The Week Ahead - 7/20/25
A comprehensive look at the upcoming week for US economics, equities and fixed income
If you're a new reader or maybe one who doesn’t make it to the end feel free to take a second to subscribe now. It’s free!
Or please take a moment to invite others who might be interested to check it out.
Also 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 are up to, 3) what’s going on with earnings (which along with valuations are the most important 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 though), 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)).
The Week Ahead
After a busy week, we’ll get a relatively lighter one next week (outside of earnings) before we get “one of those weeks” to end the month (a packed schedule of US economic and earnings reports plus the Fed (and other) policy decision along with the Aug 1st scheduled implementation date for Pres Trump’s new tariffs).
For next week though, it’s a lighter week on the US economic calendar with the headliners flash PMI’s, new and existing home sales, durable goods orders, and weekly jobless claims. We’ll also get leading and coincident indicators (the latter are more important even though the former get the headlines), the Chicago Fed National Activity Index (has a good correlation with GDP), some more regional bank PMIs, and the other weekly reports (mortgage applications and petroleum and nat gas inventories).
The Fed will be in their blackout period (although the Fed will be having their Capital Framework for Large Banks Conference on Tuesday where Chair Powell will be making opening remarks and Michelle Bowman will be participating in a “fireside chat” (seems a bit warm for that?), but given the pretty hard rule on discussing monetary policy, I doubt we’ll get anything on that front).
Treasury auctions will be light with a 20yr reopening on Wed and 10yr TIPS on Thurs. Normally I would say nobody will pay any attention, but after everyone got worked up about a 20yr auction a couple of months ago, I guess you never know.
Earnings though will heat up with a heavy slate of earnings with 113 SPX components representing 20% of the SPX (by earnings weight) reporting, the 2nd heaviest week of the season, with 23 >$100bn in market cap (GOOG/GOOGL, TSLA, KO, PM, IBM, TMUS, BX, RTX, NOW, TXN, T, ISRG, VZ, TMO, GEV, BSX, NEE, HON, COF, DHR, UNP, APH, CB, LMT, LMT, CME (and INTC is right there at $99.5bn)).
And of course there’s what seems to be a never-ending stream of headlines out of Washington.
[Will update with BoA’s list of SPX reporters when it comes out.]
Ex-US its overall a light week although we do get the ECB’s policy decision on Thursday where a hold is widely expected but what they might hint at about timing of another rate cut is less clear. There are also a few other central bank decisions (Turkey, Hungary, Nigeria, Russia among others). In economic data we’ll get flash PMIs, Canada retail sales, ECB lending bank lending survey, EU consumer confidence, Germany’s Ifo business sentiment, UK public finance data, South Korea and Taiwan trade data, and GDP and inflation prints from a number of Lat Am’s largest economies among other reports. We’ll also get the results overnight from the Japan upper house election which will have ramifications on fiscal policy.
Canada
The Bank of Canada’s business and consumer surveys for the second quarter will offer fresh insight into inflation expectations and investment plans. Retail data for May and a flash estimate for June are likely to show slumping sales as consumers pull back after a tariff-driven rush to buy cars earlier in the year. Two fiscal monitors from the federal government may contain more details about retaliatory tariff revenues collected to date.
Asia
Asia’s data docket offers a broad cross-section of economic signals, from trade in South Korea to inflation indicators in Japan, Singapore and New Zealand. The figures will help clarify how the region’s economies are responding to trade-related uncertainties. South Korea opens the week on Monday with 20-day trade data, an early indicator for July exports. Next follows consumer confidence on Wednesday and retail sales during the week, offering a read on household conditions after the Bank of Korea held rates steady this month. Also on Monday, China will release loan prime rates, which are expected to be kept steady for a second month in July, taking a cue from the People’s Bank of China. Australia takes the spotlight on Tuesday with minutes from the Reserve Bank’s July policy meeting, at which it shocked investors by keeping rates on hold at 3.85%. The minutes may offer a clearer sense of how close policymakers are to resuming their easing cycle. RBA Governor Michele Bullock is gives a speech on Thursday.
On Tuesday, Taiwan is set to publish export orders for June, along with employment data. India’s July PMIs, due Thursday, will indicate the resilience of both manufacturing and services activity. Japan closes out the week on Friday with a full slate of data, including Tokyo CPI, department store sales and factory activity. The inflation reading will offer an early steer on national price trends, while the other releases will help assess how well domestic demand and production are holding up. New Zealand reports second-quarter inflation on Monday, while Singapore publishes its price gauges on Wednesday and industrial production data on Friday. Thailand has car sales and customs trade balance figures during the week. Meanwhile, investors will be watching the fallout from Japan’s election, which according to exit polls will see the ruling coalition lose its majority in the upper house, an outcome that would further weaken embattled Prime Minister Shigeru Ishiba’s leadership and potentially unsettle markets.
Europe, Middle East, Africa
In their final decision before a seven-week summer break, ECB policymakers on Thursday will probably keep the interest rate unchanged at 2%, pushing off a response to Trump’s threatened tariffs of 30% until they materialize and their impact can be better assessed. With many officials likely to use the interlude for a long holiday, the temptation to restate that inflation is at target, and to postpone worrying about the economic outlook until new quarterly forecasts are compiled for the Sept. 10-11 meeting, may seem appropriate. Given that backdrop, the ECB Governing Council could acknowledge among themselves that the chance of another rate cut in September is growing, even if they stick with their well-worn “meeting-by-meeting” approach to decision making. In that vein, President Christine Lagarde, in her opening statement to reporters on Thursday, is likely to restate that risks to growth are “tilted to the downside,” Morgan Stanley economists wrote in a preview titled “Ready for the Beach.”
Economic reports in the coming week will inform their deliberations. They include the ECB’s own bank lending survey, due on Tuesday, consumer confidence on Wednesday, and purchasing manager indexes from across the region and other major economies, set for release on Thursday, hours before the outcome of the ECB deliberations. Other key indicators such as Germany’s closely-watched Ifo business confidence and Italian economic sentiment will follow on Friday.
The UK will release public finance data on Tuesday at a time when its economic woes and fiscal position are very much in focus. With unemployment at a four-year high and growth faltering, PMI numbers on Thursday and retail sales on Friday may also draw attention. Britain’s exposure to market stress may be a topic when Bank of England Governor Andrew Bailey and colleagues testify on financial stability to lawmakers on Tuesday. Their report on the matter earlier this month highlighted how UK bonds risk being hit by a wave of forced selling by highly leveraged hedge funds.
Consumer-price numbers are among the highlights elsewhere. Data on Wednesday from South Africa will likely show inflation quickened to 3.1% in June from 2.8%, due to higher meat prices. Iceland’s equivalent numbers are published the following day. Aside from the ECB, other rate decisions are scheduled across the wider region:
Nigerian policymakers will probably leave their key rate unchanged at 27.5% for a third straight meeting on Tuesday, as inflation at 22.2% remains elevated and both core and food price growth have started accelerating again.
Hungary’s central bank is expected to keep borrowing costs on hold for a 10th consecutive month the same day, despite a sluggish economy, after inflation accelerated in June.
The Ukrainian central bank is set to decide on policy two days later. Officials in Kyiv have kept the main rate at 15.5% since a hike in March.
Turkish policymakers are expected to resume cutting borrowing costs on Thursday after reversing course in the face of political turbulence in March. The central bank is forecast to cut the key rate to 43.5% from 46%.
The Bank of Russia has indicated it’s likely to lower borrowing costs when policymakers meet on Friday, possibly by more than the 100 basis points reduction it announced in June that brought the key rate to 20% from a record high 21%.
