Today's Charts & Ideas: What Markets Are Telling Us #30

06/27/2025 | Unsubscribe

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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:

The S&P 500 is now more expensive than usual across every valuation metric tracked by Bank of America — some by huge margins. This suggests the market is priced for very high expectations, which could limit future returns or increase downside risk.

📊 Explaining the Chart

• The table compares current valuations (as of April 30, 2025) to long-term historical averages across many metrics.

• Key valuation ratios (like PE, Price-to-Book, PEG, and Market Cap-to-GDP) are well above their norms, often by 30%–130%.

• For example:

  • Trailing GAAP PE: 26.5 now vs. 15.2 average → 74% above normal

  • Market Cap/GDP: 1.59 now vs. 0.68 average → 133% above normal

  • Price/Free Cash Flow (P/FCF): 32.1 now vs. 28.0 → still 15% above average

• The "Z-Score" column confirms these are statistically significant deviations (1.0+ is notable).

💼 What This Could Mean for You

• If you're investing now:

  • You're buying into a very expensive market, which may offer less upside going forward.

  • It doesn’t mean a crash is imminent — but the margin for error is thin.

• If you're already invested:

  • You may want to review your exposure, rebalance toward less richly valued areas (like international or small-cap stocks).

• If you're younger or long-term focused:

  • Timing matters less — but understanding valuation helps set realistic expectations.

🔄 Alternative Perspectives to Consider

• Expensive doesn’t mean uninvestable — high valuations have persisted in prior strong bull markets.

• Valuations often stay elevated when interest rates are low and growth expectations are high.

• Corporate innovation, AI-driven earnings, and mega-cap dominance might justify higher multiples — at least temporarily.

💡 One Possible Investor Takeaway

When almost every valuation measure is flashing red, it’s worth asking: Are you paying for future profits… or future perfection?

Markets have rebounded sharply, but much of the recent gains came from valuation expansion (higher P/E ratios) — not earnings. With earnings growth possibly stabilizing and valuations at historic highs, future returns may be muted or sideways, especially if rates stay elevated or foreign capital pulls back.

📊 Explaining the Chart

• The black line is the S&P 500 price since late 2017.

• The bars below show what’s driving returns:

  • Pink = P/E expansion or contraction (how much investors are willing to pay for earnings).

  • Blue = EPS growth (actual company earnings growth).

  • Purple = dividend yield (a smaller contribution).

• Key moments:

  • COVID rally (2020–2021): Huge gains mostly from P/E expansion (+92%).

  • 2022 drawdown: Valuations reset sharply (-35%), even though earnings held up.

  • Recent gains: Mostly valuation-driven again (e.g., +30% P/E gain into mid-2023), raising concerns of overheating.

• Now, the chart hints that we might be entering a “time-based” bear cycle, where stocks churn sideways instead of plunging, as valuations slowly compress.

💼 What This Could Mean for You

• If you're hoping for big short-term returns:

  • Be cautious — a flat or slow market is possible, even without a recession.

• Long-term investors:

  • A slow-moving market could be a good time to steadily accumulate shares at fairer prices.

• Retirees or income investors:

  • Dividends remain a stable contributor, but might not offset market drift.

🔄 Alternative Perspectives to Consider

• Valuations may stay elevated if inflation cools and the Fed pivots — which would support risk assets.

• The U.S. still attracts global capital — foreign capital repatriation isn’t guaranteed.

• If earnings surprise to the upside, it could offset valuation compression.

💡 One Possible Investor Takeaway

Markets may not crash — but they don’t have to soar either. Sometimes, the real risk isn’t a drop… it’s going nowhere while time passes.

Interest rate volatility remains elevated compared to equity market volatility — a sign that the bond market is still on edge, even while stock markets appear calm. This suggests investors may be underestimating risks tied to debt, inflation, and fiscal policy.

📊 Explaining the Chart

• The chart shows the ratio of MOVE Index (rate volatility) to VIX Index (equity volatility).

  • Higher values = rate markets are more volatile relative to stocks.

• Since 2022, this ratio has consistently stayed above average (above the dashed line), with spikes as high as 10.

• In 2025, the ratio remains high, meaning bond markets are still nervous — especially around Fed policy, debt levels, and inflation risk.

💼 What This Could Mean for You

• If you're in bonds or fixed income:

  • Expect more price swings and policy-related noise. Yields may stay volatile.

• If you're in stocks:

  • Don’t assume calm equity markets mean smooth sailing — underlying stress in bond markets can spill over.

