Mixed Vibes to End the Summer
For Institutional Investors: Overall positioning in US equity futures got a bit more elevated after last week’s update but remains below peak levels. On some calculations, Nasdaq 100 futures positioning is starting to look stretched.
For Retail Investors: Net bullishness on the AAII survey has deteriorated sharply in August. While this is a bullish longer-term signal for the S&P 500, this deterioration is reminiscent of the move lower seen in this survey in 1Q25.
For Small Businesses: Optimism in the NFIB survey has moved up slightly, but so has uncertainty. Views on the economy, employment, and capex improved, but the latter two remained quite weak.
And for Consumers: Sentiment in the University of Michigan survey fell slightly in the August preliminary reading. We watch this survey closely as it’s done a decent job of tracking yr/yr S&P 500 and R2000 performance since COVID, highlighting the importance of the “vibes” to equity prices. Interestingly, deterioration was seen for all three of the major income brackets.
Wrapping up with Our Bottom Line on the Broader US Equity Market: We Are Still Nervous About the Fall
We continue to think the summer rally in the S&P 500 has generally made sense from a sentiment perspective, but is also starting to run out of room from that angle.
Meanwhile, our valuation modeling (which projects a year-end P/E for the S&P 500 based on inflation and interest rate assumptions and data back to 1962) also suggests that current pricing in the S&P 500 reflects a far more benign inflation and interest rate environment than the one anticipated by the economics community at large.
We continue to feel neutral, though not bearish on US equities. The earnings dynamics that have supported the recent rise in the S&P 500 have nevertheless exacerbated some risks, as forward P/Es are close to recent peaks for the S&P 500 on a market cap weighted basis, an equal weighted measure of the top 10 market cap names in the index, and the Nasdaq 100.
Mindful of this valuation pressure, along with the tendency of September and October to be tough months for S&P 500 performance in recent years, and the sudden deterioration in AAII net bullishness, we remain on guard for choppy conditions in the balance of the year.
In terms of the broader macro, S&P 500 company commentary in 2Q25 reporting season has also kept us in the camp that the real test from tariffs from a US corporate profitability, inflation/cost pressure, and demand perspective is coming up in 3Q/4Q.