Latin America
Argentina on Monday posts May GDP-proxy data. Economic activity in April jumped 1.9% from March and 7.7% a year earlier as President Javier Milei loosened some currency controls, part of a $20 billion agreement with the International Monetary Fund. Analysts surveyed by Bloomberg last month marked up their year-on-year forecasts for Argentina’s second- and third-quarter output, to 8% and 4.2% respectively. Mexico, Latin America’s No. 2 economy, takes center stage at mid-week, offering up economic activity data along with the mid-month consumer prices report. The May GDP-proxy print on Tuesday comes on the heels of April’s better-than-expected readings, and after the economy flirted with a technical recession earlier in the year. A proliferation of headwinds — not least of which are US tariff and trade policies — has many analysts forecasting a shallow second-quarter slump, though.
After a string of uncomfortably warm inflation readings, Mexico’s June prints ticked down as supply shocks cooled. Against the backdrop of forecasts for modest disinflation, the central bank has signaled that it’s likely to slow the pace of its easing cycle. Closing out the week, Brazil’s mid-month inflation report will likely see a third straight lower reading under the weight of the highest borrowing costs in nearly two decades. Inflation expectations for 2025 have begun to come down, but remain above the central bank’s target to the forecast horizon.
BoA cheat sheets for this week.
Day-by-day calendar from DB (not posted yet):
And here’s calendars of 2025 major central bank meetings.
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. 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.
As I had been noting the month or so leading up to the June Fed meeting,
there have been some differences in how Fed members are looking forward, particularly into the second half. While many think there’s a low probability for rate cuts this year absent a serious deterioration in the labor market (regional Fed Presidents Schmid and Musalem have even talked about “leaning against” potential inflation consequences (i.e., putting rate hikes on the table (although Schmid was not so aggressive in his last appearance)) or perhaps a chance for one (Bostic), others are more constructive led by Governor Waller. Mary Daly continues to think two cuts are a “base case,” while Goolsbee is back looking for “much lower rates” in 10-16 months.
Another place there is some difference is in how Fed members think they should respond to a situation where inflation is sticky or increasing while the labor market is weak. As noted Schmid and Musalem, joined recently by Dallas Fed President Logan (not a voter this year) and Gov Kugler (who provided a very detailed analysis of her thinking (see the Friday update) would not be cutting, and NY Fed President Williams, a key voice, insinuated recently that in the event of a tradeoff between the Fed’s inflation and growth goals, they should pick fighting inflation.
So as I said 9 weeks ago,
it seems for now the markets probably have it right that the Fed is going to wait until we get deeper into the year and some of the “uncertainty” has hopefully passed (or at least we’ve had a longer run of time with tariffs in place) regardless of what happens with inflation (i.e., they are going to “look through” any cool prints for now). They also will look through high prints focusing on market-based measures of long term inflation expectations. The only thing it seems that would get them to move would be a deterioration in the labor markets.
But I noted 6 weeks ago:
I have a feeling if inflation continues to remain relatively subdued (it was basically at the 2% target in April (so Powell did get his “soft landing”)) that more members will climb on board. That said, there is certainly no rate cut coming at the meeting next week, and given we’ll only get one more set of inflation and NFP reports by July, it seems the market may be correct in September being the most likely next cut.
And as noted three weeks ago:
we did see more members “climb on board” with Waller, most notably Michelle Bowman, although that was as much her “throwing her hat in the ring” as a potential Fed chair. And while Daly and Goolsbee continued their constructive tones seeing two rate cuts this year (and Kashkari (who is not a voter this year) did the same, a large contingent came out more hawkish led by Powell, although outside of the very hawkish wing (basically Schmid and Hammack who are clearly in the no cuts this year camp and perhaps Musalem) there has been a softening in the tone as Fed members “mark to market” their statements (i.e., inflation at least at the consumer level has remained tame).
I thought Powell did a better job this week (than at the June FOMC where I was critical of his performance) in his Congressional testimony in being more balanced and acknowledging that there was certainly a path where tariffs result in moderate and/or “one time” price rises that would clear the way for rate cuts later this year. In that regard he said that with all of the uncertainty, he thought “any of” the potential inflation paths that were being forecasted by Fed members were reasonable. Importantly, both Powell as well as other Fed members say they are expecting to see tariff impacts “in the summer” and Powell specifically pointed to the June and July inflation reports (to be delivered in July and August) as key inputs.
Given all of that, I think it’s now pretty clear that if we get through August with no notable tariff impacts that the Fed will be cutting in September and likely again in December (and maybe also October if the economy starts softening) assuming things continue towards the 2% target. Of course, we could always see a quicker start to the cutting cycle if we see a sharp rise in unemployment (I think above 4.5% or 4.6%) or growth really starts to deteriorate. There even remains the outlier possibility that if we get a weak employment report (and other economic data) over the next several weeks and still soft inflation we could see July become “in play”.
And then two weeks ago
I think it’s fairly safe to say if the FOMC does anything [at the July meeting], it would be to “tee up” a potential Sept cut if inflation remains tame than to move this month. You never know of course, but if a cut is coming this month, it will without a doubt be messaged ahead of time via one of the ‘Fed Whisperers’. We’ll be getting a lot of data between July and September, and I think it’s safe to say that if it continues to come in consistent with readings the past few months, a cut is coming in September.
And I leave all of that in because I think the “how we got here” is important 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). That said, there’s clearly not a rate cut coming at the end of the month, and there’s a lot of data between now and September, so we can just see how things play out.
And that’s consistent with what we saw in FOMC pricing as of Friday:
And with yields continuing to trend in the same ranges over the past few months, the 2/10 curve has as well remaining around the +0.5% area (0.56% this week).
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, so I had said this looks officially like a "this time is different" situation.
The 3mos/10yr yield curve (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)) like the 2/10 curve has trended sideways the past few months but in its case around the unchanged mark, still clearly calling for rate cuts (this is normally closer to 1.25%).
As noted back in February, this (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. Not sure if the reinversion “restarts the clock” on the recession watch. If so 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 lifted (but in 1989 it took six months).
And another way of looking at this, the 10yr Treasury yield continues to fluctuate around the Fed Funds rate, well under the typical spread of around 1-1.25% above, so also for now still calling for rate cuts.
As noted previously when it’s dropped from above to below (as opposed to having the FFR move from below to above) as it did earlier this year, we’ve always seen a rate cut since 1985 although it can take as long as a year.
Long term inflation expectations as measured by the 5-yr, 5-yr forward rate (exp'd inflation starting in 5 yrs over the following 5 yrs), which continues to be referenced by Fed members (including Jerome Powell (although I don't think he mentioned it at the June meeting)) as evidence for long-term inflation expectations remaining “well anchored,” did hit 2.34% again this week, the highest since January before settling back, overall remaining around the middle of its 4-year range, so for now not showing a great deal of concern about longer term inflation pressures (it’s right around its 20-yr average).
And the 10-yr breakeven rate remains in the middle of its post-2021 range at 2.41%, +4bps w/w but also the highest since February.
10yr real rates remained around 2% this week, below the 2.34% mid-Jan peak (which was the highest since Oct ‘23 (and before that 2007)), well above the 2012-2020 peak of 1.12%.
As with 10yr rates implied from market pricing, backing into 10yr real rates using 5-yr, 5-yr forward inflation expectations (subtracted from the 10yr nominal yield) similarly saw them similarly around 2% (a little above as this series has consistently been a bit higher) still well below the Jan peak (2.45%). These though remain over four times the 2013-2020 average of around 0.5%.
And as a reminder according to BoA the importance of real rates on equity returns has seen the largest increase in the factors they track over the past 5 yrs and explains a larger proportion of stock returns (83% correlation) in their data (to 2006), with the dollar close behind the most correlated (76%) since 2015.
