Nvidia have produced significant rallies, while the big spenders have barely moved, and Amazon with Meta are even close to be negative for the year ! If (and that is a big if) the spenders decide or are forced by investors to slow down their spending, this could have a very sizeable impact on the share prices of the earners (suppliers), as we also described at the beginning of this newsletter. In this scenario we could see this year's laggards outperform this year's winners and hence it would not be a bad idea to scoop up shares of Microsoft or Amazon during the current correction. Especially Microsoft, it returned on Friday on its 200day moving average, about 470$ which it should be considered a buying opportunity, for long-term investors.

Disclaimer

• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.

• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.

• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.

• Sources: Chart of the Week : KSH / FactSet, Image generated by ChatGPT