Summer doesn't officially begin in the northern hemisphere for almost another month, but summer can be more of a feeling than a specific time on the calendar. I believe that summer is more set off by Memorial Day as this was normally when kids began getting out of school and the ocean starts warming up. This Memorial Day was particularly nice, and the beaches were in perfect form this year. Here is what we at Tower 68 see when it is truly summer at Tower 68:
This time of year, tends to coincide with the "sell in May and go away." Which in the olden days was when kids got out of school and all the traders hightailed it to the Hamptons and took summer off. Whatever the case, summer trading has a different feel to it. It's not that big moves or major reversals cannot happen during this time; after all, there have been notable changes in trend in the past three years at some point in June-July. We also don't necessarily witness everyone sell and go to the beach despite summer's reputation for lackluster gains. However, volumes do typically begin to dry up and the number of "throwaway" sessions increases. These are days when volatility is more muted and nothing really changes. We also tend to get less explosive action in individual stocks, making active trading more frustrating. As a result, many professionals do tend to lighten up or maybe even pack it in completely until the fall. In the end, this has really been one of the most hated rallies I’ve seen in some time. The news is so vile that the expectation of a market increasing seems almost implausible. Yet here we are only 3% off of all-time highs and a full 17% off the lows from early April:
To give a longer-term perspective, notice the most recent market increases since the COVID decline. March of 2020, when the whole world came to a screeching halt market a low that was quickly recovered from. Then in 2022 when the Fed ratcheted up interest rates the fastest in history to burn off the ether of the $7 Trillion dollars that was helicopter dropped on the economy following the shutdown. And most recently the Tariff Tussle decline from February to April of this year:
With earnings season coming to an end and no action expected from the Fed until perhaps the September meeting now, trade / tariff news will likely continue to dictate where the financial markets will go in the next few months. We have enjoyed somewhat of a reprieve from the trade war since early April, with the balance of developments signaling a welcome de-escalation. Yet, the rhetoric from President Trump late last week likely had many saying "here we go again," after he put Europe in the crosshairs as the next trade target before walking back some of that aggression late Sunday afternoon. But as per usual, on Monday morning it was announced that the Europe situation would be given until July 9th to be negotiated. This is what was released on Truth Social by President Trump:
Even though this seemed to precede the weakness on Friday, we do not see this being a sizable negative for the US. Also, remnants of the US sovereign debt downgrade was still looming over the bond market which pushed rates very slightly higher. Since this seems to be the only thing being a negative to the stock market's recovery, going into a holiday weekend this was plenty of fodder for profit taking. Institutions around the world seemed to have all agreed with this and were counting on a retest of the April lows as they were shorting US stocks and running to other markets. In BofA’s Fund Manager survey, it has recently been seen that large amounts were pulled from US markets and added to the Eurozone.
We expect this to have little impact on yields in the longer term as yields continue to stay in a tight range. There is no “surprise” here as Moody’s is citing facts we already know, the sizable US deficit. And we doubt any major fixed income manager is surprised. There is simply no incremental information here. Besides a bad headline, I just don’t see how this changes anything for the US debt picture, nor what the White House plans. So, I am inclined to view this as a non-event. These were the points that entered my mind as reasons to have considered otherwise.
Corporate cost of debt will be largely unchanged- this is evidenced by the declining spread in interest rates between high yield debt and US Treasury debt. If there was a recession, high-yield spreads should be rising to 600bp wide or higher and instead are rallying hard, down to 359bp wide now.
Corporate EPS visibility is largely unchanged- now that we are close to being done with first quarter earnings, both revenues and earnings surpassed Bloomberg analysts estimates, and future earnings have not been ratcheted lower.
Demand by consumers has been largely unchanged- measures of consumption, even in the face of inventory hiccups due to impending tariffs, have not changed, even though in many cases prices have already been raised preemptively.
Bears will want stocks to fall…-for those that have missed this V-bottom recovery, sitting with dry powder has not been a good decision. These bears almost welcomed the comments about spiking tariffs to the EU, but once again, these fears were tempered by the Trump tweet above.
As I stated last week, we believe pullbacks should remain shallow. Our conversations with clients continue to show many have remained defensive/underinvested since April lows. I believe that paying attention to the price action of the global equity markets and currency stability has kept us invested, whereas the media has been unwavering in expounding on the supposed negatives of the tariff issue and other politically charged differences by the Trump administration. Now, many are looking to increase exposure to stocks. These are 5 reasons again many investors got caught flat footed:
- many believed recession coming = sell USA equities
- many saw Supply chain hit = short US cyclicals & small-caps
- many forced to sell due to VIX surge = institutions forced to de-risk
- many saw End of “US exceptionalism” = sell USA, buy Europe
Now that we have seen how equities both here in the US and abroad have reacted after hitting their beginning of the year highs in February, we have a fairly small viewing window into what has happened since February and how companies have reacted. It is appearing that after currencies, interest rates, and stocks have shaken off the decline, the markets are now appearing a bit more resilient to changes.
As for why stocks are in better shape now, versus Feb 2025. Consider the following:
We have Visibility on tariff = risks far lower. And 2026 has incrementally better visibility. Moreover, US companies “battle tested” having survived the 5th major stress test:
COVID (2020)
Bull-whip supply chain shock (2021)
Inflation surge (2022)
Fastest rate hike in history (2022)
Tariff is latest gauntlet
With these 5 tests, we would argue that equity risk should be falling, and thus, should support rising P/E. That is, P/E should be rising into the year-end, not falling. Yet, sentiment shockingly cautious.
Bottom line, as I’ve stated above, P/E should be rising into year-end 2025 and could mean new highs in the markets. According to Thomas Lee of FundStrat, "In other words, our year-end target of S&P 500 6,600 remains intact."
Interest rates will remain front of mind for the market and are obviously tied in with all the trade noise. For all the DOGE talk of cutting government waste by a trillion dollars and improving the fiscal position of the United States, the early returns have been more mixed. Now, the administration is attempting to pass their "big, beautiful bill" which, if some projections are anywhere close to being accurate, might see the deficit expand by trillions of dollars over the next several years. This fear is why the recent credit downgrade by Moody's received so much attention, even if it didn't really change much of anything. Outside of a true "black swan" (which by definition is unpredictable), a sharp rise in interest rates is perhaps the biggest danger for the stock market, especially if combined with potentially slower growth or even a sustained contraction.
For now, such concerns do appear premature. As I always try to stress, I make decisions based on the message of the market. That message was resoundingly negative just a couple of months ago, necessitating a more defensive posture. Technical conditions have drastically improved since then, however, and I am willing to give the market the benefit of the doubt as long as not too much is given back and the support regions I want to see hold do so. With the market becoming overbought recently and the summer trading period beginning right around now, it wouldn't surprise me to see more range bound back-and-forth until closer to the fall when things often pick back up.
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