Despite last week’s hot US PPI print posting the sharpest rise over the last few months, the main US equity indices reached fresh new all-time highs, posting their sixth positive week out of the past eight for both the SPY and the QQQ. The market expects that the Fed will likely pivot, as inflation pressures, appear to be less severe than initially feared while the labor-market is showing signs of cooling. Market-implied odds for a September cut have reached 82%, with a total of 50bps cut priced in for the remainder of the year.
With the 2Q earnings approaching its end, our expectations of another strong earnings beat have materialised. 92% of the SP500 has now reported, posting an aggregate 11.3% yoy earnings growth for Q2, more than double the 4.9% growth expected at the start of the reporting period. Revenue growth for Q2 also continues to be strong at an aggregate +6% compared to 4.2% at the start of the reporting season.
On the back of the impressively strong US earnings season, positioning from systematics has now approached full length in both US and Global equities also supported by ongoing retail engagement and corporate buybacks. Hedge funds have also followed suit in adding length to US equities, with long buys significantly outpacing short sales, after being broadly bearish during the entire 30% run up in the SPY. However Long only institutional players still appear reluctant to add back significant length.
Both the SPY and QQQ are now trading at the upper end of their ascending channel since mid-2022 and we see limited upside from current levels with risks now asymmetric to the downside ahead of the upcoming Fed’s symposium at Jackson Hole. With stock markets at all time high, and still no signs of a significant deterioration in the job markets, we see a very high probability of Powell disappointing the market in terms of rate cuts for the remainder of the year, amidst ongoing inflation uncertainty from tariffs.
In Europe, 2Q earnings growth has reached +4% yoy, with approximately 70% of the Stoxx 600 having reported, but revenues continue to face pressure posting a 2% yoy decline. Both the STOXX 600 and the Euro Stoxx 50 are trading at range highs and we expect the indices to likely resolve to the upside on a potential peace agreement brokered by the Trump administration likely causing a broader rotation out of US stocks into European names similar to what we saw in Q1, given rich US valuations and Powel likely disappointing. We reiterate our positions in Novartis and Carrefour both trading at range highs and poised for a breakout.