Short-term real yields (Fed Funds - core PCE) fell back to 1.65% in May from 1.75% in Apr (rev’d from 1.81%) which was the highest since October, remaining well under the 2.70% last June, which was the highest since 2007, but above the local low of 1.38% in February. [this gets updated at the end of the month].
Not much relief for small businesses or HELOC borrowers as the real prime rate (inflation adjusted using core PCE) fell just a tenth to 4.82% from 4.92% in Apr although over a percent below the 5.9% high last June, which was the highest since Sep 2007. Still, it remains more than double the 10yr pre-pandemic avg. [this gets updated at the end of the month].
A little surprising to some was the FOMC’s median long run projection for the endpoint of the Fed Funds rate (the “neutral rate”) remaining at 3.0%. That said, note the average moved up to 3.11% from 3.02%, and even at 3% it is the highest since Sep 2018 (but also well below levels prior to that). [this will be updated after the July FOMC].
The ACM model of the 10yr UST term premium (which is solely based on interest rates), jumped last week back to +0.83% (+14bps w/w) just 8bps below the peak this year of +0.91% on May 21st which was the highest since July 2014.
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.
The MOVE index of expected 30-day Treasury note/bond volatility up a touch last week from the lowest since Jan ‘22 hit the previous week.
With overall Treasury volatility falling, 30yr mortgage spreads did as well to 2.29% the least since January remaining just in the 2.5-2.26% range since last September, but just 0.03% from the lowest since 2022, well under the 2024 peak of 2.73% and the 37-yr high of 3.1% in June ‘23. But they are still around +55bps above the 2010-2020 avg level.
Chicago Fed National Financial Conditions Index and its adjusted counterpart (the latter attempts to remove the correlation between the various indicators due to broad changes in economic conditions), both of which are very comprehensive, each w/105 indicators, in the week through July 11th fell notably to the least (loosest) since Jan ‘22.
https://www.chicagofed.org/research/data/nfci/current-data
Turning to RRP, some background:
As the Fed continues to drain liquidity from the system via QT (although much more slowly now), I think it’s important to watch for stresses which give an early warning signal that they are perhaps going to far as they did in 2018 which led to a near bear market. One area I am monitoring is reverse repos (which is an overnight secured place institutions (mostly money markets and banks) can park excess funds to accrue some interest, designed by the Fed originally to keep excess liquidity from pulling down rates too much in other short term markets and provide a “risk free” place to park short-term funds). RRP grew rapidly in 2021 & 2022 as money was pumped into the system and needed a home, but since May ‘23 has been steadily drained down by the Fed’s QT program and higher bond issuance with banks discouraged by regulatory rules from taking up the increased Treasury supply.
In particular, the continued sizeable issuance of T-bills (<1 yr duration) of around $800bn/month (accentuated by the $60bn in balance sheet runoff (meaning the Fed has reduced its buying of maturing Treasuries by that amount which the private market has to fill)) drained ~$1.75 trillion from RRP in the year through March 1st. From then until early July RRP levels had remained relatively stable in the $375-$500bn range, but then resumed their decline (in fits and starts (seeing spikes at most month-ends but then coming down to hit new lows), with the lowest level hit Feb 14th at $58bn, the least since Apr ‘21 on the back of the Fed cutting RRP rates to the low end of the Fed Funds band which made parking funds there (versus lending overnight to other institutions or buying T-Bills) less attractive in line with their desire to sop up most of this “excess liquidity” (as they have described it).
As noted in previous weeks, since then RRP had rebuilt somewhat as with the Treasury up against the debt ceiling they have had to stop issuing new Treasuries only refinancing maturing ones which had taken away a source of investment for money markets and other buyers who have had to turn to the RRP in part despite the lower and with the Fed slashing QT. With the debt ceiling now raised, and with the administration apparently looking to increase T-Bill issuance this is an area that will need monitoring, although some on the Fed think this can be drained to zero without any collateral damage.
As noted two weeks ago, with the debt ceiling raised, the Treasury is in the process of refilling the TGA (Treasury bank account) which was drawn down as they could not issue above the previous limit, which will mean around $400-500bn in extra T-Bill issuance over the next couple of months, similar to 2023.
Markets had no issues in 2023, but in part that was due to RRP funding around $800bn of that rebuild. That said, things are different today. QT has been slashed, deficits were increasing (they have declined slightly due to the tariff revenues this time around), and we now have the current need of stablecoins for T-Bills, all of which may be enough to absorb the extra issuance. So, I’ll be watching RRP levels (and more importantly bank reserves discussed below) as an early indicator of potential liquidity issues.
This week, though, all is well with RRP at $199bn a very comfortable number.
In that regard, here is what BoA said earlier this year:
We expect a debt limit resolution in late July/August, which would imply a large TGA rebuild from near $0 following the resolution.... At that time we expect the Fed’s 'dashboard' of money market & liquidity indicators will clearly shift from green, past yellow, and towards red. We continue to believe UST repo is the single best indicator for flagging when QT should end."
RRP is to me most important in its shielding of bank reserves. The $3tn mark has clearly been a line in the sand, catalyzing the indigestion in the credit markets in March ‘23 (SVB, etc.) and April (Robert Perli, head of the SOMA desk of the NY Fed confirmed we did see stresses). For now though, they remain comfortably above at $3.37tn. But with the TGA being rebuilt, I will be watching reserves closely as an early warning signal for potential stresses in funding markets (so far so good though).
For background on various estimates of when reserves will be “too low” see the Feb 4th Week Ahead.
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). 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 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), which has exerted downward pressure on 10yr yields). I sold that new, small position on the dip under 4% in April, and I have been waiting on us revisiting that 4.7 - 5% area to reload. BMO’s excellent rates strategist Ian Lyngan said this week he still thought we’d see 10yr yields below 3% at year end. I will be watching for a pop up to rebuy.
Overall though we continue to see range bound action in my “2025 likely trading range of between 4 and 5%.” While they left that range in early April (for one day), other than that we’ve been solidly in it, which I expect to continue for now.
I still believe that if we do get a recession with the unemployment rate rising over 4.5%, job losses in the employer’s payroll survey, and contractions in consumer spending and business investment, then we’re likely to see 3.6% again (and probably lower). In terms of how high they could go, I still have a hard time seeing them sustaining for long above 5%.
For all the old “final hike” and “first cut” materials, you can reference the Feb 4th blog post.
Note BoA’s Dove-Hawk chart (which they acknowledge is badly in need of an update) is missing Hammack in ‘26 (Cleveland and Chicago vote every 2 yrs), but otherwise looks right (in terms of voters (also note that Philadelphia Fed Pres' Harker’s replacement has started (Anna Paulson) who will have a vote in 2026). While little is known about how she views policy, she does come from Chicago which is headed by the more dovish leaning Goolsbee (but she’s been there for two decades).
In terms of the Hawk/Dove spectrum it’s still not that far off although Bowman has joined Waller as the most dovish while Kashkari has turned more dovish as well.
Here’s one I found this week from DB.
While it doesn’t break them across the Hawk/Dove spectrum, UBS had a nice chart this week that gives you voters this year and next. I hadn’t realized that Kugler’s term as a Gov is already up (surprising as those are long).
And here’s one that goes over current term expirations.
And I came across one from BBG. I think it’s pretty accurate except Kashkari is definitely not that hawkish (he was calling for a December cut in early November):
And here who is rotating off and on for 2025.
Found another FOMC hawk/dove chart to add to my collection. This one from Barclays. Seems pretty accurate except have to wonder how hawkish Hammack really is considering she was talking about a June rate cut right before the blackout. Also, don't think Daly is all that hawkish given she said she was looking for two cuts this year that week as well.
