5/15/25 Charts & Ideas: What Markets Are Telling Us

05/15/2025 | Unsubscribe

Good Morning!

Here are some important charts and ideas capturing the latest trends in US markets to help you understand what is happening from multiple different perspectives:

This is why we focus on macro (the big picture) - Here’s a quote from Stanley Druckenmiller, one of the most successful investors:

📊 Valuations Are Relative — Context Is Key

🔍 What the Chart Shows

• 🇺🇸 U.S. (S&P 500):

  • P/E = 20.1 → well above historical median (~15x)

  • Clearly expensive vs. its own history

• 🌍 AC World ex-US:

  • P/E = 13.4 → in line with long-term average

  • Not especially cheap in historical terms

• 📉 EM, Europe, Japan:

  • P/Es lower than U.S. (e.g., EM = 11.9)

  • But valuations are near their own norms, not deeply discounted

🧭 What This Means for Investors

• ❗ Relative ≠ Absolute Value:
  Non-U.S. equities look cheap vs. the U.S., but not vs. themselves

• 💼 Portfolio Takeaways:

  • ✅ Diversify to Reduce U.S. Valuation Risk

  • ⚠️ Be Regionally Selective — seek areas below both U.S. and local medians

  • 🤏 Don’t Expect Big Re-Ratings without macro/earnings catalysts

🔁 Alternative Perspectives to Consider

• 🟢 U.S. Premium May Fade:
  AI leadership or margin edge could narrow the valuation gap

• 🔴 "Cheap for a Reason":
  Global growth remains soft — non-U.S. valuations may stay suppressed

🔍 Macro Snapshot: May 2025 – Recession Risk, Sentiment, and Inflation

🔻 Recession Probability Divergence

• Goldman: 35% (12-month outlook, up from 25%)

• Market-implied: ~20%

• Polymarket: >50% — betting markets leading risk sentiment

• Google Trends: “Are we in a recession?” near 20-year highs — public fear ≠ market pricing

📉 Earnings & Profitability

• Revision ratio: 0.64 (near COVID lows) → earnings risk rising

• ROE: Still elevated → valuation support

• Buybacks: Record Q1 ($192B) → EPS support, financial engineering

📊 Positioning & Sentiment

• Equity positioning: 11th percentile → light exposure = upside fuel

  • Systematic: 6th percentile

  • Discretionary: 35th percentile

• Investor sentiment: 48.5% expect stock declines (highest since 2011) → contrarian bullish

🧱 Economic Indicators

• Capex: Robust (guidance 2.3x consensus avg.)

• Housing:

  • Under construction: 1.4M units vs. 3–5.5M shortage

  • Prices: YoY +3.9% → resilient

• Tourism:

  • Foreign visits plunging (EU: -17.2%, Mexico: -22.9%)

• Bankruptcies: 188 in Q1 → +35% YoY

🌐 Tariffs & Global Exposure

• China tariffs: Expected to stay 50–60%

• S&P 500 China exposure: ~$1.2T revenue → larger risk than trade deficit

📈 Inflation & Rates

• 1-year inflation expectations: Spiking near 2021 highs

• GS Core PCE forecast: 3.8% by Dec 2025, >2% into 2026

• Real 10Y yield: Highest since 2009 → tightening financial conditions

• Equity risk premium: Lowest since 2000 → valuation headwind

💼 What This Could Mean for You

• Caution on U.S. equities: ERP near dot-com lows, valuation risk elevated

• Contrarian setups emerging: Bearish sentiment + light positioning + strong capex = potential upside

• Watch real yields & inflation expectations: Subtle tightening without Fed hikes

• Earnings downgrades + China retaliation = underappreciated tail risks

🔁 Alternative Perspectives to Consider

• 🟢 Market may be right: Soft landing plausible — capex, ROE, labor still holding

• 🔴 Real rates & sticky inflation: Could suppress multiples, even without recession

• 🟡 Tariff exposure underpriced: S&P revenue from China = 7%+, risk of policy escalation

Here are the sources for the above recession probabilities: Source1, Source2, Source3.

