The Week Ahead - 8/9/26

After a packed two weeks, things calm down a bit in the upcoming week, although still with some key catalysts.

US economic data lightens up considerably in the week ahead although we’ll get two top-tier reports in July CPI (Wednesday) and retail sales (Friday). Other reports include July PPI, existing home sales, and NFIB small business sentiment, August preliminary UMich consumer sentiment as well as the Q2 household debt/credit report and the standard weekly reports (ADP, jobless claims, etc.).

In terms of Fed speakers just a couple on the calendar next week in regional Fed presidents Hammack and Barkin, but there will almost certainly be more.

US Treasury auctions pick back up for non-Bills (>1yr in maturity) with 3, 10, and 30-yr auctions Tues, Wed, Thurs respectively.

In terms of SPX Q2 earnings we’re very much in the windup phase now with just a few heavyweights left including NVDA at the end of the month (AVGO is the start of next month). In the upcoming week, just 1% of the SPX reports by earnings weight consisting of 12 components with two >$100bn in market cap in CSCO and AMAT (in descending order by market cap). We’ll also get Berkshire tomorrow. There are though over 1,600 total companies reporting this week according to WallStHorizon including several non-US heavyweights which I’ll cover on Sunday.

In terms of Iran, as I said two weeks ago:

things remain very fluid. After two weeks of escalation, things seem to have de-escalated over the weekend. The Iranians know he needs to bring this to a close, but how far they want to push things, I’m not sure.

And the latest on Sunday is Axios reporting that President Trump has decided against escalating things militarily (taking into consideration he has in the past made such statements just before an escalation).

"We are low keying it," Trump said during a brief phone call. “We are only semi-negotiating with them. We are just watching Iran with its huge inflation and the fact they have no money.” He stressed that Iran “is in very bad shape” economically and has no money to pay its troops. The U.S. naval blockade has exacerbated the Iranian regime’s economic crisis, Trump said. At the same time, Trump said that with oil down to slightly over $75 a barrel, U.S. consumers are feeling less pain from the war. “It will work out. It always works out. It’s like a chess game,” Trump said of the back-and-forth with Iran. … When Iran isn’t engaged in war, it is forced to confront a grim reality with no real solutions at hand, a U.S. official said. At the same time, the U.S. official said, around 8 million barrels of oil are going out of the Gulf every night through the southern lane of the Strait of Hormuz in coordination with the U.S. military.

Complicating things has been “growing disagreements inside the Iranian regime. One camp, led by President Masoud Pezeshkian, is extremely worried about an economic collapse and believes Iran needs to reach a deal with the U.S. Another led by the commander of the Islamic Revolutionary Guard Corps, Ahmad Vahidi, rejects any concessions.”

The interview comes after the head of Iran's Supreme National Security Council, Mohammad Bagher Zolghadr, laid out new terms for reopening the strait over the weekend most of which are clear red lines for the administration (see post below).

So it appears for now things will drag on with little change through the mid-terms unless/until Iran decides they want to reopen the Strait.

So as I said now nine weeks ago, “we’ll just have to see how things progress”. While odds on Kalshi that traffic through the Strait would normalize by the end of the year had risen as high as 86% June 24th, that dropped as low as 36% in late July and remains at 45% little changed from this time a week ago.

“Mohammad Bagher Zolghadr, secretary of Iran’s Supreme National Security Council, said the U.S. would need to permanently end the war, lift its naval blockade, withdraw its forces, end all sanctions, free Iran’s frozen assets, pay war reparations, end threats and insults, and stop military action against Iran’s militia allies around the region before Iran would open the strait, according to a report on state news agency IRNA.”

“While not Iran’s formal response nor conditions raised by Tehran’s negotiators—and the demands are obvious nonstarters for the U.S.—Zolghadr’s comments showed that the hardline Islamic Revolutionary Guard Corps is setting high hurdles to a deal that would improve the flow of energy supplies and ease the pressure on the global economy.”

“For us, the Strait of Hormuz is not merely an economic waterway, but rather a key component of our geopolitical and strategic power,” the Revolutionary Guard’s spokesman said Saturday on state media.

The spokesman and Foreign Minister Abbas Araghchi said the agreement with Oman wouldn’t reopen the strait without concessions from the U.S. In conversations with mediators, Iranian diplomats have said that means lifting the blockade, restoring a waiver of sanctions on Iran’s oil exports and freeing a few billions of dollars of blocked Iranian funds.

Iranian President Masoud Pezeshkian said Saturday that the time could be right to pursue negotiations. But mediators said Zolghadr’s unrealistic demands and the attack on shipping Saturday confirmed their concerns that hardliners are stalling approval of the deal.

Ex-US highlights from DB:

Turning to central banks, the RBA (Australia) decision is due Tuesday (DB expects a hold at 4.35%), while Norges Bank (Norway) announces its decision on Thursday. The BoJ will release its summary of opinions from the July meeting on Monday.

In Europe, the key UK release will be the Q2 GDP report on Thursday, where our UK economists expect June GDP to slip to -0.1% MoM, leaving Q2-26 GDP growth running at 0.4% QoQ, with risks skewed to the downside. Elsewhere, both Denmark and Norway release July CPI numbers on Monday.

July inflation indicators will also be in focus in China this Sunday. Our economists project +0.9% YoY growth for CPI (+1.0% in June) and PPI to increase by +4.0% (+4.1%). In Japan, notable data includes the Economy Watchers survey out Monday.

China’s Tencent and BYD lead ex-US reports next week.

Here’s their one-pager:

Monday August 10

Data: Japan June BoP current account balance, BoP trade balance, July bank lending, Economy Watchers survey, Denmark July CPI, Norway July CPI, Germany wholesale price index

Central banks: BoJ summary of opinions from the July MPM

Earnings: Ferguson Enterprises, Rocket Lab, Alcon, AST SpaceMobile, USA Rare Earth

Tuesday August 11

Data: US July NFIB small business optimism, existing home sales, Italy June trade balance

Central banks: RBA decision

Earnings: Sea, Lumentum, CoreWeave, Constellation Software, Venture Global, Super Micro Computer

Auctions: US 3-yr Notes ($58bn)

Wednesday August 12

Data: US July CPI, Japan July M2, M3, machine tool orders, Germany June current account balance, Canada June building permits

Earnings: Tencent, Cisco, Commonwealth Bank of Australia, Coherent, Nebius, Cerebras, Vestas

Auctions: US 10-yr Notes ($42bn)

Thursday August 13

Data: US July PPI, initial jobless claims, UK Q2 GDP, July RICS house price balance, EU industrial production, Japan July PPI

Central banks: Norges bank decision, Fed’s Hammack and Barkin speak

Earnings: Applied Materials, RWE, Lenovo, Adyen, Pandora

Auctions: US 30-yr Bonds ($25bn)

Friday August 14

Data: US July retail sales, August University of Michigan survey, June business inventories, China Q2 BoP current account balance, Eurozone June trade balance, Canada June manufacturing sales