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.
We’ve now had 12% of SPX earnings in for Q2 as of Thursday morning, really too early for any broad takeaways, but FWIW the beat rate has been an elevated 83%, above 1Q’s 76%, the 5-yr avg of 78% and 10-yr avg of 75%, but earnings are coming in on average +7.9% above estimates below the +8.3% 1Q and the 5-yr avg of 9.1% but above the 10-yr avg of 6.9%.
As a reminder, coming into the season we’d seen a larger than normal drawdown in expectations since the start of the quarter (April 1st), now to 4.8% y/y according to Factset from 9.3% as of the start of the quarter, -larger than the 5 & 10-year averages (-3.0% & 3.1%).
The result of the overall earnings beat rates has been earnings estimates for Q1 are now at +5.6%, +1.2% w/w, and up from 4.9% at the start of the quarter (Apr 1st), but down from +12% to start the year. While the 8th consecutive quarter of positive earnings, it would also be down from +13.3% in Q1, and the least y/y growth since Q4 ‘23.
The +1.7% improvement since the start of the quarter is below the 5yr average of +7.7%, the 10yr (+5.6), and Q1’s +6.1% (but as noted it’s still very early).
In terms of Q2 revenues, Factset says through Thursday morning 83% have beaten, a huge number well above Q1’s 64%, the 10yr avg of 64% and the 5-yr avg of 69%, and beats are +1.9% above expectations up from +0.8% and above the 10-yr avg (1.4%), but below the 5-yr avg (2.1).
As a result of the beats, Factset says 4.4% revenue growth is now expected for Q2, up from 4.2% to start the quarter, but down from 4.7% in Q1. It would be the 19th straight quarter of growth.
With the tariff backdrop, profit margins will be a big focus this earnings season. Currently, Factset says expectations are for 12.3% profit margins for Q2 (+0.1% w/w), down from 12.7% in Q1 but up from the 12.2% a year ago and above the 5-year average of 11.7%.
Three sectors are reporting a year-over-year increase in their net profit margins in Q2 2025 compared to Q2 2024: Communication Services (14.0% vs. 11.6%), Information Technology (24.9% vs. 24.0%), and Financials (19.4% vs. 18.8%).
In addition to Q2 earnings expectations seeing a big boost to +5.4% growth (still -3.2% past 15 wks, -7.2% last 25 wks), we saw some improvement to the rest of the year:
-Q3 was boosted a tenth to +7.4% (-4.3%, -8.0%),
-Q4 was boosted three tenths to +6.8% (-4.5%, -9.9%).
2025 as a whole a very respectable +9.3%, +0.3% w/w.
With earnings expectations seeing a notable improvement so did overall 2025 earnings expectations which Factset says improved from the least since the start of their tracking to $264.48 (+$0.52 w/w, but still -$9.78 since Dec 31st).
As a reminder, BoA’s analysis is that the July 1st number ( $264) will change by less than 2% by the end of the year absent a major economic event (GFC, Covid, etc.).
That represents a pretty healthy growth rate of +9.3% for 2025 earnings (+0.3% w/w), but that’s still down from 12.6% Dec 31st.
Factset says the -3.6% drop in 2025 earnings expectations in the first six months of the year was larger than the 5 & 10yr avgs (-3.4 & -2.4% respectively).
“At the sector level, ten sectors witnessed a decrease in their bottom-up EPS estimate for CY 2025 from December 31 to June 30, led by the Energy (-17.8%) and Materials (-12.0%) sectors. On the other hand, the Communication Services (+2.6%) sector is the only sector that recorded an increase in its bottom-up EPS estimate for CY 2025 during this period.”
In terms of the earnings growth exp’d for 2025 Factset notes it will be a record, although also notes that there is on average over the past 25 yrs a -6.3% deterioration from where it starts the year ($275.05) w/analysts overestimating in 17 of those yrs (which would equate to $257.72 based on the average deterioration). But it should be noted that average includes 4 outlier years (2001, 2008, 2009 & 2020) where the overestimation was b/w 27-43% due to recessions. Excluding those, the difference is just -1.1% (which would equate to $272.02 (above where we are now)).
As a reminder, though, final earnings for Q2 are very likely going to be materially higher than +5%. Factset notes that on average over the past 1, 5 & 10 yrs companies have beaten earnings expectations by 6.3%, 9.1% & 6.9% respectively resulting in “inflation” to the earnings estimates on average by 4.6%, 8.1% & 5.6% respectively over where they stood as of the start of the quarter (in this case June 30th which was 4.9%). That would mean if we get the average improvement earnings should come in at +9.5%, 13.0%, or 10.5% 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 42 quarters (Q1 ‘20, Q3 ‘22, and Q4 ‘22 are the only exceptions according to Factset).
2025 revenues are now expected to grow +5.1% down -0.7% since Dec 31st, and down from 5.4% at the start of the quarter (April 1st).
Energy is the only sector expected to have negative revenue growth (although that’s been cut by two-thirds since the start of the quarter).
The changes to 2025 earnings expectations (now at +9.3% y/y growth but down from over 14% at the start of the year) has been matched by 2026 expectations which have remained near +14% all year (as of Thursday +14.0%, +0.3% since Dec 31st), as they've mostly just tracked 2025 keeping the spread the same.
In terms of how markets are handling earnings beats & misses for 1Q, it seems investors are continuing to take a glass half-full approach (different than what Goldman has seen although Factset looks at 2 days before to 2 days after an earnings release), saying beats have seen a +2.5% reaction, the best in over 3 years (vs +1.9% in Q1 and versus the average of +1.0% the last 5 yrs), while misses are being punished around average (-2.3%, vs 5-yr avg of -2.3%, but more than Q1’s -1.9% (although in Q1 the vast majority of reports came in the context of the 20+% recovery in stocks from the April lows)).
Factset’s analysis of analyst bottom-up SPX price targets for the next 12 months as of Thursday continued to increase for an 8th week (following a 10 week string of decreases (the longest period of softening since 2022)) another +35pts w/w to 6,799 (still -242 pts last 18 weeks, but +272 pts past 8 weeks) which would be +8.0% from Thursday's close.
Health Care (+19.7% up from 15.2% the prior week) remains the sector having the largest upside seen by analysts followed by Energy (+14.0% up from 11.2% a week ago (but down from +20.4% five weeks ago), while Industrials (+4.2% down from +3.7%) is the sector expected to see the smallest price increase.
As a reminder the last 20 yrs (through 2024) they have been on avg +6.3% too high from where they start the year (which was 6,755), but note they underestimated it five of the past six years (including 2024).
Factset: In terms of analyst ratings, buy and hold ratings continue to dominate at 56.4% & 38.5% (buy ratings are up from 53.6% on Oct ‘24), while sell ratings edged up two tenths to 5.1%.
The Energy (67%), Communication Services (65%) and Technology (63%) sectors have the highest percentages of Buy ratings, while Consumer Staples (40%) has the lowest percentage. Utilities and Staples were joined this week by Financials to lead sell ratings at 7%.
The Consumer Staples (53%) sector also has the highest percentage of Hold ratings.
“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 also below its 5-year (month-end) average of 5.9%.”
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).
The intro will remain unchanged for the time being as it serves as introductory material:
As long time readers know the beginning of this section hadn’t changed much until this year 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 now stretches back pre-March with 1Q services spending getting a notable markdown in the GDP revisions (as did services exports and construction spending). In terms of more current data the pattern had continued with decent but not great data. That changed a bit this week with the data coming in much stronger than what we had been seeing the past couple of months. Core retail sales and industrial production were quite solid (which together represent around half of GDP), jobless claims remained contained, core price indices all came in below expectations (boosting real incomes), the NY and Philly Fed surveys both beat expectations, and sentiment continued to slowly improve in the UMich survey. The housing data was the one fly in the ointment this weak with single-family starts falling to the least since last July, and permits weak as well (although it was partially made up for by a big jump in multifamily starts in the NE region).
