The Week Ahead - 1/25/25
A comprehensive look at the upcoming week for US economics, equities and fixed income
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Please note that I do often add to or tweak items after first publishing, so it’s always safest to read it from the website where it will have any updates.
As a reminder, some things I leave in from prior weeks for reference purposes, because it’s in-between updates, it provides background information, etc.. Anything not updated this week is in italics. As always apologize for typos, errors, etc., as there’s a lot here, and I don’t really have time to do a thorough double-check.
For new subscribers, this is a relatively long post. The intent is to cover the same areas each week. Sometimes the various areas are more interesting, sometimes less, but it’s easier just to go through them all, so you can expect this format (with things in the same places) each week.
The main sections are intended to cover 1) what’s upcoming next week, 2) what the Fed and rates markets are up to, 3) what’s going on with earnings (which along with valuations and positioning are the determinants to stock prices over the long term), 4) what’s going on with the economy (both because of its impact on our daily lives (I am a business investor in my “real” job) but also because it impacts earnings), 5) valuations, 6) breadth (which gets into sector/style performance), 7) positioning/flows (this is the most important determinant to asset price changes in the short term), 8) sentiment (really only matters at extremes but interesting to track), 9) seasonality (gives you an idea of what normally happens), 10) “Final Thoughts” (remember you get what you pay for there, and it’s the last thing I do, so it often is a bit rushed), and 11) my portfolio (to be transparent about where my money is in the market (but note first it is most definitely not intended as financial advice, and second as I mentioned earlier my main job (and investing assets) are in private industries (RE & venture capital)) so my portfolio is built with that in mind (i.e., it’s not how I pay the day-to-day bills) plus see note about MLP’s in that section).
The Week Ahead
US economic data relatively light this week (at least in terms of importance even if plenty in terms of quantity) with a number of delayed reports in Dec PPI (although that’s just a couple of weeks behind now), Nov durable goods, factory orders, trade balance, and wholesale inventories as well as Oct Chicago Fed National Index (a great report but this is for Oct) along with the Conference Board Jan consumer confidence report, the Nov repeat sale home price reports (S&P/FHFA), our first revision to Q3 productivity, and the normal weekly reports (ADP, jobless claims, mortgage applications, petroleum and natgas inventories).
More importantly, the Fed kicks back into the spotlight with the Jan FOMC decision, although this will be the least exciting (if you’re interested in the path of interest rates) since last summer with a hold a lock, no updated SEP or dot plot, and Jerome Powell likely to get as many questions about Trump, his future, Fed independence, etc., as he is about the economy and monetary policy.
That said, it will at least be interesting, and hopefully Powell give some clues on what the core of the Fed is looking for in order to cut again, and perhaps even push back against market expectations that we’ve seen the last cut under his term. Also, we’re likely to get at least one dissent (Miran in what could be his last vote), but will be interesting to see if Bowman (who made a dovish speech earlier this month) and/or Waller (who is technically still in the running for the Fed job) join.
We also do have at least one Fed speaker on the speaking schedule in non-voter Musalem on Friday, but there will probably be more.
We’ll also wrap up Treasury auctions for the month with 2, 5, and 7-yrs on Mon, Tues, and Thurs respectively.
So that leaves SPX earnings to rule the roost next week which they will do capably kicking up to top gear with 32% of the SPX reporting (by earnings weight). That’s ~111 SPX components of which five are >$1tn market caps in META, MSFT, TSLA, APPL, and AMZN and another are >$100bn in market cap in UNP, UNH, NEE, TXN, T, DHR, PGR, NOW, LRCX, GEV, APH, IBM, CAT, MO, CMCSA, SYK, LMT, MA, V, KLAC, TMO, CVX, VZ, AXP, XOM (in order of earnings date (I think that’s all of them but my screen refreshed half way through)).
But it appears attention will need to be shared with Washington where the US is again on track for a partial shutdown at the end of the week. When I originally wrote this part on Friday I said “the odds have ‘plummeted’ in the words of one think tank after the House passed the final batch of spending bills last week and sent to the Senate. They do though need to be passed by the Senate (and are subject to filibuster) and get the President’s signature by Saturday.” That all changed over the weekend with that parenthetical now coming into play after Senate Democratic leader Chuck Schumer vowed to block the spending package unless Republicans strip funding for the Department of Homeland Security (something that’s not going to happen). Odds for a government shutdown spiked to a 74% chance (from 10%) on Kalshi (see post). They’re currently at 78%.
Also, technically Gov Miran’s term (he is filling in for the unexpired end of Gov Kugler’s term) ends Jan 31st. He will stay on until Trump names his replacement, but that time should be coming soon (but this person will also need to be Trump’s Chair pick unless he’s going to go with an existing Governor (Waller). Things continue to shift rapidly. Three weeks ago Kevin Hassett was the clear favorite, then former Gov Kevin Warsh, and now Blackrock head of fixed income Rick Rider (who I think would be a wonderful choice). The delay seems to be around Trump’s concern (probably rightfully) that given the insulation Fed Gov’s have, once he appoints someone, they will no longer be as amenable to his wishes (and will no longer be a forceful advocate for the administration (which doomed Hassett’s nomination), keeping Trump indecisive on whom to choose. “The problem is that once hired, they change their attitude … it’s incredible how people change once they’re in the job,” he said earlier this month.
Ex-US things pick up from last week with highlights policy decisions from around the globe (around 18) including Canada, Brazil, and Sweden where holds are likely as well, EU GDP, employment, Germany CPI, GDP, IFO, retail sales, GfK, unemployment, Japan Tokyo CPI, jobless rate, retail sales, industrial production Canada GDP, China industrial profits, Australia and Brazil inflation.
Canada
The Bank of Canada is widely expected to hold its policy rate at 2.25% on Wednesday, with the monetary policy report set to emphasize slower growth and heightened uncertainty tied to this year’s review of the US-Mexico-Canada Agreement. Traders in overnight swaps see the central bank staying on the sidelines for most of 2026, after policymakers said the current rate is at “about the right level” to support the economy without reigniting inflation. Statistics Canada will release November GDP by industry along with a flash estimate for December, likely pointing to weak fourth‑quarter output. November trade data may show a further drop in the share of exports to the US.
Asia
Australia will be a focus when it releases a blast of inflation data ahead of the Reserve Bank’s Feb. 3 rate decision. The figures, due on Wednesday, are expected to show that consumer price gains accelerated to 3.6% year over year in the fourth quarter. Coming on the heels of strong jobs data, the inflation report will likely underpin the RBA’s hawkish bias and spur speculation over a potential rate increase next month.
Japan also publishes inflation data. Friday’s report for Tokyo, a leading indicator for national trends, is forecast to show that the main gauge, excluding fresh food, slowed to 2.2%. However, an index that removes distortions from energy subsidies is expected to hold steady at 2.6%, demonstrating that underlying price pressure remains robust and keeping the Bank of Japan on track for more increases to borrowing costs.
Fourth-quarter GDP data is scheduled from the Philippines, Taiwan and Hong Kong. Growth is estimated to have sped up to 1.5% quarter-on-quarter in the Philippines, while Taiwan’s year-on-year advance is seen accelerating to 8.75%. China publishes industrial profits data on Tuesday that may offer fresh evidence of the pressures mounting for manufacturers as weak demand squeezes corporate margins for exporters and domestic-oriented industries alike.
December trade data is on tap from the Philippines, Hong Kong, Sri Lanka, New Zealand and Thailand, while Japan and New Zealand will release consumer confidence reports. New Zealand also release a gauge of business sentiment for January after the reading jumped in December to the highest in 30 years. On the policy front, Pakistan’s central bank is expected to cut its SBP rate to 10% on Monday, while authorities in Sri Lanka are seen holding settings steady on Wednesday.
Europe, Middle East, Africa
In the euro area, reports will focus on momentum in the economy. Germany’s Ifo survey on Monday may be closely watched given that the sentiment index hasn’t really matched recent buoyancy in industrial data that may reflect the government’s defense and infrastructure stimulus. The region’s first glimpse of GDP in the fourth quarter will arrive on Friday. All economists surveyed by Bloomberg predict some sort of expansion after Germany’s sketchy data already pointed to unexpectedly strong growth. France, Italy and Spain are all predicted to have shown increases in output. Spain and Germany will also release price data on Friday in advance of wider regional numbers due the following week. Economists anticipate inflation slowed in January to 2.4% in Spain — the weakest level in seven months — while it likely held at 2% in Germany.
Few ECB officials are scheduled to speak, and on Thursday a blackout period starts before their first decision of the year, on Feb. 5. The BOE is also entering a quiet period in advance of its outcome the same day. In terms of policy meetings in Europe for the coming week, here’s a rundown: Hungary’s central bank will set rates on Tuesday, with no change forecast by economists but all eyes on potential signs of a cut. The Ukrainian central bank’s decision is on Thursday, with the possibility of a large cut in borrowing costs foreseen by some observers. Also on Thursday, the Riksbank (Sweden) is seen holding its key rate at 1.75%, with officials likely to reiterate their view of unchanged borrowing costs “for some time to come.” With inflation slowing, Swedish policymakers can wait for evidence that a recovery is building in the largest Nordic economy.