Earnings: BYD

In this week’s Week Ahead

• An update on the economy, including last week’s mixed data, the Citi Economic Surprise Index, the latest Q3 GDP trackers, JPM’s Mike Feroli on why JPM raised its Q3 GDP forecast despite the weak jobs report, Goldman’s more cautious take on underlying job growth, the Dallas Fed Weekly Economic Index, Goldman’s Current Activity Indicator, BoA card spending, Redbook sales, the NY Fed consumer survey, and the Conference Board’s CEO Confidence survey.
• A closer look at the consumer and business backdrop, including BoA’s card-spending update, the closing of BoA’s “K” in higher- vs. lower-income spending, Redbook sales, NY Fed consumer inflation and earnings-growth expectations, job-finding expectations, and CEO views on the economy, capital spending, hiring, and wages.
• A Q2 earnings season update, including FactSet and BofA’s latest beat rates, the magnitude of earnings and revenue surprises, Amazon and Alphabet’s impact on headline earnings growth, sector-level earnings and revenue expectations, margins, and market reactions to beats and misses.
• A closer look at the earnings setup beyond Q2, including Q3, 2026, and 2027 earnings expectations, revisions, guidance trends, analyst price targets, ratings, and BofA’s work on AI vs. non-AI earnings growth.
• A look at margins and AI, including FactSet’s record margin estimates, the impact of Amazon and Alphabet’s non-cash earnings, 22V Research on AI-related margin gains, Bloomberg Intelligence on expectations for further margin expansion from AI, and BofA’s view of an exceptionally strong but still AI-led earnings season.
• An update on valuations, including how the latest moves in stock prices and earnings expectations have affected forward P/Es for the Mag-7, large caps, mid caps, and small caps, as well as Bloomberg’s look at the S&P 500’s relative valuation versus MSCI World ex-US.
• A breadth update, including the McClellan Summation Index, stocks above 20- and 200-DMAs, new highs minus new lows, equal-weight vs. cap-weight, small caps vs. large caps, and growth vs. value.
• A detailed positioning and flows section, including Deutsche Bank’s composite positioning work, discretionary vs. systematic positioning, large-cap positioning, large-cap Tech and mega-cap growth positioning, Goldman’s prime-book flows, hedge fund leverage, BoA’s systematic flow estimates, CTAs, vol-control funds, and risk parity.
• A closer look at Tech positioning and performance, including Deutsche Bank’s work on large-cap Tech positioning, hyperscaler relative performance, the relationship between earnings growth and market cap, and whether the recent Tech rotation has more room to run.
• An update on options and leveraged ETF positioning, including Goldman on call buying and their Panic Index, Deutsche Bank on call/put volume and skew, BoA on SPX and Nasdaq-100 leveraged ETF positioning, and the latest moves in single-stock leveraged ETF AUM.
• A look at retail positioning and activity, including Vanda Research on changing retail investment patterns, ETF vs. single-stock flows, and BoA private-client allocations.
• An update on gamma, including BoA and Tier1Alpha on dealer gamma, positive-gamma conditions, the potential for upside acceleration, and Citadel’s buyback-window work, and BoA client buyback trends.
• A sentiment check, including AAII, Goldman’s US Equity Sentiment Indicator, CNN Fear & Greed, BoA’s Bull & Bear Indicator, BoA’s Sell Side Indicator, Helene Meisler’s weekend poll, and Citi’s Panic/Euphoria model.
• A seasonality update, including Jeff Hirsch’s August seasonal work and mid-August inflection.
• An update on interest rates and Fed expectations, including the July jobs report’s impact on rate-hike pricing, BofA’s call for three hikes this year, Chair Warsh’s Fed setup, the MOVE index, and the Fed-favored 5-year, 5-year forward inflation rate.
• A wrap-up with some thoughts on the “on again/off again” AI trade, the broader “AI-plus” rally, earnings, positioning, gamma, buybacks, rates, Iran, and why the market setup still looks broadly constructive.

Please note that I do sometimes add to or tweak items after first publishing, so it’s usually safest to read it from the website where it will have any updates.

Economy

Looking first at the economy, my intro has remained the same since the start of the Iran conflict: “we continue to see it weathering the various storms remarkably well due in large part to continued resilient consumption (fueled by huge increases in wealth over the past few years despite slowing incomes) and AI-spending… with data of late showing a stable (and perhaps accelerating) economy, but one that is also boosting inflation.”

As noted previously, while in June that “perhaps accelerating economy” parenthetical did a lot of work, things tailed off in July. As we start August, the data last week was mixed with several very strong reports including the PMIs, productivity and output, core capital goods orders (proxy for business cap ex), Challenger job cuts and hires, and jobless claims. But that was offset to some extent by a weakish ADP report and outright weak Employment Situation report. Construction spending and the trade balance were also disappointing (the latter due to falling imports and exports).

So no reason to change my outlook at this point. The economy continues to chug along continually alternating its pockets of strength and weakness.

But the Citi economic surprise index treated the data last week as on balance fairly weak, enough to see the indicator drop to 29.5 from 38.3, the least since May 1st, down from 57.1 just two weeks ago.

Meanwhile GDP estimates are for now consistent with a solid economy (again though remembering GDP going into recessions generally doesn’t look like one is coming (it was up around 2% in Q2 & Q3 2008 well after the recession had started)).

Surprisingly despite the weak Employment Situation report a few raised their estimates this week:

BoA (who has been the most accurate over the past year) not released yet but their official estimate is 2.5%. Goldman +2.7% (from +2.4%) JPM +2.5% (+1.75%) Morgan Stanley (I don’t get until Monday) Atlanta Fed +5.83% (from +4.95% remembering they have been very high to start the last two quarters as well) NY Fed +2.24% (+2.52%) St Louis Fed not released yet Avg = +2.97% Median = +2.46%

JPM’s Feroli discusses the raise to its GDP estimate despite the weak NFP:

A constellation of indicators suggests that the economy remains on a solid footing, and we’ve raised our 3Q GDP forecast from 1.75% to 2.5%.

Nonetheless, the signals from the July employment report were more mixed than they had been in prior months.

The good news was that the unemployment rate fell a full 10bp, from 4.2% to 4.1%, and is at the lowest point since the start of last year. That improving trend has been backed up by other related measures, such as continuing claims.

But falling unemployment also came with a 23k drop in nonfarm payrolls and downward revisions that leave the three-month trend at a mere 20k. This may be another summer slowdown, but it takes away some of the sense that job growth was picking up after a sluggish 2025.

Given uncertainty about breakeven employment levels, we would normally say to focus on the direction of the unemployment rate. That is still probably right. But the household survey came with its own caveats, namely a further drop in the participation rate, which follows on the back of a particularly large decline in June (Figure 1). The result is that even in the household survey there has yet to be any pickup in the employment-to-population ratio.

Although Goldman has a less positive take:

Goldman: Friday’s report continues the pattern of weak July employment reports and negative revisions for the prior months observed in each of the last three years.

The three-month average of payroll growth stands at 20k (vs. 111k prior to today’s report), and our estimate of the underlying pace of job growth based on the payroll and household surveys now stands at 5k (vs. 74k prior to today’s report).

And as you know if you’re a regular reader, one of my favorite GDP trackers is the Weekly Economic Index from the Dallas Fed.*

In the week through Aug 1st (so doesn’t have last week’s data) it calmed down, after six weeks of jumps of at least 0.4%, edging up to +2.68% from +2.46% the prior week.

More importantly, the 13-wk avg remained at 2.83%, just under the 2.87% two weeks ago which was the best since 2022, continuing to evidence economic momentum that is above trend.

*The WEI is scaled as a y/y rise for real GDP (so different than most GDP trackers which are Q/Q SAAR) and uses 10 daily and weekly economic series but runs a week behind other GDP trackers.