So, overall, I would say, as I have the past several weeks, the data last week continues to show an economy remaining in “ok” shape at this point, but with “tiny cracks” as I put it in mid-June remaining. For now the general message remains the same as prior weeks:
Hopefully we don’t get much further softening and perhaps we can rebound as we start to (fingers crossed) get past the tariff uncertainty. The good news is the important services sector has so far held up which is keeping overall employment and wages up [but as noted we saw some cracks in that this week]. That last item is perhaps the most important indicator to watch (real wage growth). We also got a weak productivity report but for now we can look through it given it was based on faulty GDP metrics. Hopefully once they get that all squared away it comes in better, but that’s another thing to keep an eye on. Productivity is incredibly important in allowing the economy to expand with less labor supply and without triggering inflation. Still, for now, I continue to feel that any softening does not appear to be morphing into a recession.”
And as I said at the start of September:
without question, the evidence is building that the days of >3% real GDP growth are behind us, and we should be happy to settle into something more around trend (1-3% real (infl adjusted) growth). That though is far from a disaster. 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.
And looking more specifically at the biggest current risk to economic growth, the tariff policies and uncertainty they’re creating until finalized, as I mentioned Apr 20th,
I am now less concerned than I was the week the reciprocal tariffs were first unveiled given we’ve seen a clear acceptance by the administration that they likely overreached and are now dialing things back (including now China) with continued positive noises coming out of the White House regarding “deals”, etc. As I also noted we saw that there is a definite pain threshold for the administration which means to the extent things start to look shaky, we seem to have a “Trump put”, although there are perhaps longer term ramifications that we’ll only see months/years down the road in terms of the global view of the US as an investment destination which may have impacts on the cost of capital here. That’s beyond the scope of this note, though, and as I said following the unveiling of the reciprocal tariffs when I noted I didn’t want to forecast a recession despite the numerous calls for one because “I am not an economic forecaster, so I will just continue to follow the data…. I think it’s too early to draw any strong conclusions,” that remains the case. For now, I don’t see any strong signs of a recession.
But as I said July 9th, “my thinking on tariffs will get a big test soon,” which now appears to be the last week of the month.
Finally, as a reminder, it does appear that we’ll be getting some level of economic boost from deregulation and the OBBB which should at the very least offset the drag we’re getting from the tariffs and restarting of student loan payments and perhaps provide a bigger boost than many are expecting.
With the overall strong economic data last week (and despite the fact that it was pulled down by the inflation “misses” (even though they were good news), the Citi Economic Surprise Index was up another +9.3pts w/w to 12.6, now up after +36.5pts the last four weeks to the best since May 28th (14.5) which was a 5-mth high.
The highs of the year were 22.5 in mid-Jan. The 2024 high was 47.2 (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)), and while the Q1 number was weak as I expected, there is broad agreement that it was a function of mismeasurement (even the Fed said that in their May meeting minutes), but it looks like instead of that getting revised higher, it is flowing through to 2Q GDP estimates although many are not seeing the improvement I was expecting. Like Q1 though the gap is now getting quite wide (although at least all positive) going from the St. Louis Fed & NY Fed at less than 2% to Goldman near 4%,
2Q GDP estimate from the Atlanta Fed (whose GDP tracker was right in line in its 3Q & 4Q ‘24 first est’s of GDP (and just a tenth off for 2Q), but who was -1.2% too low for 1Q ‘25) falls to 2.39% from 2.6%, now the least since May 27th with minor adjustments lower to many components led by net exports and consumption (both around a tenth in terms of their contribution.
NY Fed’s 2Q GDP Nowcast (as a reminder, they were way off for 1Q seeing +2.6% vs the actual 1st est of -0.3% (although they were closer in most other estimates and that will be closer after revisions)) saw its first improvement in a month to 1.71% from 1.56% which was the least since it initiated tracking Feb 28th (still though well below the highest at 2.85%). While most of the data boosted the number the largest contribution was the retail sales report.
As a reminder the model is “dynamic” and so adjusts in real time as data evolves and “parameter revisions” added +0.03%.
The NY Fed’s 3Q GDP tracker also improved, in its case a bigger jump to 2.44% from 1.78%, now just a tenth off the highest since it initiated tracking May 30th. Unlike the 2Q report the bulk of the improvement was from the outlook/general business conditions from the NY & Philly Fed regional manufacturing PMIs.
St. Louis Fed Q2 GDP tracker (which has had a mixed track record the past few years, often undershooting actual GDP since Q2 ‘22, but was right on in Q1 & Q4 '24, but then way too high at +3.07%(!) for Q1 ‘25), unlike other GDP trackers for a second week edged higher to 1.63% from 1.42% the prior week (and 1.02% at the start of July). They do not give a breakdown of the inputs.
BoA (who as a reminder was just a tenth high for 1Q ‘25 GDP vs the 1st estimate, right on for 4Q ‘24 GDP & two tenths high for 3Q), dropped their 2Q GDP tracker one tenth to 2.2% as of Thursday, but remember they had very high expectations for the retail sales report, which was quite strong, but not that strong, and we had some negative revisions to prior months. Otherwise, they also nit picked industrial production saying the gain in biz equipment wasn’t up to their expectations offset somewhat by higher than expected inventories (which increase GDP).
Despite the stronger than expected June retail sales and July Philly Fed manufacturing index and low weekly jobless claims, Goldman cut their Q2 GDP tracking estimate by 0.1pp to +2.9% (quarter-over-quarter annualized) as core retail sales growth for both April and May was revised down. Their Q2 domestic final sales estimate remained at +0.9%.
As a reminder their official house forecast for Q2 is for 3.8%.
We forecast quarterly annualized GDP growth of 3.8% in Q2 (reflecting distortions related to frontloading of imports ahead of tariffs), 0.6% in Q3, and 0.9% inQ4.
The Weekly Econ Index from the Dallas Fed (scaled as y/y rise for GDP (so different than most GDP trackers which are Q/Q SAAR) and uses 10 daily and weekly economic series), which runs a week behind other GDP trackers, in the week through July 12th fell back to 2.37% from 2.63% the prior week (revised from 2.52%), which was the best since Apr 19th, moving back towards the middle of the 1.49 - 2.79% range it has occupied for almost all of the past 3+ yrs, only poking above a couple times (most recently Apr 5th).
The 13-wk avg remained at 2.21% (off the 2.53% reading May 3rd, which was the best since 2022), continuing though to evidence overall economic momentum that is a little above trend.
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.
Forward P/E ratios were little changed or eased off for all but the Yardeni’s Mag-8, as improved earnings estimates offset modest price gains with the SPX remaining just off its multi-year peak:
-The SPX forward P/E is 22.1 (unch w/w, +3.1pts since Apr 20th and -0.2pts from the post-2021 peak of 22.3 in December.
-Mid-caps' (S&P 400) is 16.1 (unch w/w, +2.0pts since Apr 13th, -1.0pts from the highest since early-’21 (17.1)).
-Small caps' (S&P 600 so higher quality than the Russell 2000) is 15.3 (-0.2pts w/w, +2.3pts since Apr 13th, and -1.8pts from the highest since early-’21 (17.1)).