Africa will also see several decisions on borrowing costs: Ghana is poised to extend its easing cycle on Wednesday, with policymakers expected to cut their rate by 300 basis points to 15% as inflation continues to ease. Mozambique is anticipated to lower borrowing costs to support the economy amid subdued price pressures. South Africa may follow a day later with a 25-basis-point cut, to 6.5%, as the inflation outlook remains benign. Malawi is likely to retain its key rate at 26% as inflation stays elevated. On Friday, Eswatini and Lesotho — whose currencies are pegged to the rand — will possibly diverge. Eswatini is expected to trim borrowing costs by a quarter point, while Lesotho may stay on hold.
Latin America
Brazil serves up a mid-month consumer price report along with its first monetary policy meeting of 2026. Inflation may have ticked back up to breach the 4.5% top of policymakers’ tolerance range after slowing for three months to end 2025. The central bank’s 3% target is by most accounts out of reach for at least the current calendar year and next. While a majority of Brazil-watchers expect to see a multi-year easing cycle begin to trim the key rate from the current 15% starting in the first quarter, few see that kicking off on Wednesday.
Chile’s central bankers can afford to stand pat after December’s quarter-point cut to 4.5%, likely 25 basis points above the consensus terminal rate. Also on tap from the world’s largest copper producer and exporter is an end-of-month data dump: six separate reports, with monthly production data the highlight. Brazil, Chile, Colombia and Mexico all post December unemployment reports. Among the region’s bigger economies, Peru, Brazil and Colombia currently enjoy record-low jobless rates.
In Mexico, fourth-quarter output data more likely than not will show LatAm’s No. 2 economy dodged a technical recession after posting twin negative prints for the three months through September. External headwinds, especially the wild cards surrounding US trade policy and the review of the free trade accord with the US and Canada, weigh on the outlook for 2026. Colombia’s central bank on Friday is all but certain to waste no time responding to a 23% hike to the minimum wage. Analysts see a half-point rate increase to 9.75%, with 125bps to 150bps more tightening by year-end as 2026 inflation expectations have surged to 6.37% from 4.59% last month.
DB one-pager:
BoA’s cheat sheets:
Market Drivers
So let’s go through the list of items that I think are most important to the direction of equity markets:
Fed/Bonds
As noted previously this was one of the sections that had grown unwieldy, so I’ve really pared it down (I know, it’s still really long). Given I provide daily updates on Fed expectations, Fedspeak, and analyst thoughts on the Fed, it’s duplicative (and time consuming) to regather it all, so, again, I encourage you to look at those (the daily posts) for updates. I will just give more of a quick summary.
I’ve taken out the background information from how we got to where we were from the start of the year through the end of March, but if you’re interested you can find that in this section from the March 23rd update. And I had left in the background from March the August as I had said it was “still relevant in terms of ‘how we got here,’ and it reflects the continued slow evolution of the Fed away from worries about tariff impacts on inflation towards the need for rate cuts (remembering that absent those tariff worries the Fed would already be cutting at this point).” But I had “[a]t some point the hawks will become less hawkish and then I’ll reset all of this…. Powell this week could seal the pivot, but remains to be seen.” Well that’s exactly what Powell did, so if you’d like that background, you can find it at the August 17th update. In addition, I have taken out the “next phase” in the Fed’s evolution (from the August meeting leading up to the October meeting). You can find that material at the October 19th update.
I noted two weeks ago:
with unemployment in the NFP softening two tenths (including revisions) to 4.4%, and job growth, while missing estimates, not that far off and remaining positive while household survey saw strong job growth (even as there are a host of weaker metrics such as sector breadth of job gains, involuntary part-time workers, a falling workweek, slowing aggregate income growth, etc.), the chance of a Jan rate cut has effectively fallen to zero.
That means even if we get a cool (even very cool) CPI print, given all of the distortions in that series introduced by the shutdown, it will require an affirmative declaration from a key Fed member (a la Williams speech ahead of the Dec FOMC) to get markets “onsides”. So unless/until you hear that, there will be no cut this month.
And that proved accurate as despite a “very cool CPI” the readthrough to PCE (the Fed’s preferred inflation gauge) was actually a bit hotter than expected. That along with the economic data coming in fairly solid (as covered in the Economy section last week and this week) along with the “core” of the Fed clearly signaling that rates will remain at current levels until inflation or the labor market soften a bit further (meaning they are done with their “forward looking cuts” as described in the minutes have seen rate cut expectations fall to the lowest to date this week. Currently there are less than two rate cuts priced for this year, and that doesn’t change much thereafter (meaning markets see one, maybe two, more rate cuts in total). Currently there is a cut (barely) priced (just over 50%) for June and another (also right at 50%) in October.
As I said last week
I think that we have perhaps travelled a bit too far in the hawkish direction, but one thing we can say definitively is there will be no Jan rate cut. That was confirmed by even one of the doves, Philadelphia Fed Pres Paulson as covered during the week. More importantly the “core” of the Fed (also discussed this week (Powell, Jefferson, Williams)) who are the swing voters between the doves (Miran, Bowman, Waller (although Waller hasn’t spoken since the Dec FOMC so not quite sure on him)) and the hawks (in terms of voters, basically at this point all of the regional Fed Presidents (given Paulson is the most dovish)). With Williams and Jefferson both indicated that rates “are in a good place” it was a clear signal on their intentions.
So now we are left to wait. As I indicate in the Economy section below, I think there’s actually more risk to the economy reaccelerating (at least in the first half) than softening materially, so I think it’s probably not a bad bet that we won’t get a rate cut until after Powell is gone (at the end of May). After that there’s too many variables to go through (a lot depends on who is nominated, what they say, what happens with the Lisa Cook case, does Powell step down as Governor, not to mention what’s going on with the economy and labor market).
And as noted this week, at least we did get some clarity on the Lisa Cook situation (hopefully, if the questioning is any indication (I put that post in below)). The rest, we’re left to ponder. I do also like the rise in the chances for Rick Rieder as Fed chair. I think he’d do a wonderful job, and may make it more likely that Powell will step down when his term as Fed chair ends.
As I mentioned at the top, we’ll see what we get this week from the Fed to perhaps give us some more color on what we might expect in coming meetings as Powell finished out his term (through May).
The 2/10 Treasury spread little changed for a second week at +0.64% down from +0.72% two weeks ago, which was the highest since Jan ‘22.
As a reminder, historically when the 2/10 curve uninverts following a long period of inversion the economy is either in a recession or within a few months of one. It uninverted in Sept 2024, so I had said this looks officially like a “this time is different” situation as we’re now over a year. Anything that has a lead time that long is not really useful.
The 3mos/10yr yield curve also edged to +0.54%, down from the +0.64% to start the year which was the highest since Oct ‘22 still though calling for more rate cuts or a move higher in 10yr yields (this is historically around +1.25%).
Note this curve is considered a better recession signal than 2/10’s w/the last four recessions on average coming a few months after the curve uninverted (prior to that it generally uninverted after a recession had already started)). This though is starting to run past its due date as well.
It had spent nearly a year within a quarter point of 0%. The only other comparable period (inversion followed by a long stretch around 0%) was 1989 when it spent the year within a slightly larger band (but after a much smaller inversion). When it finally lifted after that instance a recession followed six months later. This is NOT to say I think we’ll see recession in 6 months (quite the opposite).
Also, as noted back in February, reinverting is something that it did prior to (or just after) the last two recessions and it also dipped (but didn’t reinvert) in the two recessions prior to that, although this one was much more mild than previous. Regardless, the longest it went in those previous four instances before recession after reinverting is 6 months (2007).
Also note that in 1989 and 2007 we saw similar periods of a recovery from inversion that stalled at the zero line for long periods of time which turned into recessions after they finally started to steepen again (but in 1989 it took six months (we’re beyond that now)), but see the note above about the length it spent around the zero line.
Similarly the 10yr Treasury yield remains more comfortably above the Fed Funds midpoint (and the EFFR), at +59bps (unch this week) still though well under the typical non-recessionaly spread of around 1-1.25%, so calling for another ~50bps of rate cuts (or perhaps if one thinks the 10yr is mispriced, a higher 10yr yield (or some combination)).
The 2yr yield though remains below the Fed Funds midpoint (and EFFR) by -4bps. It is still though also under the typical non-recession spread of ~+50bps so also calling for more rate cuts (or a higher 2-year yield) but now just one or two.
Interestingly, long term inflation expectations as measured by the 5-yr, 5-yr forward rate (expected inflation starting in 5 yrs over the following 5 yrs) which had pushed up to 3-month highs at 2.27% last week dropped -9bps w/w to 2.18%, the least in 6 weeks. Still though just in the middle of the range since 2022. They’re a touch below their 20-yr average (2.25%).
The peak in 2025 was 2.41% July 28th which was the joint highest (with October) in a year) and 2.67% was the post-pandemic peak in Apr ‘22. The 2025 low was around Liberation Day at 2.02%
And the 10-yr breakeven inflation rate edged back -1bps to 2.32% as of Friday off the highest since Oct, but remaining in its post-2022 range.
With the drop in inflation expectations, 10yr rate real rates have quietly risen to the highest since August although still below 2% at 1.95% as of Thursday. They overall remain in their range since Aug 2023.
They are well below the 2.34% in mid-Jan (which was the highest since Oct ‘23 (and before that 2007)), but also still well above the 2012-2020 peak of 1.12%.
