July 2025 edition

A bull in a china shop

If you were off the grid for the past six months and just returned, it might be hard to reconcile recent headlines with the current market level. Despite a carousel of concerns—tariffs, geopolitical tensions, policy uncertainty—the market has powered through with a V-shaped recovery, reclaiming all-time highs in one of the fastest rebounds on record. It’s been a year that began with our annual outlook “A bull in a china shop,” and while things did break along the way, the bull kept charging.

History suggests that such strong rebounds tend to be followed by further gains over the next year. Thus, we would stick with the primary uptrend. Still, the path forward is unlikely to be smooth. The bar for positive surprises has risen, and the second half of the year brings its own set of questions.

Weight of the evidence

We continue to lean on our weight-of-the-evidence framework—an approach that blends historical context, macro/business cycle analysis, fundamentals, and market signals.

Historical context – Sharp rebound a positive signal

• Historically, when the S&P 500 rallied more than 20% in two months or less—as it just did—it has been higher a year later in all 10 prior instances, with an average gain of 24%. That said, given today’s elevated starting valuations, our work indicates gains are still likely, but more modest than history suggests.

Macro / business cycle analysis – Crosscurrents abound

• The U.S. economy is still expected to muddle through. Our base case for economic growth remains ~1.3%. The labor market is cooling but not collapsing. Consumer activity—while choppy—has held up.
• Policy Watch: Will the Federal Reserve (Fed) cut interest rates again? We believe so—likely twice before year-end. Will the tax bill pass? In our view, yes. While the bill may not significantly boost growth on its own, it could bring much-needed clarity—especially if accompanied by a more defined tariff strategy and monetary easing. This combination could help revive market sentiment. In fact, we’re already seeing early signs of renewed confidence in the M&A and IPO markets
• Tariffs: Markets have moved in near lockstep with policy uncertainty this year—a double-edged sword. The de-escalation in tariffs has helped ease recession fears, but the lack of long-term clarity remains a risk. Any renewed escalation could quickly shift sentiment.

Fundamentals – Valuations rich, but earnings improving

• The S&P 500 is back at cycle-high valuations of 22x forward earnings. Though the “average” stock—as measured by the equal weighted S&P 500 index—is trading closer to historical norms.
• Forward earnings estimates for the S&P 500 have strengthened, led by technology and communication services. However, with valuations still elevated, sustained upside will likely depend on continued earnings growth—our base case—and ongoing economic resilience.

Market signals – Trends positive, with mixed participation

• After a seven-month trading range—aside from brief downside overshoots—the S&P 500 recently broke out to the upside, marking a constructive technical shift. Over 80% of global markets now trade above their 50-day moving averages, signaling broad-based resilience.
• Only four sectors—technology, communication services, industrials, and financials—have returned to all-time highs. Meanwhile, small caps, mid caps, and the equal-weighted S&P 500 remain below their peaks. That’s less encouraging in terms of participation.
• The key question for the second half is whether we see broadening. To do so, we’ll likely need a pickup in the economy and earnings. We are open to that possibility, but we’ll wait for confirmation of improved trends before adjusting our stance. In the meantime, we continue to favor large-cap equities with a growth tilt.
• Sentiment: Investor optimism has rebounded sharply. Equity exposure among newsletter writers is near multi-year highs, suggesting a higher bar for upside surprises.

Positioning entering the 2nd half

• We are currently positioned with a growth bias and favor large caps over small caps. Our sector preferences include technology, communication services, and industrials—segments underpinned by robust earnings momentum, favorable technicals, and meaningful exposure to the ongoing artificial intelligence (AI) growth story.
• International Developed Markets (IDM): We recently raised IDM to neutral, reflecting improved technicals, supportive monetary and fiscal policies, strength in European financials, and its potential role as a hedge against the U.S. dollar.
• While performance in 2025 has improved, it’s largely playing catchup following extreme underperformance last year. Over the long term, IDM remains far behind the S&P 500—up just 14% since 2007 compared to a 300% gain for the U.S., suggesting upside remains.
• We remain focused on higher-quality bonds. While still see reasons to hold invest grade bonds, the opportunity has lessened as spreads have since tightened sharply. Municipal bonds present a more attractive opportunity, as supply-demand dynamics should improve into summer.
• Alternatives: Should help qualified investors navigate market complexity and embrace a wider range of outcomes—especially amid diverging global policy paths.
• Gold: We still see value in holding a position as a portfolio diversifier given heightened geopolitical risks, continued central bank buying, and fiscal deficit concerns. Notably, in the first half of 2025, gold gained on nearly 60% of days when both the S&P 500 and core U.S. bonds declined—underscoring its role as a hedge during broad market stress.

Final thoughts

The market has climbed a wall of worry, but the carousel of concerns hasn’t stopped spinning. From trade policy to election dynamics, the second half of 2025 will likely test investor conviction—but also provide tactical opportunities.

Let’s not forget—the bull is still in the china shop. But as we enter the second half of the year, perhaps there are fewer fragile pieces left to break. Encouragingly, the underlying market trend remains positive. We would stick with the message from our framework that remains clear: stay grounded, stay balanced, and stay open-minded.