Inside Markets — Near-Term Risk/Reward

The tactically bullish outlook stays intact as long as macro data remains resilient, earnings growth is positive, and trade rhetoric improves. Today’s batch of economic data is the last meaningful macro input ahead of next Friday’s Jobs Report. Recent data has fit the resilient theme with benign macro conditions leading to subdued levels of implied volatility (VIX). Lower volatility usually results in higher earnings multiples, but the SPX already trades at a historically elevated ~21x forward multiple. Further upside will need to come from stronger than expected earnings growth, which has been the story thus far in Q2. Market participants are expecting an imminent EU trade deal that looks like the one struck earlier this week with Japan. If a US/EU trade agreement is reached and the China tariff truce is extended at next week’s talks, there’s ‘risk’ of another leg higher on an inline/better July payroll report next Friday.

Positive comments on the M&A pipeline and a reopening buyback window keep near-term risk/reward skewed to the upside for the broad market. However, the recent rally in high-beta stocks took positioning in this group to the 100th percentile last week and unwinding that length will be painful. Notwithstanding an unforeseen catalyst, we’d expect the unwind to occur later in August when summer liquidity conditions have been known to create uncomfortable price gaps.