It has over time had one of the highest correlations with actual GDP of any tracker (see chart) although for Q2 it came in a little high predicting +2.80% y/y GDP growth vs the actual first estimate of +2.10%, while for Q1 it predicted +2.48 vs 2.66%. More importantly, it has consistently indicated no recession and relatively healthy growth since the pandemic (which is what we’ve experienced).

And Goldman’s July US Current Activity Indicator* eased back another 0.3pp to 3.6%, still though the best since November 2021. That comes after the strongest six-month period since 2022, as the manufacturing component is getting more help from other sectors, although still represents 2.0% of that 3.6% reading.

*The CAI is their “real-time measure of inflation-adjusted economic momentum using 37 inputs.”

BofA card spending (credit+debit) accelerated further in the week ending August 1st, with the gains broadening out:

• Total +4.7% y/y (+4.2% four-week moving average)
• Ex-gasoline +3.9% (+3.5% four-week moving average), while
• Ex-autos and gasoline +4.9% (+3.9% four-week moving average).

Gasoline itself remained at +19.1% y/y with pump prices remaining elevated from a year earlier.

The pickup this week was broader than the previous week’s: BofA noted that many categories saw moderate increases in y/y spending growth versus the prior week, with retail ex-autos & gasoline at +4.9% outpacing the gas-inclusive headline. BofA also flagged that its “K” has closed — ex-gas spending growth is now running at roughly the same y/y rate for higher- and lower-income households, after higher-income had led for much of the past year.

The week’s standout mover on a percentage basis was entertainment, which surged to +14.5% from +3.5% — an 11-point jump that lifted it well above its +6.6% four-week average. Among the services and travel categories that had cooled the prior week, airlines (+10.1%), transit (+8.8%) and restaurants & bars (+3.4%) all firmed.

Not every category kept pace, however. Electronics eased to +17.3% from +21.9% — though it remains one of the strongest readings on the board — and department stores gave back their prior-week snapback, slipping to -1.5% from +8.5%. General merchandise (+3.9%) and clothing (+2.3%) also softened but remained positive.

Three categories were negative y/y — department stores (-1.5%), grocery (-1.3%) and home improvement (-0.2%) — all only modestly below zero, while furniture edged back into positive territory at +0.4%.

And we also saw Redbook sales remain firm the week of July 31st:

Redbook same-store retail sales rose 8.2% y/y in the week ending July 31. Sales growth remains well above the 2025 average of 5.8% y/y.

And some takeaways from the NY Fed’s consumer survey on Friday:

July NY Fed consumer survey* sees median inflation expectations ease at the 1-yr horizon a tenth from the highest since Sept ‘23 while remaining unchanged at the 3-yr horizon at the joint highest since June ‘22 and 5-yr horizon at a joint record high:

• 1-yr median inflation expectations ease to 3.6% from the highest since Sept ‘23,
• 3-yr remained at 3.3%, still up just three tenths the past 13 months, but the highest since June ‘22,
• 5-yr unchanged for an 11th month at a joint record high of 3.0% (which has been hit several times since the series started in Jan ‘22).

While the 5-yr survey started in 2022, the 1 & 3-yr are a bit above the pre-pandemic average.

*Note: “The SCE is a nationally representative, internet-based survey of a rotating panel of approximately 1,300 household heads (so twice as big as UMich and a consistent panel). Respondents participate in the panel for up to 12 months, with a roughly equal number rotating in and out of the panel each month. Unlike comparable surveys based on repeated cross-sections with a different set of respondents in each wave, this panel allows us to observe the changes in expectations and behavior of the same individuals over time.”

And earnings growth expectations remained the highest since March.

Positively, the mean perceived probability of finding a job if one’s current job was lost increased by 1.3 percentage points to 46.2%, the highest since November.

And the Conference Board's CEO Confidence index rose to 52 in Q3 2026, up from 47 in Q2.

"Despite a partial rebound from last quarter’s sharp drop, confidence among leaders of large firms remained well below the level of 59 recorded in Q1 2026."

“CEO confidence revived somewhat in Q3 2026, potentially reflecting some easing in oil prices and geopolitical tensions,” said Dana M Peterson, Chief Economist, The Conference Board.

“The reading suggests cautious optimism among leaders of large US firms."

The report went on to note that

“CEOs’ assessments of current economic conditions recovered after plummeting in Q2 but remained slightly negative at a reading of 49.

Meanwhile, expectations for economic conditions six months from now improved into slightly positive territory.

Regarding their own industries, CEOs’ views of current conditions and expectations six months hence improved in Q3 and were more optimistic than their views of the overall economy.”

Current Conditions

CEOs’ assessment of general economic conditions improved in Q3 2026:

• 23% of CEOs said economic conditions were better than six months ago, up from 15% in Q2 2026.
• 26% said economic conditions were worse, down significantly from 47%.

CEOs’ assessments of conditions in their own industries also improved in Q3:

• 43% of CEOs said conditions in their own industries were better than six months ago, up from 33% in Q2.
• 23% said conditions in their own industries were worse, down from 33%.

Future Conditions

CEOs’ expectations about the short-term economic outlook became slightly positive in Q3 2026 after falling into negative territory last quarter:

• 25% of CEOs expected economic conditions to improve over the next six months, up from 24% in Q2 2026.
• 19% expected economic conditions to worsen, down significantly from 40%.

Overall, CEOs’ expectations for short-term prospects in their own industries improved in Q3:

• 36% of CEOs expected conditions in their own industry to improve over the next six months, down slightly from 38%.
• However, 13% expected conditions in their own industry to worsen over the next six months, down from 22%.

“CEOs expected to stay the course on their capital spending plans, with most (61%) indicating no plans to revise capital spending, and only 8% expecting to revise plans lower (unchanged from Q2).

Regarding employment, CEOs remained in ‘low-hire, low-fire’ mode, but tilted toward a slight expansion in their workforces in Q3. Plans for wage increases were overall little changed. Hiring qualified people was generally unproblematic in Q3, with a majority of CEOs (61%) expecting either no problem hiring (13%) or overall no problem but some problems in some areas (48%) over the next 12 months.”

Employment, Recruiting, Wages, and Capital Spending

• Employment: 34% of CEOs expected to expand their workforce, up from 28% in Q2 2026. This was higher than the share expecting to reduce their workforce (28%, down from 31%). 37% of CEOs anticipated no change in their workforce.
• Hiring Qualified People: A majority of CEOs (61%) expected either no problem hiring (13%) or overall no problem but some problems in some areas (48%) over the next 12 months.
• Wages: Most CEOs (58%) continued to plan annual wage hikes concentrated in the 3–3.9% range.
• Capital Spending: Most CEOs (61%) indicated no plans to revise capital spending. The share of CEOs expecting to increase capital spending eased after several quarters of gains—to 31% in Q3 2026 from 37% in Q2. Meanwhile, only 8% of CEOs expected to revise spending plans downward.

Earnings

Through Thursday according to Factset we’ve had 88% of SPX components report by earnings weight, so we’re getting to the point where we can start to lock in the overall results, and while we came into the earnings season with a high bar the results cleared it, with 86% beating, slightly above the 84% beat rate in Q1 (which was the best since Q2 ‘21) and vs the 5yr average of 78% and the 10yr average of 76%.

