Clockwise: Tech driven sell-off as Investment Clock signals Stagflation risk

Heading into last week equity markets were on an impressive winning streak, with the S&P 500 index having put together a nine-week winning streak and looking to complete a run of 10 consecutive daily gains (a 41-year record). This streak abruptly ended towards the end of last week as tech stocks led a sharp decline lower.

While this extreme move has already started to reverse this week, could we have just witnessed a dress rehearsal for the large downside moves we could expect to see in a Stagflationary environment? 

Chart 1: Tech stocks: big rally & big wobble

Source: LSEG Datastream as at 5 June 2026.

Tech m-AI-nia

The rally in stocks we have seen so far this year has been tech led, with Artificial Intelligence (AI) euphoria delivering pockets of triple digit returns on the back of spectacular earnings growth. The S&P technology sector is up over 20% year to date, with companies within AI-linked subsectors (semis and hardware) up around 70-150%.

The AI-driven chip rally has also had an outsized impact on Asian markets. South Korea's KOSPI has surged +89.0% YTD in total return terms, powered by memory chipmakers — SK Hynix's 12-month gain had exceeded 1,000% before a recent pullback, and both SK Hynix and Micron have crossed the $1 trillion market cap threshold for the first time. Taiwan's TAIEX is up +52.7%, supported by TSMC raising its 2026 revenue growth outlook to above 30%, citing resilient AI chip demand.

The scale of the rally has intensified the bubble debate

While the supply/demand imbalance related to AI infrastructure buildouts will likely remain in the near term, the scale of the rally has intensified the bubble debate, especially with the upcoming mega IPOs from SpaceX, Anthropic and OpenAI.

Last week, these overbought semiconductor stocks underperformed sharply and the US tech sector recorded its worst one‑day underperformance versus other sectors in 25 years. The exact cause of the sell-off is difficult to pinpoint with triggers including concerns over Broadcom earnings, a strong payrolls report suggesting Fed hikes and a relapse in the US/Iran war situation. 

Rates and policy expectations

Interest rate expectations have also moved a long way this year.

Rates markets have now moved to fully price in an interest rate hike from the US Federal Reserve this year, nearly two hikes from the Bank of England and close to three hikes from the European Central Bank. This is a sharp contrast to the policy easing which had been expected before the beginning of the US/Iran war earlier this year.

Chart 2: Market pricing for central bank policy changes by end of 2026

Source: LSEG Datastream as at 5 June 2026.

Overheat versus Stagflation

Our Investment Clock model uses growth and inflation indicators to categorise the business cycle into four distinct phases. Expectations of higher rates are not unusual given a pickup in inflation expectations on the back of the sharp rise in oil prices amid the continued closure of the Strait of Hormuz. However, it remains to be seen if we are in the Overheat phase of the cycle or heading into Stagflation – and this will come down to the growth backdrop.

In Overheat, both growth and inflation are rising. Despite higher yields, equity market returns can be strong.  However, in Stagflation, equity returns tend to be challenged as rising inflation and higher yields coincide with a fall in global growth.

The latest update to our Clock signalled a technical shift into Stagflation (Chart 3). That said, the outlook remains highly sensitive to developments around the Middle East and can easily edge back to Overheat or even head to Recovery if the Strait of Hormuz reopens. For now, global growth has proved resilient which is more consistent with Overheat but continued disruption may ultimately trigger larger demand destruction. 

Chart 3: Investment Clock moves to Stagflation

Source: Royal London Asset Management as at June 2026; yellow dot showing the most recent reading.

This is why we are monitoring the Investment Clock, company fundamentals and the developments in the US/Iran war carefully.

For professional investors only.  This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. Reference to any security is for information purposes only and should not be considered a recommendation to buy or sell.

The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice. Forward looking statements are subject to certain risks and uncertainties. Actual outcomes may be materially different from those expressed or implied.