The ACM model of the 10yr Treasury term premium (which is solely based on interest rates so has no “external anchor” to help explain why short-term rates may be moving (such as Fed policy expectations)), similarly rose to the highest since Sep 2nd as of Tues at +0.83% edging back to +0.79% Wednesday, up from +0.51% Oct 28th (which was the least since April).
The high of the year was +0.91% on May 21st (which was the highest since July 2014). This is up +0.21% since the Oct Fed meeting.
As mentioned above, the ACM model has a weakness in that it looks only at rates with no “anchor” to the external environment. The Kim-Wright model addresses that by adding in an expectations layer (from Blue Chip forecasters) of the expected path of short-term rates. That is just updated through Jan 16th, but that rose to the highest since May at +0.60%.
Unlike the ACM model, the post-pandemic peak was in Jan at 0.80%. The overall message is similar though in that pre-pandemic you have to go back to 2013 to find comparable levels.
The extended discussion on term premium (what it is, why it’s important, etc.), can be found in this section in the Feb 4th Week Ahead.
Starting to get a little relief for small businesses or HELOC borrowers as the real prime rate (inflation adjusted using core PCE) fell back to 4.20%, the least since July ‘23.
But while -1.7% below the 5.9% high June 2024, which was the highest since Sep 2007, it remains higher than any point in the 2009-2020 period almost the 10yr pre-pandemic avg.
The MOVE index of expected 30-day Treasury note/bond volatility fell to 56.24 on Friday, just a touch above the 56.14 on Jan 16th, which was the least since Sept ‘21.
Mortgage spreads (based on the Freddie Mac 30-yr rate) found a floor despite the drop in the MOVE index up +5bps w/w to 1.88% from the least since Feb 2022 (when they were surging higher from 1.45% in Jan 2022 to the 3.1% peak in June 2023 as the Fed tightened rates).
Still, they remain well under the peaks from the 2010-2019 period but still have some room (~23bps) for them to fall to get to the 2004-2008 avg level of ~1.6% (I use that period as it was like now a period of higher yields than post-GFC and also a period when the Fed wasn’t buying MBS and we had a more robust private market pre-2004 although with Fannie/Freddie maxing out their MBS purchases we very well might fall right through that). It also happens to coincide with the pre-pandemic 10-year average as well despite the distortions from Fed purchases, etc.
The Chicago Fed National Financial Conditions Index* and its adjusted counterpart took another step down (looser) to the least (loosest) since Nov ‘21 in the week through Jan 16th.
*Both of these indexes are very comprehensive, each w/105 indicators. The “adjusted” version attempts to remove the correlation between the various indicators due to broad changes in economic conditions which also impact other areas (so as to not double count them).
https://www.chicagofed.org/research/data/nfci/current-data
Goldman’s US Financial Conditions Index fell last week to the least (loosest) since October which in turn was the least since April 2022.
As you know if you read my RRP updates (Reverse Repurchase Program where financial institutions can park money overnight which sets a “floor” under funding markets (as you wouldn’t lend to anyone else at a rate less than you can lend to the Fed risk free)) RRP levels in mid-August finally dropped to the “near zero” levels I had been waiting (seemingly endlessly).
In line with my expectations, after moving higher into year-end (as banks “painted their books” for regulatory purposes), they have truly fallen to effectively zero (under $1bn), in line with the Fed’s desire to keep them at minimal levels (which led to the Fed having to start the reserve management purchases), so I will likely pause reporting on them unless/until they become noteworthy again.
As a reminder, now that RRP levels have drained to minimum levels, attention has turned to bank reserves as discussed below.
Bank reserves, which fell as low as $2.83tn as of the end of October, which was the least since Oct 2020 and down from $3.6tn Apr 10th (the highs of the year) under my “danger zone” level of sub-$2.9tn, had rebuilt as of the previous week week to $3.05tn, a four-month high (helped by the FOMC reserve management purchases of $40bn a month (for the time being) added to the end of QT (as of Dec 1st). They fell back to $2.95tn (-$100bn w/w) last week, but this remains a level Fed members have generally indicated they are comfortable with.
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Getting back to rates,
I said back in April 2024 that 2-year Treasuries were a good buy at 5%, and as I noted once the Fed started its cutting cycle thereafter the ship has likely sailed on seeing those yields anytime soon (meaning years). I still have some 2yr’s but have been selling on big dips in yields, not really getting a chance to reload as they never seem to be at a level that makes sense, although most analysts think they’re going lower from here.
In terms of 10yr’s I had advised then grabbing some at 4.7% (which I subsequently sold on the drop under 3.75% as posted here in September) but at the time that level seemed like something we wouldn’t see anytime soon, but we got back there in January (and I added some as posted here), and it seemed like we might be headed much higher until Treas Sec Bessent noted the administration’s focus on keeping the 10yr yield low (and perhaps more importantly committing to the auction schedule set up by Sec Yellen for the foreseeable future (and perhaps even reducing longer term supply as he has noted in subsequent interviews and through the increase to the Fed’s buyback program), which has exerted downward pressure on 10yr yields). I sold that new, small position on the dip under 4% in April, and I had been waiting on us revisiting that 4.7 - 5% area to reload.
But as I said in late Sept, it is looking less and less likely that I will get that trip back up to the 4.7% area to add to my 10yr holdings any time soon. I had been thinking that 4.3-4.5% is potentially in the cards, and we finally got that there for a hot second, but they have fallen back (in line with my statement last week that “there is very strong resistance there:). I bought a small amount but would prefer something closer to 4.5% to really wade in.
In 2025 the 10yr yield for the most part held the bottom of of my 2025 likely trading range of between 4 and 5%. As I said coming into the year, my 2026 range is 3.5 to 4.5% (with risk to the downside if the labor market continues to weaken).
For all the old “final hike” and “first cut” materials, you can reference the Feb 4th blog post.
BoA finally updated their Dove-Hawk chart. Logan I think is as hawkish as Schmid, and I’m not sure I’d characterize Goolsbee as Hawkish, more Centrist, but otherwise seems about right.
And JPM added that gives you 2026 voters. I have some quibbles. The ends are fair but there really should be a distinction b/w Miran and the rest. No way is Barr dovish (and he proved that with a speech not long after I first wrote that). He’s now proven himself to be with the Bostic/Kashkari Fed Presidents. Also, not sure about Cook (she seems to vote with Powell). I think Paulson though should be with Williams and Daly (and she proved that with a speech on Dec 12th. Collins was fairly hawkish in her last appearance as has been Goolsbee (although he’s tricky, dissenting from the Dec cut but also saying “I’m one of the most optimistic folks about how rates can go down in the coming year.”). Otherwise hard to argue much with the slotting.
And here’s one that goes over current term expirations. Note that all of the regional Fed presidents had their terms renewed for another five years (so now expire Feb 28, 2030)
Earnings
As a reminder, I have removed most of the background material, which you can get in the Feb 4th blog post. You can reference this post from 12/1/24 for stats on 3Q, this post from 3/9/25 for stats on 4Q, and this post from 6/1/25 for stats on 1Q 25. And the 9/1/25 post for 2Q 25.
While Q3 earnings will continue to trickle in, they won’t move the needle, so if you want to reference the stats for Q3 you can find them at this posta from 11/23/25.
Last week we moved a little deeper into Q4 results season with now 13% of the SPX by earnings weight having reported (so still very early) through Thursday. At this point, 75% have beaten (down from 79% the prior week and 83% in Q3, which though was the best since Q2 ‘21), also below the 5yr average of 78% and the 10yr average of 76%.
The magnitude of the beats though are just +5.3% (-0.5% w/w), below the already low +6.6% in Q3, and well below the 5yr average of 7.7% and the 10yr average of 7.0%.
Despite the relatively low beat amounts, expectations for y/y earnings growth remained at +8.2% according to Factset, which still represents a +0.4% increase from Sept 30th (but also down -0.1% since the start of the year).
The 8.2% in expected earnings growth continues to be largely driven by Tech which is expected to see a huge +26.2% y/y increase (+0.3% w/w).
The only other above 8.2% is Materials at +10.5% (but up +1.8% w/w). In contrast Industrials, Cons Discretionary, Health Care, and Energy, are expected to see negative y/y growth.
Despite all the consternation about the breakdown of US relationships abroad, companies that more than 50% of their earnings and revenues ex-US are expected to significantly outperform those that are more domestically focused with the former group expected to see +12.6% earnings growth and +10.0% revenue growth in Q4 vs 5.5% and 7.0% for those with less than 50% sourced outside the US.
And I noted last week that if past is any guide the earnings growth for Q4 can be expected to come in at +13.7% or higher. My figures were based on Factset data coming into Q3 though and Factset updated the analysis this week incorporating that quarter, but the conclusion doesn’t change much, in fact allowing us to raise that “average minimum increase” over the past 1, 5, and 10 years to expect at least +14.0% earnings growth in Q4.
Factset says over the past 1, 5 & 10 yrs companies have beaten earnings expectations by 7.4%, 7.7% & 7.0% respectively resulting in “inflation” to the earnings estimates on average over the quarter by 6.4%, 7.4% & 5.7% respectively over where they stood as of the start of the quarter (in this case Sept 30th which was 8.2%).
