Latest Research

The Index of Leading Economic Indicators has been out of sync for 2½ years. That dates back to the initial recession warning triggered in June 2022, a signal now deemed a failure. On an annual basis, the LEI has now logged two of its worst all-time forecasting misses in back-to-back years.

Despite the steady decline in the Fed balance sheet under the continuing QT, “Net Fed Liquidity”—which adjusts the balance for reverse repurchase agreements (RRA) and the Treasury general account (TGA)—is actually unchanged since the fall of 2022. Not coincidentally, that’s when the current bull market began.

Unweighted valuation measures do not show a stock market that’s broadly overvalued. Thanks to market narrowness, it’s a stark contrast to 2021—a market we view as the most broadly overvalued of all time. It’s a good setup for active managers.

Large Cap U.S. stocks remain in a bubble phase, per the valuation thresholds we identified a year ago with a pencil and ruler. Yet, rapid growth in EPS—including our estimate for S&P 500 5-Yr. Normalized EPS—has held these measures below the extremes of the Y2K Tech bubble peaks and post-COVID mania.

In two years, relative to the S&P 500 index, the median stock’s Price/Cash Flow ratio has swung from a 15% premium to a 19% discount. That’s only a point above our 10th-percentile undervaluation threshold. Prior breaches of that level always coincided with better times for active management—we expect this time will be no different.

When the S&P 500 made all-time highs the week of Thanksgiving and the following week, we viewed it as “risky, but not toppy.” Today, it is every bit as risky, but now looks toppy, too. There’s enough “wrong” with the picture that if the market immediately began to fall apart, the technical crowd would be able to cry, “It was obvious!”

Discussion of Donald Trump’s policy antics could fill up this section for the next 47 months (… not that we’ve already begun to count them down). But there’s the problem of timing.

Broad investor interest has validated the attractiveness of buffer and covered call funds. An important part of understanding these ETFs is having a solid grasp of the upside participation that is sold away. The last two years provided a perfect environment to empirically measure the give-up associated with selling calls.

There were two new group positions this month: Internet Services & Infrastructure and Hotels & Leisure. Trading Companies & Distributors was sold.

On the last Monday in January, China’s newest and seemingly wildly efficient AI assistant, DeepSeek, begged the question, “Maybe we don’t need all of these chips to run AI?” That day, Nvidia and Broadcom each cratered -17%, the largest daily loss for both since the March 2020 panic. Recall that those two firms provided a little over a quarter of the S&P 500’s +25% return in 2024.

Mid-Cap Growth (+6.4%) was the best performing style box of January. Since the end of September, MC Growth has outperformed MC Value, +15% versus +2%, respectively. Style leadership now seems to be evident in the Mid-Cap space but it’s still ambiguous among Large and Small Caps.

After an initial post-election surge, hopes of a small-cap Trump bump seem to be fading. Since election day through the end of January, the Equal Weighted S&P 500 (+1.9%) has essentially matched the S&P 600 (+2.1%).

The Up/Down ratio reads 1.68—the highest “one-month” figure since way back in January 2022. Out of the depths of recessionary-like numbers just four quarters ago, the ratio continues to rise and is now approaching its 42-year average.

Our Risk Aversion Index ticked lower again in January and triggered a new mechanical “Lower-Risk” signal.

Bond market reactions are consistent with the historical norm, so far, and suggest that a reversal of the current bear steepening is more likely than not.

The year 2024 will go down as one of the most hostile environments for active investors in the last 30 years. Style, size, and absolute market returns all have an impact on the relative performance of active versus passive portfolios; the fourth quarter continued a trend that has been in place for over two years.

Read this week's Major Trend.

Our Normalized S&P 500 P/E multiple (31.5x) ended January just below the contemporary high-water mark of 32.2x set at the end of November. This is the eighth consecutive month the ratio has been north of 30x—the threshold associated with previous market bubbles.

Read this week's Major Trend.

The S&P 500’s estimated bottom-up operating EPS nosed slightly higher during the first month of Q4 reporting (Chart 1). That’s a win in the usual slow-erosion, forward EPS game. The index is on track to expand operating earnings at 14% YOY for the last quarter of 2024, which would be the highest since Q2-23 (+17%) and well above the 4% average we’ve seen over the past three years. Full-year 2024 operating EPS is starting to crystalize around $233—a 9% improvement from 2023’s results. At present, EPS growth projections for 2025 are just shy of 16%.