Federated Hermes: Weekly Markets Wrap Up
In this week’s markets update, our investment experts opine on the evolving themes driving equity markets worldwide, from Japan’s shifting market dynamics and the broadening of equity‑market momentum, to a stronger than expected latest US labour picture.
Martin Schulz, Group Head of International Equities at Federated Hermes
Japan Enters New Era
We believe that recent election results signal renewed confidence in the Japanese market by global allocators. In fact, it cements our own top-down country allocation framework’s overweight views on Japan as shifting global capital flows further support market momentum.
Japan has been on a path of increasingly becoming more investable over the past decade due to capitalizing on its extensive reform efforts particularly on the corporate governance front, defeating generational deflationary headwinds, boasting reasonable valuations, and leveraging a competitive currency and strong balance of payments backdrop.
We see the LDP’s landslide victory as an extension of this new era, one that is likely to be defined by higher wages and inflationary pressures, targeted fiscal expansion, yen volatility, and a more nationalistic agenda.
We think that longer term yen depreciation results in Japan returning to its roots; namely, as an export powerhouse benefitting from the sustained weaker yen while leveraging decades of automation, innovation, and manufacturing expertise to compete even more aggressively on the global stage.
With markets finally breaching their 1990 peak and now at all-time highs, global investors are beginning to appreciate what policy continuity can do for its market, something that has been lacking in Japan for decades.
Steve Chiavarone, Deputy CIO for Global Equities at Federated Hermes
Broadening Market Momentum
We’re seeing a broadening out in the equity markets, and it’s being driven by two phenomena happening at the same time.
First within the AI trade, the market is shifting away from AI being expressed predominantly through the Mag Seven and is now moving into other bottlenecks in the AI story. That’s showing up in areas like semi cap and memory, where names are benefiting in a very positive way. We’re also seeing a broadening out from the technology layer of AI into the old‑cap and memory, where names are benefiting in a very positive way.
We’re also seeing a broadening out from the technology layer of AI into the old economy infrastructure needed to support it. You can see that in certain commodity prices, in power generation, and in parts of the energy sector that are responding to the build‑out of data centres and the infrastructure designed to support AI.
Second, the market is moving in a more cyclical direction. Cyclical value companies and old economy names are starting to respond and participate more. And given some of the volatility we’ve seen so far this year, defensive dividend‑economy names are starting to respond and participate more. And given some of the volatility we’ve seen so far this year, defensive dividend paying names are also participating and, in many cases, leading.
This broadening out is something market participants have been waiting for over the past couple of years, and we’re now seeing it clearly in large‑paying names are also participating and in many cases, leading. This broadening out is something market participants have been waiting for over the past couple of years, and we’re now seeing it clearly in large‑cap value on both the cyclical and defensive sides. At the same time, small caps are beginning to outperform for the first time in several years.
The broadening out is real, and we think it’s a trend that continues to have legs.
Phil Orlando, Chief Market Strategist at Federated Hermes
Strong Jobs Report Signals Potential Turning Point
Overall, this was a surprisingly very strong US jobs report, bucking the negative trend we’ve seen recently in other important labor-market data, such as: claims, JOLTS, ADP and Challenger layoffs.
It also signals that we may be at an important inflection point in the performance of the US labor market, which has been poor for most of last year, due to concerns about AI, immigration, federal government workers, tariffs, interest rates, and brutal January weather.
The fact that January was as strong as it was – particularly given how bad the weather has been this winter – suggests that the labor market may be inflecting higher over the course of 2026. We have an above-consensus GDP growth rate of 3.3% in 2026, vs. Blue Chip consensus at only 2.1%. So, this is certainly good news to support our more constructive economic view.