And despite the high bar the magnitude of the beats has been a huge +29.2% (down around 5pps though the past two weeks), almost double Q1’s +16.6%, and over four times the +6.5% in Q4 and +6.6% in Q3, and vs the 10-yr average of 7.4% and the 5-yr average of 7.0%, led by Consumer Discretionary’s +100.4% (boosted by Amazon’s massive 215% beat (on the back of a $53.4 billion gain in investments (primarily Anthropic) as well as Nike’s +479% beat, followed by Comm Services (+102.3%) similarly boosted by Alphabet’s +217% beat on the back of a $98 billion gain tied to its own investments.

Factset notes excluding Amazon and Alphabet, the surprise percentage for the S&P 500 for Q2 2026 would fall to 10.9% which would still be materially above the 5 and 10-year averages.

The beats have boosted Q2 earnings expectations to an eye-watering +50.4% up from 18.8% at the start of the quarter (April 1st). That would be the seventh consecutive quarter of double-digit earnings growth (and second above 20%) and the strongest since Q2 2021 (91.6%).

Factset notes if Alphabet and Amazon.com were excluded, “the blended earnings growth rate for the S&P 500 for Q2 2026 would fall to [a still phenomenal] 32.0% from 50.4%,” the “2nd consecutive quarter of year-over-year earnings growth above 20% and 7th consecutive quarter of double-digit earnings growth.”

Energy continues to lead on a percentage growth basis (although less so on an earnings weighted basis) +147.0%, Comm Services is not far behind (+117.0%) and Consumer Discretionary is +91.6%. Tech is +70.4%. Just incredible numbers.

As with Q1 Health Care is expected to be the only sector with negative growth -6.7% (down from +6.7% on March 31st but up from -14.0% the prior week).

In terms of Q2 revenues, 76% of SPX components have beat (vs the 10-year average of 68% and 5-year average of 70%). The beats are 3.2% above estimates, which would be the best since Q2 2022 (3.2%) and above the 5-year average of 1.9% and the 10-year average of 1.6%.

That has boosted Q2 revenue expectations to +15.0% (up from 9.5% at the start of the quarter (Apr 1st)) led by Energy (+42.5%, up from 31.7% the prior week), Tech (+35.6%), and Comm Services (+15.3%). No sector is expected to see a revenue decline y/y, in fact the least is +5.0% (Utilities).

If 15.0% is the actual revenue growth rate for the quarter, it will mark the highest revenue growth rate reported by the index since Q4 2021 (16.1%). It will also mark the second consecutive quarter of double-digit revenue growth for the index.

Looking ahead, “analysts expect lower revenue growth for the S&P 500 for the 2nd half of 2026. For Q3 2026 and Q4 2026, the estimated revenue growth rates for the index are 11.3%, and 10.9%, respectively,” meaning we’re expected to continue to see double-digit growth.

Profit margins were also boosted further this week and are now forecast at 16.9%, easily a new record (beating the 14.8% in Q1). They are also well above the prior year’s 12.9% and the 5-year average of 12.3%.

Again, this saw a big boost from the non-cash earnings in Amazon and Alphabet, but even removing those it only falls to 15.0%, still a record.

And some think they have more room to go as more companies see the benefits of AI:

Some 25 firms in the S&P 500 have quantified the impact of using AI — and said the technology will amount to 180 basis points of margin growth, on average, according to an analysis conducted by 22V Research LLC. Excluding companies lumping AI in with other productivity improvements, the average margin boost from AI stands at 150 basis points.

"It’s not just technology megacaps — garbage pickup companies, manufacturers of heating systems and insurance brokers are on the list. Extrapolating a margin improvement of this magnitude to the broader index would imply a 10% upside, at a minimum, to the S&P 500’s fair value, according to Dennis DeBusschere, president and chief market strategist at the firm."

“Direction matters more than precision in these early estimates, and the direction is toward more AI users reporting better margin improvement,” DeBusschere said.

In the first quarter, some 17 companies in the index outlined how AI boosted their margins, and the improvement stood at only 20 basis points, on average. This eases concern that massive spending on artificial intelligence technology is failing to translate into corporate margin growth.

"Even without quantifying AI’s effect on profit margins, a rising number of S&P 500 members expect general improvements from the technology. So far this earnings season, executives from 43 companies in the S&P 500 have said AI is contributing to their margins, according to data analyzed by Bloomberg Intelligence. Some 85 executives have said that AI somewhat supported margin growth. On the flip side, executives in only three S&P 500 firms refuted the idea that AI was contributing to margin growth."

BofA similarly notes an “exceptionally strong earnings season” although more so for “AI stocks”:

Earnings growth was broad in 2Q, with 10 of 11 sectors and 81% of stocks on pace to post positive YoY growth, a 94th percentile quarter over the past 20+ years (Exhibit 7). Even so, AI remained the index’s primary growth engine: the median AI-related stock grew 28% YoY, compared with 12% for the median non-AI stock. While those growth rates were unchanged from 1Q, consensus expects a sharper deceleration among AI stocks next quarter, with median EPS growth moderating by 12ppt to 16% vs. a 4ppt decline to 8% for non-AI stocks (“AI stocks” defined by membership in various AI-related ETFs; Exhibit 8).

And at this point analysts are expecting a third consecutive quarter of 20%+ y/y earnings growth with the Q3 estimate at +27.4%. As in Q2, Energy is expected to lead at 94.3% y/y growth, followed by Tech +59.5%, Comm Services +49.9%, and Materials +31.9%.

Unlike Q2 no sector is expected to have negative y/y growth with Financials the least at +3.4%.

Those rising expectations have seen 2026 SPX earnings growth expectations also continue to ratchet higher now at +30.0%, up from +17.1% March 31st and over double the +14.8% at the start of the year.

As in 2025, Tech is a leader with y/y earnings growth of +49.7% (up from +28.6% at the start of the year) but Energy will exceed that (on a percentage basis) at +76.8% (up from +6.4% at the start of the year) and now so will Comm Services +54.4%, along with Materials (+37.3%) representing the four sectors expected to come in above the SPX average.

And 2027 earnings are expected to be up another +13.6%, which is down though from +17.5% three weeks ago as analysts are no longer carrying over all (but still most of) the boosts in 2026 (such as the investment gains by some hyperscalers) to next year. That’s also down from +16.5% at the start of the second quarter (Apr 1st). Still it’s a double digit advance on top of what is expected to be a 30% gain in 2026. That would also represent a fourth straight year of double-digit earnings growth for the S&P 500, fairly unprecedented.

2027 is expected to be led again by Tech (+33.2%, up from 24.6% at the start of the second quarter despite the huge increase in 2026 estimates) followed by Health Care (+22.1%) which is expected to see a big turnaround after lagging in 2026.

In terms of the note at the start on investment gains not continuing, Comm Services (-10.3% from +8.1% at the start of the quarter) and Consumer Discretionary (-0.1% from +13.9% at the start of the quarter) have joined Energy (-11.4%) as the sectors expected to see negative growth next year.

And earnings expectations continue to be supported by very strong earnings revisions which moved higher for a third week in the week of July 31st, after cooling off for two weeks following ten straight weeks of well above average revisions. Overall it marks the best 15 weeks since 2021.

As a result, the 20-week moving average has lifted to the best since 2021 as well, as 12-month out EPS estimates continue to rise to new highs, as they’ve done each week since the turn of the year.

And BofA finds “There have been 2.3x more above-consensus than below-consensus EPS guides since July 1st, far better than historical norms (see Exhibit 15) and at the best level since 2021. By sector, Tech continues to see the strongest guidance trends.”