So using those averages would mean Q4 earnings will come in at +14.7%, 15.7%, or 14.0% respectively.
Actual earnings by the end of the quarter have not surpassed expectations at the start of the quarter in only 3 of the past 43 quarters (Q1 ‘20, Q3 ‘22, and Q4 ‘22 are the only exceptions according to Factset).
2025 as whole remained at +12.4%, where it started the year, but up from +10.6% Sept 30th.
2026 earnings expectations remain at a very strong +14.7% growth although edging back -0.2% w/w led by Tech’s +29.3%. This would be the third year of double-digit growth
Q1 earnings expectations though continue to deteriorate now down to +11.2% (-1.0% w/w and down from 12.9% at the start of the year), while Q2 is +14.5% (-0.1% w/w), Q3 +14.8% (unch) and Q4 +18.4%(!) (unch).
Factset notes that only two of the top five contributors to earnings growth for CY 2026 are “Magnificent 7” companies: NVIDIA and Meta Platforms. Overall, analysts expect the “Magnificent 7” companies will report earnings growth of 22.7% for CY 2026, which is slightly above the estimated earnings growth rate of 22.3% for CY 2025. On the other hand, analysts predict the other 493 companies will report earnings growth of 12.5% for CY 2026, which is above the estimated earnings growth rate of 9.4% for CY 2025.
And 2027 earnings are expected to grow another +15.7% (boosted +0.8% w/w), which would be a fourth year of double-digit growth. Interestingly Energy is expected to take the lead +22.8% (+2.7% since the start of the year) followed by Tech +21.0% (+0.6%) and Cons Discr +17.6% (-0.1%).e
In terms of the earnings growth expected for 2026 Factset notes it will be a record. On average over the past 25 yrs there is a -6.3% deterioration from where it starts the year ($311) which would equate to $292.34 based on the average deterioration. But Factset pulls out 4 outlier years (2001, 2008, 2009 & 2020) where the overestimation was between 27-43% due to recessions. Excluding those, and assuming no recession, the difference is just -1.1% (which would equate to $307.58.
Q4 profit margin expectations remained at 12.8%, below the previous quarter’s 13.1%, but above the year-ago 12.7% and 5-year average of 12.1%.
In terms of revenues for Q4, 69% of S&P 500 companies have reported revenues above estimates according to Factset, up 2% from the prior week and almost to the 5yr average of 70% and above the 10yr average of 66%.
But like earnings the beat amounts at +0.6% are well below the 5-year average of 2.1% and the 10-year average of 1.4%.
While 4Q earnings estimates are expected to grow the least since Q1 ‘24, revenues are expected to grow +7.8% y/y (unch w/w, and almost as much as earnings) which would be the most since Q3 ‘22.
Those have also grown now by more since the start of the quarter (from +6.4% on Sept 30th).
Factset: 2025 revenues are now expected to grow +7.2%, unch w/w and +1.6% since the start of 2025 (which is an unusually high increase). Just energy is expected to have negative revenue growth (but much less than expected even June 30th).
2026 SPX revenue growth is now expected at +7.3%, with Tech +18.0% (+0.2% w/w) and Comm Services +10.5% (unch) carrying the load (the only two sectors expected to be above the SPX).
2027 SPX revenue growth is expected at an equally strong +7.3% with again Tech +14.5% and Comm Services +8.9% leading (both edging up a tenth w/w).
In terms of how markets are handling earnings beats & misses for 4Q, again noting this is very early in the process, while still worse than historical averages, things are improving.
Looking at the two days before to two days after a report we are for a third quarter seeing beats rewarded less than typical according to Factset but what was a negative reaction of -0.4% last week has improved to +0.3%. Still though down from +0.4% in 3Q and 2Q and vs the 5-yr average of +0.9%.
Meanwhile misses are again being punished more than average but that also has improved to -2.9% from -4.0% the prior week and vs the -5.0% in 3Q and -5.5% in 2Q (the latter of which BoA said was the worst negative reaction since 2000), now basically in line with the 5-yr avg of -2.8%.
Factset’s compilation of analyst bottom-up SPX price targets for the next 12 months as of Thursday continued to increase for a 30th week to 8,113 which would be +16.3% from Thursday’s close. That’s an ATH +28pts w/w (+5692pts the past 10 weeks and +1,467pts the past 30 weeks).
Tech (+27.4% up from +25.4% the prior week) easily remains the sector seen by analysts with the largest upside (the only sector above the SPX), followed Cons Discr (+15.3% from +14.8%), while Energy remains the sector expected to see the smallest price increase (+5.7% from +7.5%) followed by Staples (+7.9% from +13.5%).
As Factset reminded us in December, the last 20 yrs (through 2024) analysts have been on avg +5.9% too high from where they start the year (which was 6,755 coming into 2025, 8,000 for 2026) but note they underestimated it five of the past six years (including 2024). They ended ~100pts too low.)
Factset: In terms of analyst ratings, buy and hold ratings continue to dominate with buy ratings at 57.7%, after December tied Feb 2022 for the highest on record (to 2010) at mont- end at 57.5% (so we look set to break that) according to Factset. Hold ratings are at 37.2%, with sell ratings at 5.0%.
The Information Technology (68% (up a tenth w/w)), Energy (65%), and Communication Services (64%) sectors have the highest percentages of Buy ratings, while Consumer Staples (45%) has the lowest percentage.
Consumer staples also has the most sell ratings at 8% (down a tenth w/w) and Hold ratings at 46% (down from 50% five weeks ago, next closest on Hold ratings is Utilities at 46% (up from 45% four weeks ago)).
The percentage of Buy ratings is above its 5-year (month-end) average of 55.1%. The percentage Hold ratings is below its 5-year (month-end) average of 39.0%. The percentage of Sell ratings is below its 5-year (month-end) average of 5.9%.
Factset also notes that two of the three sectors that have recorded the largest price increases since December 31st are also two of the three sectors that had the highest percentages of Buy ratings on December 31st: Communication Services and Information Technology. The other though, Energy, saw the second smallest price gain since then.
Just one of the three sectors that have recorded the smallest price increases since December 31 are also one of the three sectors that had the lowest percentages of Buy ratings on December 31st: Consumer Staples. The others were Utilities and Materials/Industrials.
And some other earnings stuff:
Economy
Over the past 2+ years part of my earnings optimism has been due to the economy holding up better than expected. While earnings only track the economy loosely (and markets look forward 6-12 months), there is a clear positive correlation between the economy and earnings (particularly a weak economy and weak earnings), and there is a very strong correlation between earnings and stock prices (although stock prices (being as noted forward looking) generally fall in advance of a recession and bottom 6-9 months before the end of one). So if you can see a recession coming it is quite helpful, although very difficult (especially ahead of the market). You can reference this Week Ahead (see the Economy section) for a lot of material on how every recession is preceded by talk of a “slowdown” or “soft landing” as close as a month before the start. That report also has the notes about how small caps have shorter debt maturity profiles and more of it (debt).
As long time readers know the beginning of this section hadn’t changed much since I switched to the Week Ahead format in mid-2022, with the indicators to me during that period consistent with solid (which at times has been robust) economic growth, and I have been a broken record that I “certainly do not think we’re on the verge of a recession (although as noted above every recession starts out looking like just some economic softening).”
Since the end of March, though, we’d seen the data soften (it actually stretched back pre-March with 1Q services spending getting a notable markdown in the GDP revisions (as did services exports (tourism, etc.) and construction spending)) with reports since then more mixed, although remaining consistent with an economy running around trend levels (if not a bit above).
While we were deprived of the official data, what we saw during the shutdown “seemed to offer little change in the picture with estimates of layoffs and hires remaining generally low, consumer sentiment remaining weak, but private estimates of spending healthy, reinforced by earnings reports which also indicate a fairly healthy business environment (even if top-heavy) with solid balance sheets and low delinquencies (again though with some cracks in the subprime or leveraged areas and what seems like perhaps some slowing in certain pockets of discretionary spending like restaurants).”
As noted in mid-December, we’re finally starting to get some more recent data, and as I said three weeks ago “we continue to see an economy with some softening in hiring but spending remaining very solid along with good business investment spending, strong government spending (concentrated in defense and other administration priorities), offset somewhat by weak spending on structures outside of data centers and subdued exports.”
The data since then has continued to support that, and as I said last week “to me is starting to show some evidence of reacceleration in the economy and even some green shoots for the labor market (although that is still more mixed).” This past week saw more potential evidence of that (although things remain quite mixed) with a very solid personal income/spending report (even as it showed spending outrunning incomes leading to the savings rate falling), an upgrade to 3Q GDP (which was very strong), continued job growth in the ADP weekly data, continued very low unemployment claims, the S&P flash PMIs remaining in expansion territory (although those have been softening), and consumer sentiment improving (but remaining very depressed). On the more negative side, pending home sales (leading indicator) saw their largest decline since the pandemic.
As I said last week,
I have said the past several months “the data continues to show an economy remaining in ‘ok’ shape (although a 3Q GDP print over 4% is definitely more than ‘ok’ and now 4Q is looking to be better than anyone had expected coming in), with continuing ‘tiny cracks’ as I put it in mid-June,” but if the data continues to inflect higher, particularly with the tax refunds that are upcoming (and it appears more fiscal stimulus coming down the pike), continued expansion in AI spending, government spending having troughed, the Fed more inclined to cut than raise rates, etc., I will soon have to upgrade that to “an economy that has reaccelerated to “solid” shape”.