-Yardeni's “Megacap-8” (adds NFLX) P/E is 29.3, +0.5pts w/w, +6.1pts since Apr 20th, and -2.2 pts from the 31.5 it hit in 1H 2024 (which was the highest since Jan ‘22)). It was ~31 at the December peak of the Mag-7 index.
https://yardeni.com/charts/stock-market-p-e-ratios/
Other valuation stuff:
Breadth
The NYSE McClellan Summation Index (red line, "what the avg stock is doing") has rolled over after reaching the highest since Oct last week.
The Nasdaq volume-based version (red line, favored by Helene Meisler) remains the highest since early 2021.
SPX new 52-wk highs jumped to 37 Friday, but under the 45 at the start of the month and the 10-DMA remains subdued (although maybe making another higher low?)..
% of stocks over 200-DMAs (red line) edged back from the highest since February with the Nasdaq not confirming the new highs in the index.
% of stocks above 50-DMAs (red lines) interestingly look better than both the 200 & 20-DMAs but also off the highs.
While % of stocks above 20-DMAs (red lines) are further under the highs of the year, but look better than over 200-DMAs.
SPX growth/value pushed last week to a new record high to 1995 (2.33).
https://yardeni.com/charts/growth-vs-value/
Similarly, the equal-weighted SPX vs cap weighted ratio fell to the least since 2003.
IWM:SPY (small caps to large caps) ratio remains near the 24 year lows hit in April.
SPX sector breadth improved a bit this week to 8 of 11 sectors higher (from 6 the prior week, but down from 11 the week before that) although again only two up over 1% (the same as the prior week, down from nine the week before that). And again three sectors were down more than that this week (although a different three - Materials, Health Care and Energy vs Staples Comm Services and Financials the prior week). Again this week no clear style differentiation in terms of leaders/laggards.
Stock-by-stock chart from FINVIZ_com for last week consistent with a very mixed picture. As with the prior week plenty of stocks moving in both directions more than 4% last week. Top performer was IVZ +15%, worst were ELV & MOH both -19% (and CNC was -13%) as health insurers were sold aggressively.
Other breadth stuff:
Flows/Positioning
Flows from BoA’s Flow Show report:
EPFR FICC flows in the week through Wed continued to be mostly "risk on" for a 4th week with bank loans remaining at the top (the riskiest slice of corporate debt) and EM debt remaining in the top 3 (second this week). Cash fell back to 5th from 3rd, but otherwise it was commodities and gold/silver rounding out the top 5 again. TIPS the only outflows this week.
ICI data on money market flows saw a second week of outflows -$7.3bn in the week through July 16th from the ATH two weeks ago, less than the -$26.0bn EPFR saw, but the previous week EPFR saw a large increase vs a decrease in ICI. Again this week ICI says was all from institutions (-$11.1bn vs +$3.9bn retail) which are ~60% of MMF assets).
Total MMF assets now at $7.07tn down slightly from the $7.08tn ATH.
https://www.ici.org/research/stats/mmf
Looking at CTA (trend follower) positioning in the US indices, first as noted two weeks ago BoA has updated their reporting to now providing detail on bullish, flat, and bearish price paths (which are based on price trend vs moving averages), and also adds in short, medium, and long term price trends.
With that backdrop they say: “According to our model, trend followers added to equity longs this week, especially in the US as the S&P 500 and NASDAQ-100 reached new all-time highs. In fact, long positioning in NASDAQ-100 futures looks to be in consensus across short-, medium-, and long-term trend followers which increases the potential impact should CTAs unwind in a reversal. Our closest NASDAQ unwind trigger is still more 2% lower from Friday’s close with selling accelerating at 5% lower from the index high.”
So BoA sees CTAs as continuing to add to equity longs for the SPX, NDX, and RUT in the upcoming week, particularly on a positive price path and/or with lower volatility.
They don’t have a buy trigger for the SPX but the first sell trigger is 6275 with a second at 6032. NDX has a sell trigger at 22761 while RUT has a sell trigger at 2141 (buy trigger at 2324).
Meanwhile, Goldman estimates systematic macro global equity buyers added $30bn of net length last week ($67bn in the last 1 month), and will add another $42bn in the next 1 week ($107bn in the next one month in the baseline scenario) driven by CTA/trend followers.
"Nearly $42bn or 40% of the global figure is expected to be in US markets."
“Global trend signals remain positive nearly across the board of markets and tenors, and the first S&P area is 3.5% lower around 6070 currently for the short-term trend threshold, though some markets–e.g. Euro Stoxx are closer to their thresholds”
Tier1Alpha’s model also sees CTA positioning in US equities having pushed even higher last week requiring further price gains to see them add.
DB also has seen substantial buying from CTAs in US equities the past two weeks (although sees overall positioning as not stretched), and CTAs remain full of foreign equities: “CTAs continued to increase their overall equity longs, taking it to the highest in 13 months (90th percentile), mostly driven by elevated positioning outside the US. Within the US, they increased longs in the S&P 500 (57th percentile [from 26th two weeks ago]) and in the Nasdaq 100 (66th percentile [from 30th]) but remained modestly short the Russell 2000 (32nd percentile [from 7th percentile two weeks ago]).”
BoA notes on gamma positioning that “[a]s of Thursday’s close, SPX gamma was +$2.6bn (47th 1y %ile) a relatively modest figure. However, a large portion of Thursday’s gamma footprint is due to July’s 3rd Friday expiry (i.e., 18-Jul) which is now past.”
So BoA sees gamma as remaining relatively low but still positive which should have some marginal dampening impact on volatility, but as of Thursday at least it saw a big wall that is perhaps what has kept SPX rallies from extending. It remains little changed on declines until around the 6150 but then builds. Again, though, this is all likely to change as strikes reset at the start of this week.
Goldman says “S&P liquidity remains at its cyclically improved levels, and gamma hedging flows remain overall pro-cyclical with buy estimates considerably bigger on equivalent up/down spot moves beyond 2% currently.”
BoA continues to model risk parity funds (whose AUM is est’d to be as big as CTAs & vol control combined ($500bn-$1tn)) with their (leveraged) overweight to bonds remaining near the highest since 2021 (although continuing to roll over), while their commodity and equity exposures remain low (although the former has been building the past couple of months).
#oott
DB gives a more granular look but definitely sees less of an allocation to bonds. Otherwise similar (with “low” equity allocations and also seeing rising commodity exposure): “Risk parity funds kept their overall equity allocation flat again at a low level (8th percentile). They modestly raised their allocation to EM (27th percentile) but trimmed that in developed markets outside of the US (6th percentile). Allocation to the US (8th percentile) remained flat at low levels. Allocation to bonds (34th percentile) and inflation-protected notes (30th percentile) got trimmed, while that to commodities (44th percentile) rose.”
With realized volatility already sharply lower at the 1-mth horizon and the 3-mth horizon now finally following (which should continue this week), BOA sees vol control (volatility targeting funds) exposure continuing to slowly rebound now a little above their lowest positioning of 2024.
They noted three weeks ago though: “vol control frameworks are likely to continue adding exposure as realized vols decline. However, we note that buying from vol control strategies is typically more gradual than the CTA moves.”
Tier 1 Alpha sees vol control exposure having built a little more than BoA but still plenty of room to move higher.
DB sees vol control as having more fully reengaged now up to the 69th %ile since 2010 “the highest since late February”.
And as noted two weeks ago “we’re now into the meat of the April/May volatility on the 3-mth realized volatility lookback,” which you can see by the sharp drop in the chart of realized volatility, and we’ll continue to drop some big numbers including 2.5, 2.4, 2.0, & 1.7% lookback days. That should see the 3-mth lookback realized volatility continue to “to drop like a rock”.
