Inside Markets — Aging Bull Market

While it’s not our expectation, it is important to recognize that upcoming catalysts (tomorrow’s CPI and start of Q2 earnings season) have the potential to broaden out the equity rally. The narrow market breadth and thin equity leadership we see today are internal characteristics associated with a maturing bull market. A broadening out of the rally would encourage investors to add equity exposure, adding fuel for further upside. At a minimum, the events of the next two weeks will inform the policy and growth outlooks for H2. An inline CPI print (lower YoY headline number) seems achievable and would keep the Fed on track for policy easing to begin in September. An inline Q2 earnings season that delivers +8.8% YoY earnings growth seems like a much higher bar.

A broadening rally could even put the Russell 2000 (RTY) catch up trade back in the realm of possibilities. The RTY has underperformed the S&P 500 (SPX) by >30 percentage points over the last two years and trading at a rare forward multiple discount. This makes the RTY ‘catch up trade’ one of the most compelling risk/reward profiles in equity markets when conditions are right. The right conditions usually present themselves at the end of recession when the Fed begins to ease monetary policy.