The most talented runners don’t just walk faster and more fluidly. Recovery time is also reduced. The current bull market phase, which broke out of the block six months ago, has proven to be an elite refresher with a short rest before moving on to the next mile marker. The S&P 500 index fell as much as 2.98% in intraday prices after President Donald Trump re-escalated the U.S.-China trade conflict, almost all of which fell in one day on October 10th. The index then spent nine business days in that one-day range before hitting a new all-time high last Friday, at one point above 6,800, after a non-threatening CPI report removed one possible hurdle to two more rate cuts expected by the Federal Reserve before the end of the year. The main reason the CPI report rose was because it simply passed and next week’s big tech profits became the next known mover, allowing the AI industry’s old favorites to reassert leadership. .SPX 3M Mountain S&P 500, 3 Months Last week, this column suggested that “the ideal scenario for the remainder of the year would be for the recent turmoil to last a bit longer before being seen as a suitable scare, skimming the froth from the speculative and resetting expectations in a way that rebuilds investors’ ability to surprise on the upside.” At this point, there doesn’t seem to be any need for real fear, other than a few days last week when gold, crowded momentum plays, and disingenuous meme stocks liquidated in a somewhat sloppy but ultimately benign rotation. Julien Emanuel, equity strategist at Evercore ISI, argues that gold’s frantic rally and swoon does not require the high-velocity speculative material associated with it to dictate the broader market path: “Gold’s decline was accompanied by declines in other speculative themes, from quantum computing to lithium, just as they were in early 2021, when the peak of meme stocks, SPACs, and unprofitable tech caused temporary instability across markets.” Uranium. But rumors of an end to speculation in 2025 are greatly exaggerated, just as the S&P 500 index rose another 23% in 2021, heading into the capital markets peak a year after the meme stock slump. ” This has been well observed, but the disappearance of the most frothy market themes from their early 2021 peaks was far more damaging than anything seen so far this month. Insatiable Retail Buying And it’s hard to find anything resembling the end of the speculative frenzy. Scott LaVerner, equity trading flow guru at Citadel Securities, on Friday praised the relentless aggressiveness in the activity of somewhat valuation-insensitive retail investors, noting that 22% of trading volume now comes from personal accounts, the highest amount since (yes) February 2021, and that personal accounts have been net longs of stocks in 23 of the past 27 weeks. And really, what can stop such excited and insatiable buying among non-experts in a dynamic movement when the AI hype is being driven by so many adjacent industries and marginal companies, when Robinhood is blurring the line between investing and gambling with its in-app sports prediction contracts, when entire subsectors (rare minerals, quantum computing) are being pushed into the stratosphere at the slightest hint that the Trump administration might acquire a stake? “Are you sure you won’t fail because you have too much equipment?” But despite all the fun and games, the true foundation of company value – real profits – has generally performed well to support high valuations. So far, companies have exceeded expectations about 80% of the time, which is better than normal. Stocks don’t necessarily benefit from that, but they do move the chain toward future earnings growth projections. Of course, the S&P 500’s total return in 2025 is expected to be lower than the consensus forecast at the beginning of the year. The full-year forecast as of December 31st was $274, but it fell to $264 in July and has now risen to $268. This is a 2% decline in a 10-month period when the S&P 500 index is up 15.5%. Yes, the market is more expensive now, but there is always next year. The 2026 consensus is hovering above $304, and this is becoming the denominator in all investors’ valuation assumptions and earnings projections. This is what bull markets do, they postpone their optimism until they are forced to reconsider. Were small swings in popular momentum stocks enough to dampen expectations of enthusiastically receiving good news on tech companies’ earnings? John Flood, head of Americas equity sales and trading at Goldman Sachs, said so in a trading desk note: “This week’s painful decline in momentum… has only added to an already large wall of concern. As a result, sentiment and positioning for the mega-cap tech earnings core are the friendliest I’ve seen to date, barring the next footfault from Magma (Microsoft, Amazon, Google, Meta, Apple).” This week we are preparing (although not expecting) another rally at the supercap tech-led index level. ” Will it rise again at the end of the year? There are several reasons why it’s difficult for bears to find food in years like this, especially as fall progresses. We all know that most years have an upward bias in the last two months of the year, and even more so if the first 10 months are strong. Admittedly, it’s difficult to explain specifically why this year accounts for 20% of the year-end seasonality failures, but it’s worth noting that this year was an anomaly in the seasonality signal. It was supposed to be a good run through April, but by April 8, the S&P had posted a 15% year-to-date drawdown. The chart below from Renaissance Macro Research plots the S&P 500’s daily returns over the next three months, based on decades of market history. Last week, we reached what we believe to be the best entry point for profits over the next three months. However, keep in mind that almost exactly three months ago (late July) would have been the worst time to buy, and the index is up 6% since then. Two weeks ago, the president’s social media rant about raising tariffs on China exposed investors’ collective complacency in shifting attention away from trade policy fluidity. In a way, it makes sense, given that there are incentives all around to make sure things settle into a manageable arrangement. The risk-off reaction, along with some corporate credit disruptions and overbought speculative sectors, temporarily overwhelmed the market’s normal ability to absorb shocks through rotation. If we had to identify another node of complacency, it might be investors’ comfort level with the underlying solidity of the economy. Conventional wisdom sees modest job growth as largely the result of immigration restrictions and demographic trends, divorced from the still-sound GDP tracking model that captures emergent capital investment levels and discretionary spending by the wealthy. That’s a plausible and defensible position. And it’s also true that the overall (unofficial) consumption data and company comments aren’t ringing any alarm bells. Still, the market is no longer sending as emphatic a message about the pace of growth as it was a few weeks ago. Equal-weight consumer discretionary stocks are no longer outperforming. Industrial products are improving, but relative terms have stalled. “A good proxy for the U.S. economic surprise may be the relative performance of the S&P’s cyclical sectors, which have been severely underperforming since October 1st,” said Jim Paulsen, a veteran strategist at Poulsen Perspectives. “During this October turmoil, homebuilders and other key cyclical areas of the market lagged. At the same time, AI trading rose,” said Warren Paiz, founder of ThreeFourteen Research. Accumulated anecdotes may include increased news about corporate layoffs, weaker S&P PMI manufacturing confidence, and mortgage application numbers that are less responsive to lower interest rates. There’s a good chance markets will be eased by AI-induced growth concerns, the Fed’s dovish reorientation, and the expected stimulus effects of a new tax law that expands tax refunds early next year. And perhaps without government data, it can’t continue to be good news for the foreseeable future, given the distortions of the shutdown, and perhaps the Street will consider a mulligan once the data is available. This low-volatility rally since April closely resembles the uneventful bull market throughout 2017. That rise required a sharp acceleration into January 2018, with heightened investor expectations for policy-driven growth, reaching severe excess levels well above the current level before entering a sharp correction. Of course, none of this is enough to stop bulls from questioning for now. But such questions serve as a study guide when the tape goes looking for an excuse to conduct the next test.