The 1-mth lookback though continues to remain much less favorable (although it did drop a bit last week) and will likely not provide much buying power (but would provide selling on a jump in volatility). While we do get two days of 1% moves, the other three days are 0.2% or less.
Regardless, as noted two weeks ago, given the drop we’re going to be seeing in realized volatility at the 3-mth lookback this week, we should be a continued increase in vol control buying absent notably higher volatility.
And Tier1Alpha finds overall systematic positioning continues to recover but remains under the 0 z-score (the mean since 2011).
Goldman says current systematic positioning “is a touch above a 6 out of 10, and expected to get to slightly above an 8 after next month’s baseline buying…. US equity length remains at or below its 1-yr average and above multi-year average at a 72-78% historical rank.”
DB sees it at the 45nd %ile since 2010 (up from 24% four weeks ago) and now “slightly above neutral”. As a reminder a few weeks ago they said it would likely continue to recover through July:
backward-looking vol signals continue to be impacted by the April vol shock and as it recedes from the relevant lookback windows, we expect systematic strategies to continue to raise exposure. Trend signals will also continue to move higher absent a meaningful selloff (at least -2% for the S&P 500).
I like to look at the notional value in leveraged ETFs as a barometer of risk appetite, and both the SPX and NDX leveraged ETFs rebounded to near the highest levels since pre-2024 for the SPX and to those levels for the NDX.
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). BoA estimates while they’re just 4% of end of day flows for the SPX, they’re 36% for the NDX in the last 5 minutes.
And leveraged ETF AUM in the two largest single stock ETF’s $TSLA and $NVDA both also moved higher with TSLA +$569mn to $8.5bn, the highest since March, while NVDA was +$486mn to $6.4bn, the highest since Feb.
3rd place $MSTR though -$183mn to $3.1bn. $COIN moved back into the fourth spot just above $PLTR at $1.33b vs $1.21bn.
And after buybacks ended 2024 at a record, and started 2025 even better, they had slowed April through late June, picked up somewhat seasonally (although note we’re deep into the blackout window which runs through July 25th (but that said it only impacts around 30% of buybacks)), but fell back last 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”). We got close to washed out levels in April before steadily recovering much of that until two weeks ago (when I said we were “getting to” eurphoric). The last two weeks have been more mixed.
AAII bulls (those who see higher stock prices in 6 mths) edged back for a second week to 39.3% from 45.0% two weeks ago (which was the highest since Dec 5th) now roughly equal with the bears (see lower stock prices in 6 mths) who rose to 39.0% from 33.1% two weeks ago (which was the least since Jan). 21.8% were neutral from 21.9% two weeks ago.
Those are vs the historical avgs of 37.5% (bulls), 31.0% (bears) & 31.5% (neutral).
https://www.aaii.com/sentimentsurvey
AAII special question this week was "How, if at all, have you changed your approach to investing recently?"
Over half (51.2%) have made modest or no changes.
38.9% have become slightly or much more cautious.
9.9% have become more aggressive.
NAAIM (investment managers) exposure index which "represents the average exposure to US Equity markets reported by our members" and which ranges from -200 (2x short) to +200% (2x long) fell back for a second week to 83.69 down from 99.3 two weeks ago which was the highest in a year, while the 4-wk avg (87.67) softened from 90 which was the highest since December.
https://naaim.org/programs/naaim-exposure-index/
The 10-DMA of the equity put/call ratio (black/red line), rose for the first time in three weeks after getting close but not making it to the May lows (which were the lowest in a year) evidence of some incremental shifting to buying of downside vs upside protection.
When it’s increasing it normally equates to a consolidation in equities and increase in volatility and vice versa.
The CNN Fear & Greed Index was basically unchanged w/w on Friday at 75.0, remaining (just) in “Extreme Greed” for a third week (the first time since Mar ‘24) and down slightly from the 78.5 three weeks ago. Now 5 of the 7 indicators are in Extreme Greed, one in Greed, and one in Neutral (none in Fear or Extreme Fear):
Extreme Greed = stock price breadth (McClellan Volume Summation Index); junk bond demand; stock price strength (net new 52-week highs); put/call options (5-day put/call options); safe haven demand (20-day difference in stock/bond returns) (from Greed)
Greed = market momentum (SPX vs 125-DMA);
Neutral = market volatility (VIX & its 50-DMA)
Fear = None
Extreme Fear = None
https://www.cnn.com/markets/fear-and-greed
BofA’s Bull & Bear Indicator (a global metric), up another +0.1pts w/w, now at 6.3 ("Neutral"), “highest since Oct ‘24” and further above the 3.2 it hit at the start of the year which was what would now be a 1-yr low. Three of the six components remain “V Bullish” vs just one that is “V Bearish” (HF positioning).
The increase was “on strong EM/HY inflows & lower FMS cash levels (offset by hedge fund SPX short positioning).”
BoA’s Hartnett notes “what pushes B&B Indicator toward sell signal of 8 in coming weeks [is] equity inflows >$25bn, HY bond inflow >$3bn, SPX>6400, [and] hedge funds covering SPX shorts.”
Helene Meisler's weekly poll remained bearish for a 3rd straight week (and 5th in 6 and 10th in 12) although improving to 47.6% voting next 100pts higher on the SPX (up from 41.4% which was the most bearish read in six weeks).
The high of the year was 72.9% voting higher Apr 13th (a record) and the low was 33.2% on May 17th (also a record).
Helene Meisler’s always fun Weekly ChartFest. Her message this week:
“Many charts haven’t budged in weeks (SPX 2 weeks ago 6279; today 6296) so most of the lines remain the same. Even the RUT (IWM), where they tell me all the action is, is pretty much the same place it was two weeks ago. I’m going to keep my eyes on the interest rate sensitive groups in the coming weeks. Utes are pushing to a new high and IYR has been knocking up against resistance. The Homies is what everyone else has their eye on!”
It normally includes Citi’s Panic/Euphoria Index which fell almost to the zero line at the end of April but since then has moved higher now back into Euphoria after never getting to Panic.
As a reminder, “[h]istorically...euphoria levels generate a better than 80% of stock probabilities being lower one year later.” In that regard, it first entered euphoria in late March 2024 (when the SPX was around 5200) and then reentered in late October (around 5800). This time (July) the SPX is at 6200.
We didn’t get to 5200 by late March of this year, but we got closer than I would have thought at 5500.
We crossed over 5800 mid-May and haven’t looked back. Seems a stretch at this point to see us under there by October.
That would make it 0-for-2. We’ll see how it does this time (would need to be under 6200 July 2026).
Seasonality
As we move into the second half of July, we exit what since 1950 is the strongest half month of the year at a nearly 2% median gain to a more middling second half. In fact at an approx half percent median return, it's closer to the bottom to than the top.
And looking since 1928 a similar story with just a +0.07% avg return, the 9th weakest of all 24 halves (and vs +0.25% avg) and +0.34% median, also the 9th weakest (vs 0.59% median). Also, notably it’s tied for the third most volatile at a 4.06% standard deviation vs the 3.5% median for all periods.
And we know that looking at July as a whole, in Pres Yr 1 it is one of the strongest months up 67% of the time with an average return of +2.28%, second only to April.
The only negative is that the average Pres Year 1 peaks in July and falls around -8% by the end of the year from the peak.
As always, though, remember that seasonality is like climate. It gives you an idea of what generally happens, but it is not something to base your decision on whether to bring an umbrella (as the Santa Rally showed us).”
Final Thoughts
In some background, I noted at the start of the year,
As we turn the page into the new year, we’re presented with a very different backdrop than what we saw for much of 2024 when the Fed was moving from hiking to cutting, bond yields were falling, seasonality was mostly favorable, systematic positioning was mostly a tailwind, political risk was low, valuations had room to grow, liquidity was very robust, the economy was firing on all cylinders, volatility (until early August) was more subdued, earnings were rebounding, etc.