In looking at how markets are rewarding beats and punishing misses, according to Factset (who looks from the two days before to two days after a report) in line with the high bar coming into earnings beats are being rewarded well under the typical amount, although improving to +0.4% from the prior week’s +0.1% and -0.3% the week before that (but as compared though to the 5-yr average of +1.0%, and down from +1.2% in 1Q and 4Q ‘25 and +0.4% in 3Q and 2Q ‘25).

Misses though are now being punished less than average at -2.3% vs the 5-yr avg of -3.0% and also better than the -4.3% in 1Q. Previous to that we saw -1.4% in 4Q, -5.0% in 3Q, and -5.5% in 2Q (the last of which BoA said was the worst negative reaction since 2000).

BofA for their part, like Goldman last week, notes that Tech is pulling down the aggregate numbers, and they say looking just one day post-earnings misses have been hit more than usual, especially if accompanied by a guide-down:

"Companies that beat EPS outperformed by just 10bp on average the next day, down from +50bp [the previous week]. Those that beat both EPS and sales gained 90bp, still well below the 1.4ppt historical avg.

"Even with positive reactions to Microsoft and Amazon, the avg. TMT stock that beat both metrics lagged after reporting."

Meanwhile, misses have been punished more than usual (-3.2ppt vs. -2.5ppt historical avg.), while below-consensus EPS guides – which have been relatively rare this quarter – have faced an even steeper penalty (-4ppt the next day).

This week they updated their aggregate numbers:

Companies that beat EPS traded in line with the market the next day on average, while those that beat both EPS and sales gained 80bp, well below the 1.4ppt historical average. Meanwhile, misses have been punished more than usual (-3.4ppt the next day vs. -2.5ppt historical avg.).

Analysts also collectively continue to think that the S&P 500 has a lot of upside, and after falling for the first time in a few months the prior week, FactSet’s compilation of analyst bottom-up SPX price targets moved back higher w/w to 9,106 (+56 pts w/w, ~+1,990 pts since Thanksgiving, ~+2,940 pts since July 1st, and ~815 just since March 31st). That would be +18.1% from Thursday’s close.

Tech (+23.4% from +29.3% the prior week) rose to the sector seen with the biggest upside, followed by Comm Services (+22.1% from +29.9%), but then Utilities (+18.6% from +15.6%) replaces Consumer Discretionary (+17.4% from +25.4%) in third place. On the other side Financials (+9.4% from +10.4%) remains the sector with the least upside, the only sector not expected to see double digit upside over the next 12 months.

As FactSet reminded us in December, the last 20 yrs (through 2024) analysts have been on avg +5.9% too high from where they start the year (which was 8,000 for 2026) but note they underestimated it five of the past six years (including 2025 when they saw 6,755 at the start of the year (we ended at 6,845)).

Over the previous 20 years (2005–2024), the average difference between the bottom-up target price estimate at the beginning of the year (December 31) and the final price for the index for that same year has been 5.9%. In other words, industry analysts on average have overestimated the final price of the index by about 5.9% one year in advance during the previous 20 years. Analysts overestimated the final value (the final value finished below the estimate) in 11 of the 20 years and underestimated the final value (the final value finished above the estimate) in the other 9 years. It is interesting to note that analysts have underestimated the final value in five of the past six years (2019–2024).

In terms of analyst ratings, buy and hold ratings continue to dominate with buy ratings at 59.2% seven tenths below the record high of 59.9% the last week of April. The 5-year month-end average though is 55.8% according to FactSet, so we’re well above that.

Hold ratings are at 36.0%, off the 35.4% record low (to 2009), but well below the 5-year month-end average of 38.7%, with sell ratings at 4.8%, remaining in their narrow range since 2009 but below the 5-year month end average of 5.6%.

Tech leads in buy ratings (69%) while Staples leads in sell ratings (8%).

The increases in stock prices over the past week saw valuations (price to next-twelve-month (NTM) earnings) jump higher for the Mag-7 after hitting the least since April 2025. The other indices saw smaller increases remaining well off the highs of the year.

BBG: The S&P 500’s P/E vs the MSCI World ex-US index now at the least since 2020.

Breadth

Breadth, which softened in the second half of July made (very) incremental improvement last week.

The McClellan Summation Index (“what the average stock is doing”) weakly tries to roll upward.

Although percentage of stocks over 200-DMAs (red lines) saw notable improvement last week, particularly on the Nasdaq.

While SPX percent of components above their 200-DMAs is poking over the downtrend line from 2021 and is now the highest since 2024.

And shorter-term 20-DMAs similarly saw the NYSE trudging up while the Nasdaq shot higher.

SPX new 52-week highs minus new lows slightly improved but still ended the week at just eight, while the 10-DMA edged higher, both though showing limited new-high participation despite the index high.

While the ratio of the equal-weight SPX to the cap-weighted continues to fall back.

As does the ratio of small caps to large caps (Russell 2000 to SPX) after hitting the highest since July 2024 three weeks ago.

While S&P 500 growth/value continued its rebound for a second week now up to 2.47 from 2.35 two weeks ago, the least since early May, still down from its all-time high of 2.52 hit at the end of May.

Supported by the ratio of forward earnings for growth/value pushing to a new all-time high at 2.06.

Positioning/Flows

Turning to equity market positioning, after dropping back in July, positioning has started to rebuild.

Deutsche Bank:

Our measure of aggregate equity positioning rose this week from slightly below neutral to modestly overweight (0.22sd, 55th percentile), taking it to the highest level in two months.

Discretionary investor positioning (-0.06sd, 43rd percentile) jumped from notably underweight to near neutral, still well below levels implied by earnings growth, while systematic strategies’ positioning (0.55sd, 73rd percentile) moved sideways and stayed overweight.

Large-cap positioning (0.64sd, 87th percentile) also jumped to notably overweight but is not extreme, while small caps (-0.14sd, 43rd percentile) remained slightly underweight. Large-cap positioning is currently in line with S&P 500 earnings growth in the mid-teens, well below the 33% we just got in Q2.

The jump in positioning has been led by that in large-cap Tech which is again quite elevated (95th percentile), although still below the highs seen in October last year and again in early June. It is closer to the levels implied by earnings growth.

Relative performance of Tech was at the bottom of its long-run channel last week but has now risen to the middle, continuing the 5th such rotation in the last 3 years.

Specifically for hyperscalers, they remain in the middle of their relative range over the past two years, during that time below the levels implied by earnings growth.

Goldman for their part says their prime desk saw equities “modestly net sold this week, driven by short sales outpacing long buys in Macro Products. Single Stock net flows finished ~flat, as long buys were offset by short sales – this week’s increase in single stock gross flow was the largest in 7 weeks, as 10 of 11 sectors(sans Info Tech) saw re-grossing activity.”

Hedge fund positioning remains relatively light with gross leverage at just the 6th percentile over the past year (although 52nd over the past 3 years) and relatively heavy in longs with the long-short ratio at the 97th 1-year percentile (although 50th 3-year and just the 33rd over the past five years).

BoA for its part (note these are global flows) sees overall systematic positioning as having relevered slightly last week remaining near the highest since March. Importantly they continue to say “systematic flow risks appear relatively balanced,” with “sell triggers” now sitting “further away, with declines over 4% required to generate meaningful CTA selling.”