And as I said at the start of September 2024:
without question, the evidence is building that the days of >3% real GDP growth are behind us. That though is far from a disaster, and we should be happy to settle into something more around trend (1-3% real (infl adjusted) growth). The important thing will be to see the softening level out (L-shape) rather than continue to fall turning the “soft landing” into a recession.
Finally, as mentioned, as we turn the page into 2026 we’ll be getting more economic boost from deregulation and the OBBB which should at the very least offset the drag we’re getting from the tariffs, restart of student loan payments, and in the short-term loss of the health insurance subsidies (although I expect those to be replaced at some point) and perhaps provide a bigger tailwind than many are expecting.
The Citi Economic Surprise Index improved to +25.2 as of Friday from +16.7 the prior week and +7.8 the week before that, the best since late Sept, and less than five points from the highest since 2024.
The high of 2025 was 29.9 Sept 1st and the low was -24.6 June 24th. The 2024 high was 47.7 (in Feb) and the low -47.5 (in July).
And GDP estimates are for now consistent with a no recession call (again though remembering GDP going into recessions generally doesn’t look like one is coming (it was up around 2% in Q2 & Q3 2008 well after the recession had started)). After a very strong read in Q3, estimates outside of the Atlanta Fed are for some slowing in Q4 due to the shutdown drag (which will be “paid back” to us in the current quarter), but estimates for the most part have been rising quickly with an over 2% quarter now expected by almost all the trackers (and several closer to three with Atlanta Fed over 5%) much better than the 1% most were expecting a few months ago.
Atlanta Fed saw their 4Q GDP tracker edge up to 5.37% after having come in the closest (along with Goldman) for 3Q at +3.48% vs the actual 4.3%.
NY Fed’s 4Q GDP tracker hit the highest since it initiated tracking in August +0.03% w/w to 2.74% with the largest change on the Oct/Nov personal spending numbers.
As a reminder, they were well under for 3Q at +2.31% vs the +4.3% actual first estimate and 2Q at +1.68% vs +3.0% after being too high for 1Q at +2.6% vs -0.3% (although they have been closer in most quarters prior to 2025)).
And another reminder, the model is “dynamic” and constantly updating itself (how it weights inputs, etc.) to become more accurate which result in “parameter revisions” (which are normally small, but Jan 9th saw an increase of +0.60%). This week just +0.01%.
Their Q1 2026 tracker was -0.02% w/w to +2.73%, off the highest since they started tracking in late November.
The St. Louis Fed 4Q GDP tracker continues to confound remaining negative at -0.02% as of Friday from -1.46% two weeks ago. Unhelpfully they do not give a breakdown of the inputs.
The St. Louis Fed was a pretty good tracker pre-pandemic, but since Q2 ‘20 it has been much less so. For the just completed 3 Q they were by far the lowest of the trackers at +0.42%, nowhere in the vicinity of the 4.3% actual first estimate.
That dismal 3Q performance comes after undershooting 2Q ‘25 by -1.2% and overshooting Q1 ‘25 by +3.7%. It did though do well Q4 (and Q1) ‘24 but otherwise has been at least 1.5% off every quarter since Q2 ‘20, often by much more than that.
BoA sees their 4Q GDP tracker jump +0.6% w/w (now up +1.4% the last three weeks) to 2.8% as of Thursday. They see real final sales to domestic purchasers coming in at +1.7% up from +1.3% last week.
Here were the details behind the change if you’re interested in the granular detail:
“In the Dec industrial production report, utilities and business equipment came in higher than expected while mining came in lower than expected. This led to an increase in our 4Q PCE and equipment investment tracking. Meanwhile, structures saw a small decline. Oct construction spending came in higher than expected, leading to an increase in our residential investment, structures investment and government spending tracking for 4Q. 3Q GDP printed lower than our expectations at 4.4% in the final print. This was mainly due to a higher net exports estimate in our 3Q tracking. Also, inventories came in higher than expected. Additionally, personal spending came in higher than our forecast in Oct and Nov. Overall, this led to an increase in our 4Q PCE and inventory accumulation tracking.”
As a reminder their tracker was 1.2% low for 3Q vs the first estimate and 0.8% low for 2Q ‘25 GDP, a tenth high for 1Q, right on for 4Q ‘24 GDP & two tenths high for 3Q ‘24.
Their official forecast was 2.7% for 3Q GDP (vs 4.3% first estimate) and is 1.4% for 4Q.
Goldman as of Thursday had boosted their 4Q GDP tracker to +2.4% (Q/Q SAAR) with private domestic final sales growth also at +2.4%.
Goldman’s official “house forecast” is for +2.4% GDP with +2.5% private domestic final sales growth (last column).
Goldman’s Dec US Current Activity Indicator* edged back -0.3% to +2.8% still the highest since Dec ‘24.
*The CAI is their “real-time measure of inflation-adjusted economic momentum using 37 inputs.”
The Weekly Economic Index from the Dallas Fed* in the week through Jan 17th edged back -0.14% to 2.34% (after the prior week was revised +0.03% higher), remaining in the 1.49 - 2.79% range it has occupied since 2022 only poking above a couple times (most recently Apr 5th).
This series has become one of my favorites as it has a high correlation with actual GDP (see chart and note the recently released Q3 GDP report showed y/y GDP at 2.33%, right in line with this index) and has consistently indicated no recession and relatively healthy growth since the pandemic (which is what we’ve seen). It was referenced in November by Dallas Fed Pres Laurie Logan as support for her contention that the economy “remains solid”.
Importantly, the 13-wk avg is at 2.23% (down a bit from the 2.53% reading May 3rd, which was the best since 2022, but still a very healthy reading), continuing to evidence economic momentum that is slightly above trend.
*The WEI is scaled as a y/y rise for real GDP (so different than most GDP trackers which are Q/Q SAAR) and uses 10 daily and weekly economic series but runs a week behind other GDP trackers.
https://www.dallasfed.org/research/wei
Other economy stuff:
Valuations
Like the other sections, I’ll just post current week items regarding the multiple. For the historical stuff, see the Feb 4th blog post.
With equity indices mixed, P/Es generally followed with all but the Mag-7 edging back:
-The SPX forward P/E (red line) edged back to 21.8 (-0.1pts w/w, -1.8pts from the highest since 2001 on Yardeni’s model (which is a bit lower than most others (presumably due to the forward earnings calculation and earnings data source))).
-Mid-caps’ (blue, S&P 400) were -0.2pts w/w to 16.5 (down from the highest since 2024 and -0.6pts from the highest since early-’21 (17.1)).
-Small caps’ (green, S&P 600 so higher quality than the Russell 2000) -0.1pts to 16.0 (the highest since early 2025 and -1.0pts from the highest since early-’21 (17.1)).
-Mag-7 (purple) though +0.1pt to 27.8, the least since 1H ‘25 (-3.2pts from the highest since 2024 (30.9)).
https://yardeni.com/charts/stock-market-p-e-ratios/
Other valuation stuff:
Breadth
The McClellan Summation Index (“what the average stock is doing”) continues its upward move since bottoming in late November now the highest since late Sept.
SPX new 52-wk highs (red line) bounced around last week falling to 17 on Tuesday (the least of the year) before jumping back to 64, the joint highest since Nov ‘24, then ending the week at 24.
The chop has kept the 10-DMA (blue line) around the highest since Dec ‘24 at 42, a little off the 47 hit last week, up from 19 three weeks ago, which was the least since June (the 2024 peak though was 76).
% of stocks over 200-DMAs (red lines), a gauge of stocks in longer term uptrends, which had been lagging the price action since Sept, but got in gear three weeks ago, improved to over 70% for the NYSE for the first time since Dec ‘24 last week remaining above this week.
Nasdaq is lagging but at least continues to make steady improvement from its bottom in November.
SPX though weaker than both.
% of stocks above 50-DMAs (red lines), a gauge of stocks in medium-term uptrends, a similar story, not yet to the highs of the year, although those highs for the NYSE (in June) were the highest since Jan ‘24.
And shortening the lookback to % of stocks above 20-DMAs (red lines, indicative of equities in shorter-term uptrends) the same idea.
SPX growth/value edged up from a 5-mth low of 2.33 to 2.34 as of Jan 23rd, down from the highest since 1995 (2.44) the first week in Nov, but still up from around 2.0 to start 2025.
https://yardeni.com/charts/growth-vs-value/
The softening in the growth/value SPX ratio comes even as the relative forward earnings of growth vs value pushed to a new record high (1.70 as of Jan 15th), further off the chart. That is up from 1.0 Jan 2020.
Equal-weighted SPX vs cap weighted ratio fell back from its downtrend line from the start of its drop from the Jan ‘23 peak (which was a 3-year high (the all-time high was in 2015).
IWM:SPY (small caps to large caps) continued to extend well over the downtrend line from the local peak in 2021 to the highest since Dec ‘24 before edging back.
SPX sector breadth looks remarkably similar to the prior week in terms of the variability (with of course the actual sectors changing), but again just two sectors not up/down ~1% or more (Cons Discr & Tech).