Now we’re in what is historically a more challenging year (1st year of a Presidential term and 3rd year of a bull market following two 20% years) with valuations well above where we started 2024, high expectations (judging from analyst SPX forecasts), higher volatility and political risk…higher bond yields (particularly real yields), a Fed talking more about fewer than more cuts and continuing to drain liquidity that is now hitting levels we’ve run into issues in the past, high earnings expectations, etc.
It doesn’t mean that we can’t have a good or even a great year. Balance sheets remain very solid as does the economy and labor markets (even if slowing), earnings are expected to be very good, buybacks are expected to be a continued tailwind, there’s a lot of scope for the Fed to become less hawkish, the upcoming administration may provide big tailwinds in tax cuts, deregulation, etc., etc. But we need to see at least some of those come through, and disappointments are not going to be welcomed given the set-up, so my expectation is for choppier markets more like we’ve seen since October than what we saw before.
But in mid-April I noted that I thought
the upside is much more favorable than the downside…. The tariff issue remains the overhang over things and until things are finalized it will weigh on market, consumer, and business sentiment, and prevent any sort of truly sustainable rebound. At some point we’ll get to a resolution that will “free” the markets to react more typically to the other fundamental inputs….. Positively, we did see that Trump will, as expected, not push things too far in terms of stress on financial markets as evidenced by his pivot following stresses in the bond market (which weren’t actually all that bad outside of the move in yields (things barely registered on the Fed’s radar))…the good news is we have taken all of the “froth” out of the equity markets, which means we’ll be working from a much less extended base with plenty of “dry powder” from hedge funds, institutions, etc. And while the Fed is on hold for now, they still have a bias to cut, and the economy (and most importantly labor markets) remain for now healthy.
And then in late May,
and things continue to progress better than I think most anyone thought they would, even with institutions still remaining relatively low in positioning as noted in the Flows/Positioning section. As they continue to catch up to the market, it will be an additional boost. Sentiment has turned markedly more bullish but isn’t quite yet what I’d consider a headwind. Earnings expectations have continued to deteriorate, but so far markets haven’t paid much attention. That said, valuations are getting back up towards frothier levels which may present a headwind before too long. Markets can only outrun earnings for so long. The Fed also doesn’t remain particularly friendly to the markets, but again for now stocks have seemed ok with that. We’ve also run a long way in a short period of time, so some consolidation at some point would be expected.
But as I said, “things look far from dire, meaning just as we can’t take for granted this is not a bear market rally, we shouldn’t take for granted this is not going to end up leading to new highs.” … a lot of course also depends on President Trump. The markets have rode a wave of more positive policy (trade deals, progress on tax legislation, etc.), and with Trump saying twice recently it was a good idea to buy stocks, I think we’ve established a “Trump put” at those levels. That said, as I noted last week, “it is just this sort of calm that Pres Trump has in the past sought to use to inject changes in policy, so that’s something to watch out for.” That continues to be the case.
And the following week,
President Trump did take advantage of the equity recovery to inject a broadside against both Apple and the EU (which we’re perhaps seeing to some extent again with Canada), he dialed it back almost immediately, which perhaps indicates as I noted then he’s losing his taste for “pain” associated with the tariffs and is wanting to move along to more market (and politically given the upcoming midterms) friendly items such as tax cuts and deregulation. It seems that escalatory statements now are more to move towards resolution than intended to provide policy guidance. If so, this is a definite market positive. We’ll get a lot more information on that front in the next two weeks. That said, with markets at all-time highs, the likelihood of escalation on his part is definitely higher.
All of which I continue to leave in as it remains relevant both to “how we got here” but also with how, for now, it appears that President Trump will operate (escalate to de-escalate, push harder when markets are doing well, make concessions when markets turn lower, etc.), with markets continuing to bet on that continuing (Trump not doing anything to upset the apple cart, although note we remain firmly in Pres Trump’s "escalate" part of the current trade cycle which he has been using to try to unstick trade negotiations that are getting bogged down and provide leverage for his trade negotiators)), passage of the OBBBA, continued deregulation efforts, etc.).
And while (as I’ve noted the past eight weeks) systematic traders (particularly CTAs) and hedge funds have slowly started to bring their positioning back to more neutral levels, equity exposure for the overall systematic universe (especially the large group of volatility targeters including risk parity) and institutions (funds, etc.) still remain low. This still leaves them in a position to “catch up” if the rally continues and/or as volatility continues to die down (and with less to sell if it doesn’t). That said, positioning is now well off the levels we were at a couple of months ago, and CTAs in particular, who are more fast moving, now have brought their positioning back to at least neutral levels (meaning it will take more for them to buy and less for them to sell).
For now we are in the the corporate buyback blackout, but corporate flows continue to remain an important tailwind (only discretionary buybacks are impacted) which has really been the driving force behind market gains over the past year. Retail buying has cooled, but it certainly hasn’t turned into major selling, and it seems that “buy the dip” remains as strong as ever. Hedge funds also have been increasing exposure the past few weeks.
Valuations continue to be a bit of a headwind, but technicals, sentiment, and seasonality have all turned from less favorable to at least neutral (although note the seasonality tailwind is much less going forward (and will turn negative into April) and technicals have softened a bit), and the indices have lost some of the momentum that resurged two weeks ago (although that may have been in part due to high gamma as we approached options expiration which “pinned” markets).
Next week gamma will reset which will provide markets more room to move, but it’s a light week overall (absent something important from Washington) with the biggest market moving factor earnings (in particular Alphabet on Wednesday).
But overall as noted last week
we continue to have a “honey badger” economy (unkillable for now), a Fed that it seems has to cut at some point this year absent a significant resurgence in inflation, the tailwind of the Trump tax bill (front loaded spending increases, back loaded spending cuts), and an upcoming earnings season which seems from all appearances to be setting up to be any easy beat over beaten down expectations. The recipe for continued gains seems favorable for now, particularly as President Trump has pushed out any real decisions on tariffs to the end of the month.
That does set up a toxic brew of tariff deadlines, a turn to worse seasonality, and Mag-7 earnings as we move into August, but for now there’s nothing on the radar that screams problems to me (of course it’s always the punch you don’t see coming right?). As noted last week, “a consolidation of some sort should be expected. But that certainly doesn’t mean it has to be now.”
And in the long term, as always just remember pullbacks/corrections/bear markets are just part of the plan.
Portfolio Notes
SCHW position was called away.
Cash = 32% (held mostly in SGOV & BOXX (BOXX mimics SGOV but no dividend, all capital appreciation so get long term capital gains if you hold for a year)
Bonds/Fixed Income (mostly short duration like MINT, SHY, ICSH, etc., but also 3% or so in longer term (TLH, TLT)) = 20%
Core equity positions (each 5% or more of portfolio (first 2 around 10% each, total around 25%) Note the core of my portfolio is 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/)
EPD, ET, PAA
Secondary core positions (each at least 1% of portfolio, less than 5%)
ENB
And the rest of the top 20 (all >0.5%, less than 1%):
GILD, XOM, ARCC, VNOM, AM, HYD, MPLX, TLH, NEM, IBIT, RRC, PFE, CTRA, ING, AMZN, BOND, VZ, OXY, CMCSA, GAK, CHWY, RHHBY, OWL, VICI, BIP, AR, GPN, FXI, URNM, DVN, SCMB, VOD, GOOGL, SLB, BAYRY, GLD, TLT, O
High quality, less conviction due to valuation
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.
To subscribe to these summaries, click below (it’s free).
To invite others to check it out,