Specifically they see:

• +$23B of buying in a flat market (from +$33B of buying last week);
• +$13B of buying in an “up” market (from +$19B of buying; ”up market” defined as 97.5th percentile price path or ~+3.5% similar to Goldman); and
• -$46B of selling in a “down” market (from -$77B last week and -$212B three weeks ago; “down market” defined as the 2.5th percentile price path or ~-2.9% (different than Goldman who uses -4.5%)).

DB also sees CTA positioning as having rebuilt, but in the US falling back to the 61st percentile (since 2009) from the 66th the prior week, with the Nasdaq-100 continuing to remain at just the 37th while SPX and RUT fell back to the 64th and 78th from the 70th and 82nd respectively.

Vol control positioning though, despite the big jumps in volatility Monday and Tuesday, increased to the 84th percentile from the 67th the prior week (although still down from the 96th three weeks ago) at the “upper end of its historical range”:

Their sensitivity to market selloffs eased sharply over the period, reducing the likelihood of mechanical de risking on smaller drawdowns. While positioning has climbed back, funds still retain some capacity to add to equities.

Tier1Alpha though says vol control has cut back positioning with the higher volatility to start the week. And that higher volatility has seen 1-month realized volatility push just over 3-month making 1-month the dominant trigger per Tier1Alpha:

“We’re also seeing signs of structural stress in the vol control space now that 1-month realized volatility has officially moved back above 3-month realized volatility. This is a small but important detail for vol control funds that use volatility-scaling strategies to manage risk, which typically use the higher of the two look-back windows to determine their equity allocations.

“Now that the 1-month realized volatility is higher, we’d expect to see more aggressive rebalancing flows from these funds given the shorter lookback window will be more sensitive to daily returns. So far this week, we estimate that this class of strategies generated around $12B in net selling.”

And they note “the returns rolling out of the sample remain relatively small. Overall, we do not expect these funds to generate any material buying over the next 2 weeks, leaving the structural backdrop thin.”

In that regard there is just one 1%+ day in the 1-month lookback (and one in the 3-month lookback), making the outlook for vol control buying unfavorable for a third week.

While for risk parity DB says equity positioning was “little changed” although for US equities it did edge higher for a fourth week now to the 67th percentile from the 37th four weeks ago. That takes it from historically underweight to slightly overweight. Bond exposure is at the 41st percentile (“neutral”) but commodities remain elevated at the 95th (“elevated”).

“Overall, positioning continues to favor inflation hedges & commodities, while maintaining a modest overweight to equities.”

While call buying (which adds incremental upside pressure) shot higher last week. A look at some metrics:

The 10-DMA of the put/call ratio fell sharply from the highest since April.

Goldman notes “Desk flows have seen clients use options to chase the market higher with this week’s US option volumes averaging nearly 10% above the 50dma, and calls representing over 58% of total listed contracts – the broader options complex is signaling any residual panic from last week has been eradicated.”

In that regard, Goldman’s Panic Index (measure of pressure for downside protection) fell to the least since pre-2024.

Goldman also notes that Monday and Tuesday brought a historic flattening in Put-Call Skew. The cumulative 2d change in near-term SPX Normalized Put-Call Skew was the second largest in magnitude that we’ve seen in the last 20 years.

While DB notes

The ratio of call to put volume (5d ma) rose sharply this week to a two-month high (85th percentile).

With 5-day total net call volume in the 99th percentile since 2010.

Net call volume rose broadly across single-stock, index, and ETF options. Within single-stock options, volume rose sharply in MCG & Tech, followed by defensives, Consumer Cyclicals, and Industrial Cyclicals; other sector groups saw only minimal changes.

S&P 500 options skew (3m, 90%-110%) declined sharply to its lowest level in two years before rebounding slightly.

Like call buying, leveraged positioning acts as a “negative gamma source” as Charlie McElligott has put it (meaning that there is added buying/selling pressure from them in the direction of daily flows as they rebalance each day).

Positioning in Nasdaq-100 and SPX leveraged ETFs continued their rebound according to BofA with both jumping higher, SPX to the highest in over a year.

And that translated over to single-stock leveraged ETF AUM, which saw gains in 19 of the 23 stocks tracked by BofA (and all of the top 10) led by NVDA & PLTR.

Turning to retail, Vanda Research says retail investors are “changing investment patterns”

Retail investors are still selling US single stocks, but they’re not completely MIA. They're committed to tech, mainly via ETFs. This is a sign that the habits of retail investors may be changing. This is less about cutting exposure, and more about changing investment patterns.

BoA client retail equity positioning also reflected retail rebuilding equity positions with AUM in stocks increasing to 65.7% (up +0.2% w/w (although some of that was the increase in stock prices), record was 66.1% June 5th), 17.4% in bonds (-0.1% w/w, 17.2% June 5th was lowest since Mar ‘22), while cash edged back to 9.6% the joint record low (hit now five times this year).

Turning to gamma:

BoA saw gamma as of Thursday’s close having built to $5.1B, the 59th one-year percentile from just $1.8B the prior week as it pushed right through the “hump” and is now on the verge of pushing into negative gamma on the upside. That means that the potential is there for rallies to accelerate to the upside, while declines will run into a gamma “cushion” which should incrementally slow them although we saw how the SPX ran right through that cushion to the upside last week:

SPX hedger gamma whipsawed amid elevated volumes as spot rose with vol early in the week, defying the typical negative spot-vol relationship.

Hedger gamma nevertheless ended 6-Aug at $5.1bn (59th%ile in last year), as flow net sold gamma in non-0DTE expiries later in the week.

However, hedger positioning as of 6-Aug is net short ~22k contracts between 7750 - 7900, potentially sending gamma lower if the spot up / vol up dynamic and 0DTE upside demand persist.

Tier1Alpha’s update was also as of Thursday night and they also see gamma solidly in positive territory, although they see gamma as building on a rally (vs turning negative like BofA). Like BofA though they don’t see it falling negative on the downside until the 7,540 area.

SPX is set to finish the week in a positive gamma environment, meaning the conditions for lower volatility remain in place. The last 2 days of price action have been a textbook example of positive gamma vol suppression, with Wednesday's intraday range measuring 0.95%, followed by just 0.58% yesterday.

Turning to buybacks, we are now almost to the fully open buyback window with now around 80% of discretionary buybacks by index weight (discretionary buybacks represent ~30% of all buybacks) for S&P 500 companies active this week according to Citadel’s Rubner. With the reporting season slowing down appreciably by SPX market cap, that will slowly grind higher over the next month.

While BofA says buybacks “slightly picked up last week” but still are flat y/y on a 4-week average basis from +19% the prior week. But they are “below the historical avg. for Week 3 of earnings season when normalized by mkt. cap.”

YTD they say annualized buybacks are “slightly below full-year ‘25 levels and below ‘24 records, but above 2016-23 levels,” and as a% of market cap are the least since late 2023 (on a rolling 52-week basis).

Although offsetting the return of buybacks, Goldman notes that equity issuance has also been significant, with US corporates raising a record amount of equity in Q2 through IPOs, follow-ons, converts, and SPACs.

Goldman: US corporates raised $252 billion of equity in Q2 through IPOs, follow-ons, converts, and SPACs, eclipsing the previous quarterly record of $234 billion set in Q1 2021.

Follow-on offerings accounted for $70 billion of the Q2 issuance volume and have totaled $105 billion YTD through July, excluding non-US companies, ADRs, and offerings smaller than $25 million. This represents the largest volume of follow-on issuance at this point in the calendar year since 2021.

