Inside Markets — Intact and Improving

Our tactically bullish fundamental outlook since mid-May has required 1) resilient macro data; 2) positive earnings growth; and 3) easing trade rhetoric. Now, we see growing evidence that all three pieces are intact and may be improving. On the macro-economic front, last week’s flash PMIs signaled that US economic growth may be accelerating. The data aligned with GDP growth of ~2.3% three—six months forward vs. consensus expectations for H2’25 growth of ~1.3%. Friday’s non-farm payroll number is a big catalyst with consensus looking for +109,000. We believe markets will respond favorably to a print north of +100,000. After Friday, the next major catalyst will be July CPI due on August 12. The easiest piece for us has been near-term earnings growth given a relatively low Q2 bar of ~4.5% YoY. As of Friday, 34% of SPX companies had reported, with ~80% beating revenue by ~2.3%; and 80% beating earnings by ~6.1%. Using the actual numbers from the 34% of reporters plus consensus estimates on the rest gets you to +6.4% earnings growth in Q2. While trade has been the biggest wildcard, recent US/JPN and US/EU agreements provide incremental policy clarity that already seems to be priced into markets. As we’ve noted before, a bull market tends to use pessimism and skepticism as fuel for greater upside. We shouldn’t be surprised if incremental trade clarity results in a brief period of consolidation.

Discretionary hedge funds spent the last four weeks de-grossing with gross exposure well below levels from the February high, YE’24 and the high from last summer. According to positioning data, the largest incremental buyers were systematic funds (CTAs, risk parity, vol targeting) that accounted for ~$99B in demand last month. Retail investors were also a major source of demand over the past month, but a lot of the buying seemed to be in stocks with the highest short interest. That game may be coming to an end as reduced gross hedge fund exposure suggests the easy short squeeze will be harder to induce. We expect demand from the systematic community will continue if the SPX remains above its 50-day moving average and the VIX stays below ~20, but the pace of demand will likely slow as we move into August. At that point, corporate buybacks will likely be the biggest source of demand until fund flows slow considerably after Labor Day.