On the positive side, 6 of 11 sectors again higher (down from 10 the week prior to last which was the most since Nov), although just two were up over 2% (after five the prior two weeks but none the week before that), and just one up at least +3% (down from three and two the prior two weeks).
Energy moved from fourth to first but otherwise leadership changed as the top three from last week (RE, Staples, Industrials) all fell out of the top four replaced by Materials, Comm Services, and Health Care.
On the negative side, we again had four sectors down at least -1% (from one the week before last), and again two (RE & Financials after Financials & Comm Services the prior week) were down at least -2%.
Weekly stock-by-stock chart from FINVIZ_com looks similar to the the prior week but definitely with less bright green and more bright red.
Looking at the top 11 stocks by market cap, six were higher last week (up from four the prior week) led by META +6.2% (rebounding from the prior week’s -5.0%). Leading to the downside was JPM for a second week -4.7% after -5.1% (now down -11% since Jan 6th).
2025 loser Moderna MRNA is starting 2026 much better leading the SPX for a second week +16.5% after +22% the prior week, one of five stocks up at least +10% (down from 11 the prior week and 22 the week before that) which included other prior leaders SNDK and MU both also up huge this year.
~55 SPX components were up over +4%, down from ~120 the prior week, the most since Nov and 100 the week before that (but up from 18 and 15 the two weeks before that). Again around a fifth of those were >$100bn in market cap (down from a little over a third two weeks ago) in AMD (again), MU, NEM (for a third week), GILD, UNH, META, VRTX, IBKR (for a third week), CVS, CMCSA, BSX, ANET (again), SBUX (again), NOW, AMGN, MDT (in descending order of percentage gains),
On the other side Abbott Labs ABT, led decliners -11.8%. Only one other component was down over -10% (down from 11 the prior week).
~50 SPX components were down -4% or more (down from 70 the prior week, 35 the week before that but just 3 the week before that), with 12 >$100bn in market cap (after sixteen, four, eleven, and zero the previous four weeks) in ABT, GE, COF (again), AVGO, BX, APP (again), KKR, MS, JPM (again), IBM, INTC, WELL (in order of percentage losses).
Other breadth stuff:
Flows/Positioning
EPFR from the Flow Show:
EPFR FICC flows in the week through Wed saw bank loans break the multi-month streak of Gold/Silver and Commodities finishing right next to each other coming in at second, but otherwise saw those remain once again in the the top three (where they’ve been for the last couple of months for the most part) w/+0.65 & +0.45% in AUM respectively.
Bank loans this week took the second spot after leading the prior week at +0.45% of AUM after +1% the prior week, the most since July.
Rounding out the inflows were TIPS (remaining in the top five a second week), Corp IG (same), then Corp HY and MMFs.
EM debt finished in last place (in the bottom two for a third week) although decelerating to -0.05% of AUM from -0.35% the prior week -0.9% the week before that (which was the “biggest since May ‘22,” but only after the “biggest inflow ever 3 weeks ago”).
ICI data on money market flows in the week through Jan 22nd unlike EPFR who saw a small (+$0.7bn) inflow into MMFs saw another sizeable outflow of -$30.8bn after -$74.7bn the prior week (which was the most in at least 20 weeks (I haven’t been keeping a record of this that long), which pushed the YTD total further negative at -$34.8bn.
Institutions (who hold ~60% of MMF assets), saw the bulk of the outflow again this week (after having led inflows for 7 of the prior 8 weeks, at -$24.6bn after -$55.8bn cutting total inflows now -$32.0bn YTD (but +$415.7bn last 19 weeks).
Retail saw a smaller outflow of -$6.3bn after -$19.0bn, now -$2.7bn YTD but +$108.1bn the past 19 weeks).
Total MMF assets are now $7.70tn down from a record $7.80tn Jan 7th.
https://www.ici.org/research/stats/mmf
On combined systematic strategy positioning, BoA doesn’t comment directly on their charts, but as a reminder last week they had noted that “with “equity realized volatility now at depressed levels, volatility‑sensitive strategies may have pushed aggregate systematic equity positioning to its highest level in roughly five years.” Well, volatility increased, and as one might expect given that set-up, systematic positioning was dialed back, although remaining for now not far from those 5-year highs.
But that also increases the sensitivity to further volatility, particularly to the downside, leading to the most asymmetric modeling since late October before that pullback (note their caption on Exhibit 1 is wrong, I emailed them).
In that regard, BoA estimates just +$1bn of buying in a flat market (down from +$19bn last week), and
-$7bn of selling in an “up” market due to the volatility increase (”up market” defined as 97.5 %ile price path or ~+3.5% similar to Goldman)), and
-$217bn selling in a “down” market, up from -$169bn in their last update (”down market” defined as the 2.5 %ile price path or ~-2.9% (different than Goldman who uses --4.5%)).
While CTAs still dominate the selling in a down market (due to both increased volatility but more importantly breaking sell triggers) representing -$154bn of the -$217bn in combined estimated selling, as noted last week vol control has become a larger piece adding -$48bn (although down from -$54bn given their selling last week) with risk parity the rest.
DB on positioning:
Like the S&P 500, our measure of equity positioning overall has continued to go sideways through a variety of short-lived tape bombs (0.41sd, 68th percentile). Systematic strategies trimmed their overweight positioning this week as vol rose (0.67sd, 79th percentile).
Discretionary investors have raised positioning to a little above neutral, the top of the cautious range in place since March (0.20sd, 58th percentile).
Tier1Alpha says overall systematic positioning fell back to just above the average level since 2011.
Looking more specifically at CTA (systematic trend follower) positioning in the US indices, BoA says:
“Geopolitical tensions pushed global equities lower early in the week, with the S&P 500 and Nasdaq each falling more than 2% on Tuesday. While this move brought CTA stop‑loss levels closer, our models show trend followers largely maintained long equity exposure through the selloff. Short‑term systems, which react more quickly to price momentum, may have trimmed U.S. equity longs, but medium‑ and long‑term trend followers remain extended on the long side. Looking into next week, a further bearish move could trigger more material CTA selling, with the bulk of potential de‑risking occurring roughly 3–5% below current levels.”
As a reminder, BoA now looks at bullish, flat, and bearish price paths (which are based on price trend vs moving averages), but also in short, medium, and long term price trends.
It appears that we continue (as we have since early December) to see only the shortest not yet having brought their positioning back up to the levels from early Nov (and they turned lower on the SPX and NDX with the latter now the least since late May/early June) but are close on the RUT leaving less room for CTAs to add per the systematic positioning summary, but they still see a good amount of breathing space (3-5%) before any selling would take place.
They don’t therefore provide buy levels (as that is more volatility dependent as they note) but they see the first layer of sell triggers at 6780, 24927, and 2592 on the SPX, NDX, and RUT respectively.
DB sees CTA equity positioning at the 83rd %ile to 2010 up from the 73rd %ile two weeks ago. In terms of the US though, long positioning remained at the 63rd %ile (up from 54th two weeks ago) with the SPX at the 62nd (down from the 65th the prior week but from the 55th two weeks ago), RUT at the 64th (62nd and 53rd), and NDX the 53rd (51st and 46th), so seeing more room to expand than BoA models.
Tier1Alpha sees CTA positioning in US equities more in the mode of BoA closer to full positioning.
BoA on SPX gamma:
“SPX gamma was ~$11bn (93rd 1y %ile) last Friday but it gapped lower to a measly $2.0bn concurrent with the equity decline on Tuesday. The remainder of the week [though] gamma grew, alongside equities, and was +$6.0bn (75th 1y %ile) as of Thursday’s close. There is room for gamma to continue to climb conditional on the S&P grinding higher from here but if equities fall next week gamma is likely to fall as well.”
So unlike some others, BoA sees gamma as ending the week at a relatively high level (at least as compared with the past year which has been relatively low), which should provide some cushion to volatility, although as they note it falls off quickly to the downside, turning negative at the 6700 level (where dealers have to “chase” moves), so like Tier1Alpha seeing volatility growing with downside moves and increasingly softening with upside moves to the 7100 level (which is an interesting spot as Tier1Alpha says the JEPI call strike is 7155, so perhaps BoA disagrees).
Tier1Alpha though sees gamma a little differently:
BoA’s estimate of risk parity positioning (which they estimate at around $200bn of AUM at max exposure) continues to see the leveraged exposure to bonds at around the highest since 2021, while the stock and commodity exposure remains around average levels since then.
DB models risk parity funds (est ~$250bn in max AUM) much differently than BoA with the equity allocation at the 76th %ile and commodities the 75th but bonds at just the 41st (although the charts don’t look quite in line with that):
“Risk-parity funds’ overall equity allocation declined this week (76th percentile), driven by a broad-based decline across the US (68th percentile), other developed markets (71st percentile), and EM (81st percentile). Their allocation to bonds (41st percentile) increased, while allocation to inflation-protected notes (66th percentile) and commodities (75th percentile) stayed flat.”
As noted earlier BoA models some clear selling last week by vol control funds (which they estimate at around $200bn of AUM) which saw their positioning fall back from near the 2025 peak.
DB sees vol control funds at just off “their historical maximum (99th percentile),” at the 97th percentile with their “sensitivity to market selloffs relatively low”.
While Tier1Alpha models less selling from vol control funds last week but also had seen less buying leading up to last week.