Sentiment

Sentiment was mixed this week but mostly moved in a more bullish direction:

American Association of Individual Investors (AAII) sees bulls edge higher for a second week but not yet above the level of the bears:

AAII bulls (those who see higher stock prices in 6 mths, blue line) up to 37.0% from 31.0% the prior week (and from 29.6% the week before that, the least since September), but still down from 44.9% three weeks ago and remaining just below the long-term historic average of 37.5% for a third week.

Bulls still remained below the level of the bears (who see lower stock prices in 6 mths, red line) for the 18th week in the last 23 even as the bears edged down to 38.0% from 42.1%. Bears also remain above the long-term average of 31.0% for a 25th straight week (and they’ve only been below it 9 weeks since Dec 12, 2024).

The Neutral camp (yellow line) came in at 25.0% down from 26.9% the prior week and 28.1% the week before that, a three-month high. It remains under the long-run average of 31.5% and has been over that only twice since July 2024.

But Goldman’s US Equity Sentiment Indicator*, eased back after jumping higher the prior week, but remaining over the “stretched” threshold of 1.0 at 1.17 down from 1.56 the prior week.

This is since 2009 consistent with a 1-month average return of ~-1% although the positive rate is weak at just over 50%.

*The indicator combines “six weekly and three monthly indicators that span [across the more than 80% of the US equity market that is owned by institutional, retail and foreign investors]. Readings of +1.0 or higher have historically signaled stretched equity positioning. Readings of -1.0 or lower have signaled very light positioning and have historically been a statistically significant signal for subsequent S&P 500 performance”.

The CNN Fear & Greed Index (blue line) up for a third week jumping to 63.7, the highest since mid-May from 42.5, 39.4, and 37.1 the prior three weeks. The indicator thus moves to “Greed” from “Fear” where had been for the most part the past nine weeks.

And we moved from at most one indicator above Neutral the past two months to now four of the seven:

Extreme Greed = market momentum (SPX vs 125-DMA) (from Fear); put/call options (5-day put/call ratio) (from Fear); junk bond demand (vs investment grade)

Greed = safe haven demand (20-day difference in stock/bond returns) (from Neutral)

Neutral = market volatility (VIX & its 50-DMA)

Fear = stock price strength (net new 52-week highs); stock price breadth (McClellan Volume Summation Index) (from Extreme Fear)

Extreme Fear = None

https://www.cnn.com/markets/fear-and-greed

Fear & Greed Index

What emotion is driving the market now?

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It’s useful to look at stock market levels compared to where they’ve been over the past few months. When the S&P 500 is above its moving or rolling average of the prior 125 trading days, that’s a sign of positive momentum. But if the index is below this average, it shows investors are getting skittish. The Fear & Greed Index uses slowing momentum as a signal for Fear and a growing momentum for Greed.

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A few big stocks can skew returns for the market. It’s important to also know how many stocks are doing well versus those that are struggling. This shows the number of stocks on the NYSE at 52-week highs compared to those at 52-week lows. When there are many more highs than lows, that’s a bullish sign and signals Greed.

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The market is made up of thousands of stocks. And on any given day, investors are actively buying and selling them. This measure looks at the amount, or volume, of shares on the NYSE that are rising compared to the number of shares that are falling. A low (or even negative) number is a bearish sign. The Fear & Greed Index uses decreasing trading volume as a signal for Fear.

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Options are contracts that give investors the right to buy or sell stocks, indexes or other financial securities at an agreed upon price and date. Puts are the option to sell while calls are the option to buy. When the ratio of puts to calls is rising, it is usually a sign investors are growing more nervous. A ratio above 1 is considered bearish. The Fear & Greed Index uses a bearish options ratio as a signal for Fear.

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The most well-known measure of market sentiment is the CBOE Volatility Index, or VIX. The VIX measures expected price fluctuations or volatility in the S&P 500 Index options over the next 30 days. The VIX often drops on days when the broader market rallies and soars when stocks plunge. But the key is to look at the VIX over time. It tends to be lower in bull markets and higher when the bears are in control. The Fear & Greed Index uses increasing market volatility as a signal for Fear.

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Stocks are riskier than bonds. But the reward for investing in stocks over the long haul is greater. Still, bonds can outperform stocks over short periods. Safe Haven Demand shows the difference between Treasury bond and stock returns over the past 20 trading days. Bonds do better when investors are scared. The Fear & Greed Index uses increasing safe haven demand as a signal for Fear.

横向滑动查看完整图表

Junk bonds carry a higher risk of default compared to other bonds. Bond yields—or the return you get on investing in a bond—dip when prices go up. If investors crave junk bonds, the yields drop. Likewise, yields rise when people are selling. So a smaller difference (or spread) between yields for junk bonds and safer government bonds is a sign investors are taking on more risk. A wider spread shows more caution. The Fear & Greed Index uses junk bond demand as a signal for Greed.

And BoA’s Bull & Bear Indicator jumped to 9.7, the highest since 2021 (which doesn’t align with prior statements that 9.6 was the joint highest since 2020, but going with the report this week) remaining above its sell signal (8.0) which it crossed back above the week of May 22nd:

“rises to 9.7 from 9.4, highest since 2021, on strong HY inflows, tighter global HY and AT1 risky bond spreads, and stronger global stock index breadth; note "old" Bull & Bear Indicator at 7.8”

Note last week Hartnett had said:

extreme bull market positioning remains headwind for risk assets, as has been case since BofA Bull & Bear Indicator "sell signal" triggered May [22nd] (since when a lot of rotation and a little retreat...healthcare up 9%, banks 8% vs. ACWI -3%, MAGS -8%, SOX -11%, oil -11%, bitcoin -15%); "old" Bull & Bear Indicator at 7.4

[And from three weeks ago]:

BofA Bull & Bear “sell signal” remains in place, extreme bull positioning says markets “toppy”, reduce equity exposure, retreat or rotate much smarter summer tactic for risk assets than reload.

17 “sell signals” since '02, average loss for global stocks over 2-3 months is 2-3% (hit ratio of ~60%), with max drawdowns of 15-20% (caveats always “tops are a process, lows are a moment”, i.e. greed harder to reverse than fear).

While their Sell Side Indicator (SSI, a contrarian sentiment signal that tracks sell side strategists’ average recommended allocation to equities in a balanced fund) "inched up from 56.2% to 56.5% in July, remaining at its highest level since February 2025 despite a mixed month for equities."

The Indicator remains at “Neutral” but only 1ppt away from “Sell” ("5x closer to a 'Sell' signal than a 'Buy'").

"That said, the current reading of 56.5% is still below levels reached in prior market peaks (typically over 59%) and implies a healthy price return of 11% over the next 12 months (the most bullish of our five S&P 500 target models."

"The SSI has been a reliable contrarian indicator – it has been bullish when Wall Street was extremely bearish and vice versa...Historically, when the indicator has been here or higher, next 12-month S&P 500 returns were negative 33% of the time vs. 18% overall since 1985."

And Helene Meisler’s followers remain bullish for a second week, the most in six weeks.

While the Citi panic/euphoria index remains squarely in Euphoria although easing back off the highs. I should note it has had a fairly poor track record over the past couple of years (I will post the details in an upcoming week).

Seasonality

While August is very mixed for seasonality as discussed entering the month, the upcoming week is one that starts weak across markets and all years according to Jeff Hirsch, although there is an interesting inflection scheduled for Thursday (circled).

