Morning Notes — Outlook

SPX: We continue to expect a successful test of the 9/2 record high before year end with cyclical/value leadership under any election scenario.   Equity positioning remains light among individual investors, long-only managers, hedge funds and systematic funds.  Elevated bearish equity sentiment is also supportive.  Market tops aren’t made when equity positioning is light and sentiment is bearish.  Market tops are made when positioning is crowded and sentiment is euphoric.  To put this in perspective, the most recent market top before the pre-pandemic February top occurred in September 2018.  At the time, CTA beta vs the SPX was at ~90% and AAII sentiment poll from the week of 9/27/18 gave a bullish reading of 45.75%.  Today, CTA beta vs the SPX sits at ~20% and the AAII poll shows only 26.24% bullish. 

CQ3: Next week kicks off CQ3 earnings season with the bottoms-up SPX EPS estimate now higher than it was at end of the quarter.  This almost never happens as analysts usually have to revise estimates lower based on company guidance and other factors.  A record low of 22 companies in the S&P 500 lowered Q3 guidance.