🔍 China vs. U.S. Industrial Growth (2019–2024)

📊 The Data

• 🇨🇳 China: +37% industrial production since 2019

• 🇺🇸 U.S.: Still -2% below pre-COVID levels

• 2020 Crash: China -14%, U.S. -17% → China sharply outpaced in recovery

🧭 Strategic Implications

🇨🇳 China’s Industrial Surge

• Reinforces status as global manufacturing hub

• Aligns with Made in China 2025 and supply chain autonomy

• Leading exports: EVs, solar tech, consumer electronics

🇺🇸 U.S. Output Lag

• Despite CHIPS Act & IRA, industrial output remains below 2019

• Services = 77% of U.S. GDP → limited semiconductor, green tech, defense capacity

💼 What This Could Mean for the U.S.

• 🛠️ Resilience Risk: Weak manufacturing = exposure to global shocks

• 👷‍♂️ Labor Impact: Stagnant industrial jobs = constrained wage growth & innovation

• 🌐 Geopolitical Weakness: Low output = reliance on rivals during strategic crises

• 💸 Inflation Volatility: Import reliance heightens price instability in trade conflicts

🔁 Alternative Perspectives

• 🟢 U.S. Soft Power via Services:
  Tech, healthcare, and finance still drive global influence

• 🔴 Reindustrialization = Long Game:
  Reshoring is expensive, slow, and politically sensitive

• 🟠 IRA (Inflation Reduction Act) & Clean Tech Investments:
  May revitalize U.S. manufacturing in batteries, semis, EVs — but impact lags

🔍 Chart Insight: Easing Cycle Could Reignite Inflation

• 🟥 Red Line: Net number of central banks cutting rates (15-month lead indicator)

• ⚫ Black Line: Global PMI Prices — a proxy for global pricing power

• Historic Pattern: Easing precedes inflation rebound ~15 months later

🔺 Why Inflation Risk May Be Rising Again

1. 🔁 Global Easing Resumes

   • Central banks are pivoting after 2021–2023 hikes

   • Net easing = more liquidity, looser conditions

2. 📈 PMI Prices Bottoming

   • Producer pricing power turning up → inflation tailwinds building

3. 🛢️ Commodity Bottlenecks

   • Underinvestment + tariffs + deglobalization = structural cost pressure

4. 🌍 EM Demand Rebound

   • China & India growth reviving global manufacturing and resource demand

🧭 What This Could Mean for Markets

• 🔥 Sticky Inflation Risk:
  Inflation may settle above 2%, complicating rate cut trajectories

• 📉 Bond Vulnerability:
  Long-duration assets at risk if yields rise again

• ⏳ Rate Cut Repricing:
  Markets may delay or reduce expected Fed/ECB easing

• 🔄 Sector Rotation:
  Cyclicals, energy, commodities, EM could lead → Tech/defensives may lag

🔁 Alternative Perspectives to Consider

• 🟢 AI as a Deflationary Force:
  Productivity gains may contain wage-driven inflation

• 🔴 Lagged Tightening Still in Play:
  Past rate hikes may still dampen demand and pricing power

• 🟠 Base Effects Disinflation (Q3 2025):
  Could temporarily suppress CPI, even as structural risks rise

🔍 Market Breadth Breakout: Bullish Signal from A/D Line

📊 What the Chart Shows (May 13, 2025)

• Top Panel: NYSE Advance-Decline Line → New all-time high

• Bottom Panel: S&P 500 still below YTD highs

• Key Insight: Breadth is leading price — a classic bull market trait

✅ Why This Is Bullish

• 📈 Broad Participation: Not just mega-caps — many stocks are advancing

• 🛡️ No Bearish Divergence: A/D Line strength = confirming internal momentum

• 💪 Momentum Reaffirmed: Healthy internals typically precede durable rallies

💼 What This Could Mean for You

• 🟢 Stay Long-Biased: Strong breadth lowers downside risk

• 🔄 Rebalance Toward Breadth Leaders: Small/mid caps, cyclicals may offer better upside vs. crowded tech

• 🧭 Trend Confirmation: A/D Line breakout supports momentum & trend-following entries

🔁 Alternative Views to Consider

• 🟠 Near-Term Overbought?
  Watch for short-term pullbacks after sharp moves

• 🔴 Macro Risks Persist:
  Breadth doesn’t shield against rate/inflation shocks

• 🟢 Soft Landing Support:
  Widespread strength implies recession fears are fading

That’s it for today!

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Best Regards,

Ultimate Alerts Team

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