• For everyone:

  • Elevated rate volatility can impact borrowing costs (like mortgages, loans) and market stability.

🔄 Alternative Perspectives to Consider

• Volatility in rates may fade if inflation continues to decline and the Fed signals a clearer path forward.

• Equities might be correctly looking through the noise — if earnings are strong, they can weather rate swings.

• Some see this as a window of opportunity, where calmer equity volatility allows for better entry points before potential turbulence.

💡 One Possible Investor Takeaway

When bonds are jittery but stocks seem calm, it’s worth asking: Is the equity market relaxed… or just not paying attention yet?

The recent S&P 500 move — a sharp rally followed by a pullback — is strikingly similar to patterns from 2001 and 2022, both of which led to sustained declines. While not a guarantee, this historical context is a red flag that risk may be rising, especially if current market conditions don’t improve soon.

📊 Explaining the Chart

• This compares the current S&P 500 path (blue) to 67-day historical analogs (black) that show a >0.8 correlation to the Feb 19, 2025 peak.

• Key patterns:

  • January 4, 2022 and January 31, 2001 are nearly identical in shape and timing — both led to drops of -21% to -29% over ~240 trading days.

  • These were periods of tight Fed policy, tech sector stress, and inflated valuations — echoing today.

• However, not all outcomes were bearish:

  • 1996, 1985, and 1997 saw sharp recoveries, gaining 25–33% over the following months.

  • The key difference: those years came with lower inflation and easier financial conditions.

💼 What This Could Mean for You

• For cautious investors:

  • The analogs suggest a risk of deeper correction if history repeats like 2001 or 2022.

  • It might be wise to avoid chasing rallies and focus on capital preservation or rebalancing.

• For long-term investors:

  • Market cycles are regular — this could be noise within a long-term uptrend.

  • If you're dollar-cost averaging, volatility may offer better entry points.

• For retirees or near-retirees:

  • Consider reviewing allocation to risk assets, especially if you’ll need cash soon.

🔄 Alternative Perspectives to Consider

• History doesn’t repeat exactly — conditions today (AI innovation, strong job market, fiscal stimulus) may support a more resilient outcome.

• Market analogs can create false alarms, especially if investor positioning, sentiment, or economic policy shifts rapidly.

• The S&P has often defied bearish analogs during global growth spurts or Fed pivots.

💡 One Possible Investor Takeaway

When the market walks and talks like it did in 2001 or 2022, it’s wise to stay alert — but don’t assume the story ends the same way.

Macro hedge funds have made a significant shift — they're now heavily long the Japanese yen, betting it will strengthen. This move reflects a broader "risk-off" mindset, with investors preparing for potential market stress or global asset price declines.

📊 Explaining the Chart

Top Chart: Macro Funds' Positioning

• Tracks how macro and systematic funds respond to Japanese yen (JPY) moves.

• The black and brown lines show a significant shift: their returns move positively with the yen, a reversal from the past four years when they were short (betting against it).

• This suggests macro funds now see the yen as a safe-haven play, rising when markets fall.

Bottom Chart: Speculator Positioning

• It shows how much speculators (like hedge funds) are betting long on the yen (brown line).

• They've now taken on near-record long positions, while the USD/JPY exchange rate (black line, reversed) reflects increased pressure for yen strength.

• Such extreme positioning often reflects consensus thinking, and sometimes precedes sharp market moves.

💼 What This Could Mean for You

• If the yen strengthens, it could:

  • Signal risk aversion in global markets (stocks, commodities, etc.).

  • Lead to potential volatility or pullbacks in U.S. equities and emerging markets.

• For U.S. investors:

  • Watch your exposure to global stocks or companies with overseas revenue — currency shifts can impact earnings.

• If you're investing in currencies or international ETFs, be aware that:

  • A yen rally could be sudden and fast-moving.

  • Currency moves can erode or boost returns depending on your exposure.

🔄 Alternative Perspectives to Consider

• Positioning is crowded — sharp reversals are possible when everyone’s on one side of a trade (long yen).

• The yen's strength depends on Japanese bond yields and policy stability, both of which are uncertain.

• If global risk sentiment improves or U.S. yields spike again, yen strength could unwind quickly.

💡 One Possible Investor Takeaway

When big macro players flip aggressively into a “safe haven” like the yen, it often signals growing concern under the surface. Sometimes the smartest money isn't just chasing returns — it's preparing for turbulence.

That’s it for today!

Best Regards,

Ultimate Alerts Team

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