And there is some scope for buying expansion from vol control funds as we drop 1.2% and 1.0% days out of the the 3-month lookback (which is “the new rebalancing toggle,” as it has moved over the 1-month). There is nothing greater than a 0.7% day though falling out of the 1-month.
I like to look at the impact of moves in leveraged ETFs on the overall market as a barometer of risk appetite (the greater the impact, the more investors have in these ETFs which I think of as “higher risk”), and both SPX and NDX leveraged ETF AUMs were little changed remaining in their recent ranges and overall much closer to the highs of 2025 than the lows.
Remember, this is a “constant negative gamma” source as Charlie McElligott put it in a Oddlots appearance (meaning that there is double/triple buying pressure from them as they rebalance each day).
Looking at the two largest single stock ETFs, TSLA and NVDA, in line with the pivot away from the Mag-7 in recent months but better week last week, both bounced after having seen their AUM’s fall back to the lowest since May and June respectively. TSLA ETFs added +$0.3bn in AUM to $7.8bn (44th %ile over the past year), while NVDA leveraged ETFs added +$54mn to $6.0bn (42nd %ile over the past year).
MU jumped from 7th to 3rd adding +$0.3bn to take it to $1.3bn (100th %ile over the last year), and PLTR remained in fourth place at +1.2bn (51st %ile) as $GOOG shed -$56mn to fall to fifth (still 94th 1yr %ile as the funds are relatively new).
META improved to 6th adding $165mn to overake MSTR (-$46mn) but after MU those are all within $100mn of each other so expect continued jockeying back and forth. And you can add AMD to the mix at $962mn in AUM.
And after buybacks ended 2024 at record levels and started 2025 even better, they had by and large remained below seasonal averages from April until October when they seemed to have picked back up (depending on who you ask), but according to BoA and Goldman they accelerated into year-end and have continued to run at record levels on a nominal basis in 2026, although that is still just in line with the average since 2010 on a market cap weighted basis We are now starting to exit the buyback blackout window which will allow discretionary buybacks (~30% of all buybacks) to recommence.
Goldman notes last week was the peak of buyback blackouts: “Our flows started to see a slight pickup in activity vs the prior week; last week finished 1.3x vs 2025 YTD ADTV and 0.6x vs 2024 YTD ADTV. Still light volumes given blackout but we expect to see flows increase as open window picks up. Basically, the market will receive a source of supportive flows starting next week.”
And some other notes on positioning:
Sentiment
Sentiment (which I treat separately from positioning) is one of those things that is generally positive for equities when its above average but not extreme (“it takes bulls to have a bull market”, etc.), although it can stay at extreme levels for longer than people think, so really it’s most helpful when it’s at extreme lows (“washed out”).
After moving towards extreme bullish readings in later October before falling back along with the equity drawdown in November, with a couple hitting at or near extreme lows for the year at the end of November, as noted since then “like clockwork they have rebounded along with the equity recovery although only a couple are really anywhere near extreme levels.” Those that were though fell back last week leaving sentiment definitely not at sell signal levels.
Probably not surprising, as I don’t think it picked up the bounce in stocks Wednesday, AAII investors eased back after having pressed the bull-bear spread to the widest since Nov ‘24 the prior week:
AAII bulls (those who see higher stock prices in 6 mths, blue line) fell back to 43.2% from 49.5% the prior week, which was the highest since Nov ‘24, still though remaining above the long-term historic average of 37.5% for a 4th week (and the 7th week in 8 (with the other week 37.44).
Bulls also remained above the level of the bears (who see lower stock prices in 6 mths, red line) for an 8th week, the longest streak since 2024, who edged up to 32.7%, a 4-week high, from 28.2%, extending further above the 27.0% three weeks ago, which was the least since Oct ‘24. Bears are though back over the long-term average of 31.0% for the first time in four weeks (but they have been above all but 7 weeks since Dec 12, 2024).
The Neutral camp (yellow line) edged up to 24.1% from 22.3%, the least since Nov 13th and remaining under the long-run average of 31.5% for the 78th week in 80 (since July ‘24).
https://aaii.com/sentimentsurvey
The AAII asset allocation survey saw the allocation to stocks edge down to 70.8% in December from 71.2% in Nov, which was the highest since Nov ‘21, moving into bonds which edged up to 14.4% from 14.0%, which was the least since May ‘24, while cash remained at 14.8%, a tenth off the 14.7% in Oct which was the least since Nov ‘21.
In the special question this week AAII asked “What is your performance forecast for the S&P 500 index in 2025?”
In broad terms 70% are looking for a decent to very good year (up over 2%), 12% a flat year, and 18% a down year. Specifically,
A little less than half (44.1%) said up between 2-9%. Another quarter (25.9%) are looking for 10%+.
The “flat” group (12%) is -1% to +1%.
Around 10% were looking for -2% to -9% while 7% were looking for a larger than -10% decline.
NAAIM (investment managers) exposure index (blue line) edged back for a second week to 88.46% from 96.01%, now the least since Nov 19th but overall remaining in its range since late May when it crossed above 80. Since then it has ranged between a low of 76.85 (July 30th) and high of 100.83 (Oct 29th) (over 100 means that the average respondent (investment manager) was levered long equities).
The 4-wk avg (reddish line) also edged down to 93.78% from 95.4% continuing its softening from the 97.9% Dec 24th, which was the highest since Mar ‘24 (99.0%).
As a reminder, the index “represents the average exposure to US Equity markets reported by our members” and which ranges from -200% (2x short) to +200% (2x long).
https://naaim.org/programs/naaim-exposure-index/
The 10-DMA of the equity put/call ratio (black/red line) fell back towards the lows of the year (0.55) at 0.56 from to 0.60 the prior week (meaning more upside protection (calls) being bought), which was the highs of the year.
It remains well below the 0.71 in late Nov (which was the highest in a year) closer to the 0.50 it hit at the start of Oct (which was the joint lowest in three years)).
When it’s increasing it normally correlates to a consolidation in equities and increase in volatility and vice versa.
Goldman’s US Equity Sentiment Indicator* after moving into “stretched positioning” (over 1.0) three weeks ago for the first time in nearly a year but then falling into negative territory (-0.2) last week for the first time in six weeks, edged up to +1.0 this week.
*The indicator combines “six weekly and three monthly indicators that span [across the more than 80% of the US equity market that is owned by institutional, retail and foreign investors]. Readings of +1.0 or higher have historically signaled stretched equity positioning. Readings of -1.0 or lower have signaled very light positioning and have historically been a statistically significant signal for subsequent S&P 500 performance”.
The CNN Fear & Greed Index (blue line) after hitting 62.17 the prior week, back into “Greed” and the highest since Sep 22nd, softened back to 52.37 as of Friday, remaining though above the 43.69 Jan 7th which were the lows of the year, firmly in “Neutral”.
After having the seven indicators on one side or the other for the most part of the past year, they are perfectly split with three in Greed/Extreme Greed, three in Fear/Extreme Fear, one in Neutral:
Extreme Greed = junk bond demand (vs investment grade); stock price strength (net new 52-week highs) (From Neutral);
Greed = stock price breadth (McClellan Volume Summation Index) (from Neutral)
Neutral = market volatility (VIX & its 50-DMA)
Fear = market momentum (SPX vs 125-DMA) (from Neutral)
Extreme Fear =put/call options (5-day put/call options); safe haven demand (20-day difference in stock/bond returns) (from Extreme Geed)
https://www.cnn.com/markets/fear-and-greed
The revamped BofA Bull & Bear Indicator edged back to 9.2 from 9.4 the prior week, the highest since Feb ‘18, “an extreme bullish level,” falling just back under the “contrarian sell signal” level.
The drop was “on big outflows from equity/EM ETFs, a dip in global stock index breadth, [offsetting] bullish positioning in BofA FMS (e.g. cash level at record low 3.2%)”.
As a reminder Hartnett noted last week that “past 24 years average 3-month return when B&B Indicator >9.3… ACWI flat, S&P500 - 1%”. All six of the components remain either “Bullish or “V Bullish”.
Hartnett notes the “old” BofA Bull & Bear indicator fell back to 7.0 from 7.5 the prior week (the highest since Feb’21, but still never hitting a sell signal (the old indicator didn’t hit a sell signal post-pandemic (why they changed it))).
A week after the record streak of bullishness in Helene Meisler’s weekly poll ended at 13 weeks, Helene’s poll respondents this week we’re exactly split 50/50 on whether the next 100pts on the SPX will be higher or lower from 49.1% seeing higher the prior week.
The 50/50 split is only the third time since the poll’s inception six years ago that we’ve seen that (arrows). As you can see both prior instances were within a week of a pullback. While they don’t look like much on the chart, both were 8-10%.
The record high was 73.3% Dec 20th, the record low was 33.2% on May 17th.
I noted last week that after the the previous record streak ended it resumed soon thereafter with another 6 weeks of bullish readings (and the SPX chopped for a bit but also continued on its way for another six months).
Looking in more detail at when the previous longest streak (10 weeks) of bullishness in Helene’s poll ended in Apr 2021 (second chart), the next week was higher but then we fell back for two weeks, chopped for a month, then resumed climbing into the Dec ‘21 peak of that cyclical bull.
