Today's Charts & Ideas: What Markets Are Telling Us #22

06/27/2025 | 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:

📊 What the Chart Shows

The chart illustrates S&P 500 average performance during ~20% drawdowns since 1950, including:

• Blue lines: Historical range (25th–75th percentile), average, and median S&P 500 paths around drawdowns

• Orange line: The current drawdown path from the February 19, 2025 peak — one of the sharpest but fastest recoveries on record

Key observations:

• Historical drawdowns tend to stagnate or decline for about a year after recovery

• The current recovery has been sharper and quicker than most historical cases

💼 What This Could Mean for You

• 🚫 Tempered Expectations:
  Historically, markets that rebound quickly from sharp drops often face sideways or modest returns over the next 12 months.

• ⚠️ Valuation Headwinds:
  With valuations and concentration risk still elevated, staying selective rather than chasing the rally may be prudent.

• 🔄 Fed Policy Shift:
  Diminished odds of rate cuts reduce monetary tailwinds, potentially capping further upside.

🔁 Alternative Perspectives to Consider

• 🟢 Resilience Narrative:
  The strength of the current recovery may reflect structural economic resilience not present in past bear markets.

• 🛡️ Event-Driven vs. Structural:
  If the drawdown was event-specific (e.g., tariffs), it might not follow typical bear market behavior.

• 🧠 Behavioral Tailwinds:
  High retail and AI-driven flows could push markets beyond historical norms despite macro caution.

📊 What the Chart Shows

Chart 1 (Top):
Displays the percentile rank of BofA Global Fund Manager Survey (FMS) growth expectations, cash levels, and equity allocation:

• April 2025: Sentiment dipped sharply amid trade war concerns

• May 2025: Modest rebound in sentiment

• Historical context includes annotations for 9/11, GFC, and COVID

Chart 2 (Bottom):
Shows FMS positioning with a record overweight in Eurozone equities relative to US equities for May 2025 — the highest since 2017

💼 What This Could Mean for You

• Bearish Bias May Be Fading:
  Sentiment has improved from extremely bearish April levels, suggesting potential support for risk assets in the near term.

• Regional Rotation in Play:
  The sharp overweight in Eurozone equities implies institutional investors may see better relative value or economic momentum in Europe compared to the US.

• Dollar Weakness in View:
  Though not shown here, the commentary notes that USD is now the most underweighted since 2006, reinforcing a possible broader global diversification theme.

🔁 Alternative Perspectives to Consider

• Sentiment Bounce ≠ Sustained Rally:
  While sentiment improved, it remains historically low. This may still reflect caution more than conviction.

• Crowded Trades Risk:
  Overweighting Europe and underweighting the dollar could reverse abruptly if US macro surprises to the upside.

• Trade Ceasefire Might Be Temporary:
  The bounce in sentiment reflects hopes around US-China relations. Any backtracking or new frictions could reverse these flows.

📊 What the Charts Show

This multi-panel chart visualizes six historical “worry windows” — periods when the S&P 500 bottomed, but forward 12-month EPS expectations were still declining. The shaded areas highlight the disconnect between improving equity prices and lagging earnings sentiment.

Highlighted periods:

• 2009, 2012, 2016, 2018/19, 2020, and 2022 all featured:

  • A “worry window” where EPS estimates continued falling post-market bottom

  • Market resilience or a rally despite declining EPS

💼 What This Could Mean for You

• Price Leads Fundamentals:
  Markets often begin recovering before earnings expectations bottom — a reminder that markets are forward-looking.

• Ignore the Noise, Stay the Course:
  If current conditions mirror past worry windows, a further pullback isn’t guaranteed — patient investors were historically rewarded.

• Opportunity in Disbelief:
  Worry windows often end with markets substantially higher, even while economic or EPS data remains weak.

🔁 Alternative Perspectives to Consider

• Every Cycle is Different:
  Macro policy, inflation, or geopolitical dynamics could break the historical pattern.

• Delayed Pain Risk:
  If EPS revisions are too optimistic or new shocks emerge, a second market bottom can’t be ruled out.

• Window Can Stay Open:
  The duration of worry windows varies — acting too soon may expose investors to continued volatility.

📊 What the Chart Shows

• The chart compares S&P 500 EPS growth (YoY %) on the left axis with discretionary investors' equity positioning on the right axis.

• As of early 2025:

  • Investor positioning remains elevated, suggesting optimism.

  • No sign of a slowdown is being priced in, despite past instances where positioning lagged or led EPS growth shifts.

  • The historical correlation is 50%, indicating a significant relationship between investor behavior and earnings growth.

💼 What This Could Mean for You

• 🟢 Confidence in Earnings:
  Investors appear confident that corporate earnings will continue to rise, supporting equity markets.

• 📈 Support for Valuations:
  High investor positioning suggests support for current market levels as long as earnings growth holds up.

• 🧭 Momentum Trade Alive:
  Market sentiment favors cyclicals or growth equities that benefit from continued earnings strength.

🔁 Alternative Perspectives to Consider

• 🔻 Over-Optimism Risk:
  Elevated positioning may leave little room for upside surprise — any earnings disappointment could trigger sharp positioning unwind.

• 🧮 Lagging Signal:
  Earnings expectations often follow price — the chart doesn't prove earnings will remain strong, only that investors expect them to.

• ⏳ Mean Reversion Probability:
  Past cycles show that high positioning is rarely sustained for long — sentiment can shift quickly with macro data or shocks.

📊 What the Chart Shows

• The chart illustrates secular trends in asset class performance from 1947 to 2032 (projected).

• Top line (gray/black):
  Represents the real return of the S&P 500, with shaded inflationary regimes.

• Bottom panel:
  Compares 10-year compound annual growth rates (CAGR) of:

  • 🔵 Small vs. Large Caps

  • 🟠 Value vs. Growth

  • 🟣 CRB (Commodities)

  • 🟢 International vs. US (xUS vs. US)

• Notable turning points are highlighted (e.g., 2000, 2017, projected 2025–2026).

💼 What This Could Mean for You

• 🌐 Shift Toward International and Value:
  If the US mega-cap secular bull market has peaked, expect leadership rotation toward international stocks, value, small caps, and commodities.

• 🧭 Portfolio Diversification Rationale:
  Long-term investors may benefit from tilting away from concentrated Mag 7 holdings and into historically underperforming segments now showing reversion potential.

• ⏳ Secular Rotation Opportunity:
  As shown in past cycles, these asset classes have experienced decades of under- and outperformance — potentially offering long runway ahead if the current regime turns.

🔁 Alternative Perspectives to Consider

• 🛑 False Peaks:
  Similar arguments were made in 2017 and 2020 — secular leaders can remain dominant longer than expected.

• ⚖️ US Structural Advantages:
  Superior innovation, capital markets, and profitability could justify continued US outperformance, especially in tech.

• 🌀 Global Correlation Risk:
  In a high-beta environment, diversification may offer less protection — synchronized downturns may persist across asset classes in “all one trade” regimes.

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