I’ll also leave up the Fed seasonality information. We are getting towards the end of the “rockier 2-3 month stretch” which has been more favorable for the last three Fed chairs.

And I noted two weeks ago the tendency for equities to be down for the first meeting of a new Fed chair, bounce back over the next couple of weeks, but see a much rockier 2-3 month stretch. Jeff also looks further out (from the start of a new Fed chair which would have been May 22nd for Warsh) and if you exclude Greenspan since 1933 the 6-month and 12-month returns have been pretty good. I’m going to leave this in to see how we track as time goes on.

Rates/Fed

Turning to interest rates, I noted two weeks ago that after thinking that a rate hike this year was a low probability event, the chatter from Fed members, including the new Chair, made me “increasingly convinced that a hike is a real possibility this year, something I thought was unlikely absent a continued push higher in inflation.”

And then last week I said:

That possibility materially escalated after the at best confusing performance by Chair Warsh at the press conference. I have a hard time believing that his goal was to see the long end running higher, but here we are. Questions about the Fed’s credibility are swirling and the bond vigilantes have been reawakened.

So while I think very much that Warsh didn’t intend to raise rates, but use “tough talk” (reiterated commitment to price stability, etc.) in the near term until he could get the results from his hand-picked task forces that would give him proper cover to keep rates on hold until inflation hopefully dials back, the markets may force his hand.

As a reminder as I said a week ago “even if my thinking was correct and the Fed doesn’t raise rates, while it will likely mean a softening of shorter-term rates (which in fairness is where my focus was for the most part), it very likely doesn’t mean the long end will soften as resurgent inflation expectations will offset any softening in fed funds expectations. In fact, it may very well steepen rates, and then those rising inflation expectations may lead to just that forced Fed hike to calm them.”

That seems to be playing out at this point, although it should be mentioned that inflation expectations have only represented about half of the move in nominal rates. The other half has been a continued move in real rates which means a tightening of financial conditions.

And that overall remains the case. Chair Warsh (assuming I’m right that he doesn’t want to raise rates) got some “welcome” (if you can call a weak jobs report “welcome”) relief in the payrolls report as discussed earlier, but as I noted in the Friday update, markets cut expectations and yields only marginally, meaning it will take a lot more than that to take the pressure off for one or more hikes this year.

That makes the August jobs report and the two sets of CPI/PPI reports we’ll get (starting next week) likely the deciding factors (although of course Warsh has the opportunity to “set the table” for the rest of the year with his Jackson Hole speech at the end of the month (though few expect him to do that).

For now we remain in my new ranges established last week: “I still think that 5% on the 10-year and 5.75% on the 30-year represent areas where we will see very strong buying. On the 2-year I think a lot depends on whether the Fed hikes. If they do there’s potentially another ~25 basis points to the upside. If they don’t, I think we’re going lower from here.”

Here’s a link to the Friday update if you want to review where rates and Fed hike expectations currently stand.

FWIW BofA is sticking with their call for three rate hikes this year:

Soft payrolls and participation, with a falling u-rate, are symptomatic of a negative labor supply shock, likely due to changes in immigration policy and demographic headwinds. That said, the weakness in AHEs isn’t consistent with a slowdown in supply. In our view, the wage figure was perhaps the most dovish aspect of today’s data.

Fed officials have argued that i) the labor market is in balance and the payroll slowdown is largely due to supply, and ii) the labor market is not a source of inflationary pressure. Today’s data shouldn’t change these views.

Job growth is averaging 30k in the last 3m (40k private), vs. our estimate of a 20k breakeven pace. And that’s despite unfavorable seasonality in the summer. Wages were certainly very soft, but on the flip side, the u rate is now 0.2pp below the bottom of the range of Jun SEP forecasts for end-’26.

Markets responded to today’s data by pricing out 5bp of cuts by year-end. We agree that the Jul jobs report was a bit dovish on net. But we are sticking with our call that the Fed will hike by 75bp this year, starting in Sep.

The Fed is likely to remain more focused on inflation than labor. The Jul CPI report is a bigger event than today’s jobs numbers.

And the easing in the upward pressure on yields has seen expected 30-day Treasury market volatility (MOVE index) also ease back from the highest since March last week.

In terms of inflation expectations the Fed favorite 5-year, 5-year forward rate (expected inflation for the 5 years starting 5 years from now), eased back a touch to +2.28%, remaining in the range over the past five years.

Wrap-Up

As I wrote last Sunday:

As mentioned Friday and in the Flows section, the deleveraging we have seen puts us in a much better position from a positioning standpoint than we were coming into July, with BofA flipping to a net positive base case for the upcoming week, and DB becoming more constructive as well.

One thing we will need to keep an eye on is long-end yields. As I mentioned Wednesday, “until long-end yields stabilize, it will keep pressure on the ‘elsewhere’ stocks.” Hopefully we see buyers come in next week to at least stabilize rates.

And as I said Monday:

Wouldn’t you know it, but we ticked just about every box. The AI trade, after some early weakness, continued, but we also got many of the “elsewhere” stocks participating as well, helped by yields stabilizing, which pushes us further away from systematic sell levels.

But Wednesday I noted:

Today the AI trade, and broader growth complex for that matter, turned “off again,” and there wasn’t enough support elsewhere to keep things going. The growth rally was quite strong the prior four sessions, so perhaps it was just a breather before it resumed. It could also require a more prolonged consolidation, but I don’t think we’ve gone far enough to really require that. Things haven’t gotten particularly extended, with the Nasdaq-100 RSI just 55, for example, so I’m thinking more a pause that might last through Friday morning, with traders not wanting to get ahead of the Employment Situation report.

And that “pause that might last through Friday morning” continued Thursday, not helped by unfavorable headlines around Iran, which lifted crude prices and Treasury yields, along with the poor reaction to guidance from SanDisk and Western Digital.

But it turns out the employment report was, in fact, the clearing event traders were waiting for, as an objectively weak report took some heat, though just a little as discussed in the Fed section, out of Fed rate-hike bets and yields. Still, with most bracing for much worse, it was enough to see a resumption of the “AI-plus” trade, which boosted stocks across sectors and led to a solid day and week of gains.

So will the now “on again” AI trade continue? The evidence is there, with momentum building, expected earnings continuing to ratchet higher, and positioning not yet “extreme” according to DB.

And the overall setup remains favorable as well, with systematics biased to buy according to BofA, discretionary and hedge fund positioning light according to DB and Goldman, buybacks almost back to full strength, retail re-engaging, the economy remaining resilient even if pay growth continues to ease — something we’ll need to keep an eye on — and earnings growth spectacular.

Sentiment is not really a tailwind but not yet a headwind — “it takes bulls to have a bull market” — seasonality is not great, and rates are pushing up toward levels that may cause some indigestion, but none of those are yet at levels that I would consider “red flags.”

And as discussed at the top, it appears from the most recent indications that President Trump has no appetite for dialing things up militarily at this point, which means it’s likely things will drag on with little change through the midterms unless or until Iran decides it wants to reopen the Strait.

I had said last Sunday I was becoming more constructive, and that continues into the coming week

BBG’s Jonathan Levin:

The record high for the S&P 500 came after a two-month gap (43 trading days to be exact).... This type of breakout, after a drought of more than 40 days, has happened on 22 other occasions in the past 30 years. The S&P 500 was higher six months and 12 months later in more than 70% of those episodes.

DB: Pullbacks of -5% or more have historically occurred every 3 to 4 months.