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The stock market looks (superficially?) better in late summer than it did at its “old” high on February 19th. It’s far from cheap, but is no more expensive than in February, and technically speaking, the S&P 500’s July’s highs were broader than those of February. That said, there’s divergent action among secondary measures that are troubling.

Whether or not the label "bubble" fits this market, U.S. economic risks continue to rise, while Mega Cap valuations home-in on levels seen only in 1999 and early 2000.

Our hypothesis is that true active managers are more diversified than their style box indices and when one style has a prodigious quarter, active portfolios of that variety will surely lag. Q2’s low success rate for actively-managed growth portfolios is exactly what we expect in such a stylistically lopsided period.

These days, the rate of inflation is a much-discussed topic, as it hovers near the threshold that would allow the Fed to begin cutting interest rates. The CPI’s latest reading of 2.9% is down significantly from pandemic levels, but not quite low enough to claim victory in achieving the Fed’s 2% target.

Read this week's Major Trend.

The S&P 500’s potential downside to its 1957-to-date median is -44%, and its normalized P/E ratio of over 30x continues to be a concern. However, we can only cry “wolf” so many times… 11 of the past 14 month-end measures have been above that threshold.

Read this week's Major Trend. 

The S&P 500’s Q2 estimated bottom-up operating EPS shot 2% higher after the first month of reporting. This recovery effectively negates some of the earnings markdown associated with trade uncertainty in the months leading up to this reporting season. The EPS snail trails for the coming three quarters also leveled out or have even turned higher.

And just like that, we’re thrust back into the good ‘ole days where Roaring Kitty was a household name and SwaggyStocks.com was one of our bookmarks in Internet Explorer (RIP). Highly-shorted stocks are back in vogue among the retail crowd. Those virtuous crusaders—or perhaps compulsive gamblers—brave or stupid enough to crowd into names with almost 50% of shares sold short have returned for another round of “sticking it” to the short-sellers*.

Read this week's Major Trend. 

Imagine the best-performing industry group out of 119 since late 2023. Was it a red-hot tech stock? A booming financial giant? Think again. It was in the stone-cold consumer staple sector: tobacco, which has surged almost 90% through this period!

The relative valuation across major themes can be highly informative of investor sentiment and economic expectations. July’s Green Book observation of the unusually high valuations of cyclicals vs. defensives is suggestive, indicating a positive outlook on the business cycle and hinting at a risk-on mentality. Periods when the reverse is true would reflect concerns of an economic slowdown and a desire to play it safe when it comes to equity risk exposure.  Whether one is a portfolio manager looking to play the momentum in cyclicals or a relative value opportunity in defensives, it is worthwhile to keep an eye on this telling relationship.

Read this week's Major Trend. 

Read this week's MTI.

June delivered solid gains across strategies, with Core up 3.5% and Select Industries gaining 5.9%, driven by AI infrastructure exposure and strong stock selection. Core remains ahead of major benchmarks year-to-date despite a defensive tilt. AdvantHedge held its ground in a rising market, with short positions in underperforming Consumer Staples sectors contributing to relative strength.

“Sell In May” has been better advice historically than random chance suggests. Still, that seasonal pattern has so far been “Trumped” this year, with SPX +12% since late-Apr. Technicians tend to view new market highs as bullish, but that’s not always the case. The NYSE Daily A/D Line provides a clue as to whether the mid-year strength is apt to persist.

The SPX upturn to a new high has been confirmed by just three of the eight bellwethers we use to monitor breadth and leadership. Yet, we don’t view the uneven recoveries by the other eight as abnormal; our instincts are to wait a bit longer before classifying the laggards as yellow flags.

SPX has become less representative of the broader U.S. stock market both in performance and valuation. In fact, the S&P 1500’s normalized P/E ratio has slipped below its long-term median, implying that returns near the long-term norm of +10% could be possible for the average stock in that index. 

Our S&P 500 Cyclical Sector Composite is one of three market bellwethers to join SPX at an all-time high. While technically bullish, the action generated a concurrent new peak in relative valuation that should temper the optimism of those heavily invested in traditional cyclical sectors. 

Housing activity remains at very depressed levels, with 30-year mortgage rates near 7% keeping those with low-rate mortgages frozen in place, and those wishing to get into a home are frozen out. Qualifying income to buy a median-priced home is almost $105,000—up 122% from Feb-2020.