Inside Markets — Reset

The CBOE Volatility Index (VIX) was priced for 2-3 days of uncertainty going into election results. The VIX wasn’t priced for a result before the open on Wednesday. The move from ~22 on Monday to ~16 on Wednesday was one of the largest moves in the past decade. We’ve done this a lot lately, but higher levels of implied equity volatility result in multiple compression and lower levels lead to multiple expansion. All of that VIX volatility may have been priced out of markets in a single day, but the multiple expansion continues, albeit at a slower pace.

The unwinding of election-related hedges has added powerful short-term fuel to favorable seasonal fund flows and open buyback window. Negative fund flows are mostly responsible for bearish seasonality in September-October and positive fund flows are responsible for the ‘year-end rally.’ The year-end rally (it started btw) may pause or slowdown next week as the unwinding of election hedging comes to a close, but the dynamic will continue to draw oxygen from fund flows, buybacks with added optimism around deregulation and the potential for lower tax rates. These election-related drivers combine with strong recent macro data (US Economic Surprise Index at +37) to put cyclical/value stocks at the top of the performance list.

Given the aforementioned backdrop, our preference is to add Midcap (~$5B-$50B) cyclical/value equity exposure. Midcap stocks generally trade at lower forward multiples with the S&P Midcap 400 Index (MID) now trading at ~15.5x consensus ’25 EPS vs. the SPX at 21.5x. The rotation into cyclical/value groups could also come at the expense of mega-cap leadership. Large cap stock concentration is at an all time record with the largest 10 SPX companies accounting for ~35% of its total market cap.