Inside Markets — High Beta Crowding

The near-term technical backdrop remains favorable given lower implied volatility, ongoing systematic demand and a reopening corporate buyback window.  Q2 earnings season is off to a strong early start with 61% of reporting companies beating consensus by >1z vs. an historical average of 48%.  The Q2 earnings bar continues to look too low in our view given resilient US data and favorable financial conditions (weaker USD).  A stronger Q2 earnings season should help investors look through any tariff-induced soft patch, while the macro resilience theme could shift to outright strength given a potential tailwind from accelerated depreciation.  The recently signed reconciliation bill allows for immediate 100% depreciation, which is already encouraging increased capex. T announced its fiber network expansion plan following passage of the bill, with management adding they plan to ‘provide an update on the expected impact of bill on its FY’25 and LT financial outlook (capital allocation) on its 7/23 earnings call.’

Favorable trade rhetoric was a third requirement for our tactically bullish fundamental outlook back in late May.  While that leg of the stool looks wobbly at best, it seems to be providing the necessary skepticism that bull markets tend to burn as fuel.

The potential for higher long-dated sovereign bond yields remains the prominent observable risk followed by record crowding in high-beta stocks.  In our view, the crowding in high beta stocks is the byproduct of exuberant retail investors.  The ultimate unwinding of this crowded trade will be a painful lesson that will also weigh on the broader equity market.  The inevitable unwind makes high quality/low volatility stocks relatively more attractive in the current environment.  As we move deeper into August, volumes and activity will start to slow with thinner liquidity conditions likely to cause uncomfortably large price gaps in consensus high-beta positions.