And the link to Helene Meisler’s always excellent Weekly Chart Fest.
Her message this week:
Despite the chopped up week and despite the S&P and RUT ending the week slightly red there was very little change in the charts. I still think the 493 are over-extended but the group I think needs to be focused on is the Banks.
It normally includes Citi’s Panic/Euphoria Index which fell almost to the zero line at the end of April, moved higher, softened again in August but never left Euphoria before hitting new 52-week highs six weeks ago before again softening mid-Nov to mid-Dec but again climbing back towards the highs remaining well into Euphoria.
While the fine print says “[h]istorically...euphoria levels generate a better than 80% probability of stock prices being lower one year later,” it has seen a mixed track since the start of 2024:
-It entered euphoria in late March 2024 (when the SPX was around 5200). We didn’t get to 5200 by late March of this year, but we got closer than I would have thought at 5500 (and we did fall under for one day in April).
-The next entry into Euphoria was in late October 2024 w/the SPX around 5800. The closest we’ve been since the start of October was 6550.
This most recent entry was in July w/SPX at 6200. We’ll see how it does this time (so would need to be under 6200 July 2026).
Seasonality
As we move into the second half of January, seasonality for all years since 1950 turns less supportive but still positive with a median return of +0.5% a little below the median for all periods.
Looking since 1929 the second half of Jan similarly weakens to more mediocre levels with an average gain +0.33%, right in the middle of all half-months, a little above the all-halves average of +0.25%, and the median a little better +0.45% which is similarly around the middle of all half-months and a little below the all-halves median of +0.59%.
The second half of Jan has also been positive 57.7% of the time, a touch above the 56% average and in-line with the 57% median for all halves, while the standard deviation (volatility of returns) is 3.27%, down from 3.52% for the first half and below the all-halves avg/median of 3.5%.
For the month as a whole, since 1928 January is the 3rd best month with an avg return of 1.21%, up 62.2% of the time.
And looking specifically at Year 2 of the Presidential cycle, January has been up 58% of the time with an average gain of 0.80% (vs 62% and 1.19% for all year), but if we zoom in on since 1970, it’s up just 36% of the time with an average loss of -1.77% (vs 59% and 1.08% for all years).
Final Thoughts
If you want the summary as to “how we got here” in 2025 you can see the Dec 21st Week Ahead in this section.
As I have said the past few weeks, despite a start to the year that I think few envisioned (outside of the President’s inner circle perhaps) from the geopolitical (Maduro removal, potential Iran strikes, potential NATO tariffs, etc.) to the domestic (Fed rate cut bets slashed, a flurry of executive proposals from capping credit card rates to homebuyer assistance to attempts to limit certain buybacks and executive compensation, renewed government shutdown threats, etc.) markets have not only hung in remarkably well but have seen a dramatic broadening to the more sensitive areas of the market (cyclicals, small caps, etc.).
Holding things back at the big-cap index level has been the weakness in the heavyweights (Mag-7 is flat not only for the year but since Sept 22nd) along with selling from systematic strategies last week with the increased volatility. But nevertheless, the index remains in its upwards channel since June, supported by previous Fed rate cuts (and a very high bar for hikes), solid if not spectacular earnings (even if they’re not being rewarded as they historically have for a third consecutive quarter), a solid economy that is showing tentative signs of reaccelerating (see Economy section), a continued strong retail bid with hedge funds also now participating, systematic strategies that have maintained high levels of exposure even if trimming at the margins, and buybacks reaccelerating to record levels (even if just average on a % of market cap basis). Seasonality is also favorable in January and sentiment while positive is not frothy (the “sweet spot”), while valuations, while high, are off their most extreme levels.
And starting next week we’ll start to see companies, who have been the largest buyers of stocks the past couple of years, coming out of their buyback blackouts. If we can get volatility to calm down, we’ll see gamma rebuild (which will further dampen volatility) and systematic strategies likely add back what they sold last week, and as noted there don’t seem to be any issues with retail buying, the economy, earnings, and while interest rates did jump last week they did not make it to levels that would really be problematic for equities and are already falling back.
We also took a major risk factor off the table it appears with the Lisa Cook issue. As I noted several times last week, a decision against Cook had the potential to really inject uncertainty around the Fed which would have definitely carried over to markets.
So there’s a lot to like. But with the recent declines, we also remain closer to “tipping points” that might see a higher level of systematic selling. But as we saw in November, even that can’t dent the market for more than a brief period.
This week is a big week though with earnings from 32% of the SPX (by earnings weight) including five of the Mag-7. Major disappointment (which I don’t expect, actually the opposite) would be problematic at the index level (even if it might actually lead to move broadening). We also have the Fed (who also does not seem to be likely to provide a negative surprise) and Washington (who seems to be a never-ending source of drama that thankfully the markets have looked through focusing on what’s important - the economy and earnings). Hopefully that all continues.
Given all of that, as I have said since the end of November, “I continue to believe as I have said for most of the year ‘for now it makes a lot of sense to be comfortably long stocks, with a plan in place for the inevitable 5-10% drawdown.’” I still think that’s still the case.
And as I’ve written since August (with recent updates):
The longer term story remains a positive one. The Fed is engaged in a cutting cycle in what does not appear to be a recession (which has almost always resulted in market gains), earnings growth has been strong with revisions very positive (although we might be seeing some cracks in that), we will continue to get more fiscal tailwinds from the OBBBA as we move deeper into 2026 (as noted in the Economy section), the economy remains healthy with some evidence of acceleration, corporate buybacks remain solid on pace for a record year (and we’re exiting the discretionary buyback blackout), and retail continues to want to buy the dip (and it seems perhaps now hedge funds as well). It’s when we start to see a majority of those flip that I’ll be more concerned.
And in the long term, as always, just remember pullbacks/corrections/bear markets are just part of the plan.
Portfolio Notes
Continue to make incremental moves. As we move to a subscription model, I will likely resume providing more detailed information on trades and a longer list of positions to paid subscribers.
Cash/Short-term Bonds = 15% (I have moved most of the cash out of SGOV (I haven’t touched the BOXX (BOXX mimics SGOV but no dividend, all capital appreciation so get long term capital gains if you hold for a year)) and into other short term vehicles like BINC, MINT, etc.
Longer Duration Bonds/Munis (mostly the latter) = 5%
Core equity positions (each 5% or more of portfolio (first 2 around 10% each, total around 25%) Note my largest positions are in energy infrastructure, specifically petroleum focused pipelines (weighted towards MLP’s due to the tax advantages). If you want to know more about reasons to own pipeline companies here are a couple of starter articles, but I’m happy to answer questions or steer you in the right direction. https://finance.yahoo.com/news/pipeline-stocks-101-investor-guide-000940473.html; https://www.globalxetfs.com/energy-mlp-insights-u-s-midstream-pipelines-are-still-attractive-and-can-benefit-from-global-catalysts/). That said, I should note that I would not necessary recommend such a large position in MLP’s at this time. I bought most of these positions a long time ago (many when oil briefly traded with a minus sign in front of it). At this point I have become “trapped” in them because of the way they are taxed as partnerships (selling them would trigger a very large tax bill). I don’t expect much out of them price-wise, but they will continue to kick off very good tax-advantaged yields and I will continue to sell out-of-the money puts and calls on them to generate additional income (hard to complain about 15% returns).
ET, EPD
Secondary core positions (each at least 1.5% of portfolio, less than 5%)
PAA
And the rest of the top 50 (all >0.5%, less than 1.5%):
ENB, GILD, XOM, VNOM, AM, AMZN, IBIT, BOND, URNM, ING, ARCC, TLH, MPLX, CRM, GSK, VICI, RRC, NVDA, TDG, GLD, CTRA, FXI, TLT, SCMB, MSFT, AR, DUOL, BIP, MRVL, OXY, OWL, BAYRY, CPER, VZ, DIS, PFE, DDOG, NKE, GTBIF, EWZ, O, BEP, ES, CHWY, CMCSA, BA, UNH, GIL, LULU, OBDC, INDA, MELI, PYPL, KKR, DVN, AXP, ARES, JPM, WDAY, FISV, YOU, ANET, TOST, ASML, ADBE, AVGO, COF, NOW, CI, UBER, GOOGL, AGNC, LVMUY, BRK/B, GDX
Note: EPD, ET, MPLX, PAA all issue K-1s (PAGP is the same as PAA but with a 1099).
Reminder: I am generally a long term investor (12+ month horizon) but about 20% of my portfolio is more short term oriented (just looking for a retracement of a big move for example). This is probably a little more given the current environment. I do like to get paid while I wait though so I am a sucker for a good well supported dividend. I also supplement that with selling calls and puts. When I sell a stock, I almost always use a 1-2% trailstop. If you don’t know what that is, you can look it up on investopedia. But that allows me to continue to participate in a move if it just keeps going. Sometimes those don’t sell for days. When I sell calls or puts I go out 30-60 days and look to buy back at half price. Rather than monitor them I just put in a GTC order at the half price mark.
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Incredibly comprehenisve roundup as always. The breakdown of systematic positioning across CTAs, vol control, and risk parity is particuarly useful for understanding potential selling pressure. I'm curious how you weigh conflicting signals from different data sources like BoA vs DB models? As someone who tracks market flows, these weekly updates are an invaluable resource for contextualizing the noise.