Model : "disclaimer"
Position : "left"
Hello. This is Keith Lerner with the most recent monthly market update. As we, closed last month, we discussed that we thought in the second half, we would see more upside in the market, but also some more broken glass. And we're seeing a little bit of that early into August. But upfront, our three main points are this. One, the equity market uptrend remains intact, but likely needs a digestion or consolidation phase after such a big run up.
The recent bout of tariff news and softening labor market comes at a time when we're in a more of a historically weak seasonal period as well. On market pullbacks, we would still be looking for opportunities in US large caps and more of the growth styles such as technology and communication services. So let's zoom out a bit and and hopefully provide some perspective. The big picture, as I mentioned, is this market has been ripping since April, right, up twenty eight percent.
It's baking in a lot of good news on a short term basis, and expectations are higher. So it just means it's a bit more vulnerable if you don't get that good news, and we're seeing that again a little bit in in August. The big picture though also is, historically, we tend to get three or more pullbacks a year of five percent. They always come with bad news, but we still think the underlying trend is positive.
And I would also just remind folks of the April driven tariff, sell off that also eventually rebounded. We think over the summer months, it will be a pretty choppy period, maybe a little bit more downside. We also, our work suggests we are likely also have some upside before year end. So as far as positioning at this point, our big picture view is is to be more balanced, not overly bullish or overly bearish, more in line with long term equity targets as an example.
As I already mentioned, we're still focused on, US large caps and more of the growth style. Mid caps and small caps are cheap, but the relative price trends continue to deteriorate. And in this period of uncertainty, are less likely to outperform. Moving to the fixed income side, we're still focused on that high quality area, and we're seeing we're seeing those actually hold up somewhat better here recently.
And then also more from a portfolio diversification standpoint, modest positions in gold still make a lot of sense, in in our view. So the bottom line this month is the underlying equity market trend remains intact. It deserves the benefit of the doubt, but we do think we're gonna be in more of this digestion pause period.
And, again, that's that's normal. As we have this consolidation for those folks underweight equities, we'll be more focused on the US large caps and the growth style. And, of course, you know, we will keep you abreast as we get more information and our as our view evolves, and we'll look forward to connecting with you next month.
Still charging, but the floor’s getting crowded
We noted last month that the bull was still charging through the china shop, and we expected more broken glass along the way. This continues to be our expectation.
The first half of the year was anything but smooth. Markets endured an 18.9% setback before staging one of the sharpest rebounds on record. Since the end of April, however, volatility has evaporated, and equities have climbed steadily without even so much as a 1% daily decline until this past Friday.
That calm had lifted investor sentiment. While that’s understandable given the strength in the market and earnings, it also raises the bar for positive surprises, leaving the market more vulnerable to short-term disappointments.
Still, the bull market deserves the benefit of the doubt. The trend remains constructive, supported by resilient fundamentals and leadership from growth sectors. Yet, as we enter the seasonally weaker stretch of the year, and after a 28% rally from the April lows, the floor is getting more cluttered—with tariff tensions, softening labor data, and policy uncertainty all in the mix.
Following a V-shaped recovery, expectations are high. The trend remains positive, but choppiness ahead may offer entry points into U.S. large-cap growth, tech, and credit.
Weight of the evidence – Balanced outlook
The recent modest pullback in markets doesn’t change our broader view, but the weight-of-the-evidence reinforces a balanced approach—not overly bullish or bearish—suggesting investors should be more aligned with longer-term target allocations across stocks, bonds, and cash.
Historical analysis – All-time highs tend to be a positive signal, but overdue for a pause
- Historically, when the S&P 500 rallied more than 20% within two months, as it did coming off the April lows, stocks have been higher a year later in all 10 prior instances since 1950.
- Additionally, performance following record highs tends to be solid and in line with typical returns over the next year.
- In both cases, however, the path forward has been punctuated with hiccups along the way. Moreover, the market tends to average three pullbacks of 5%-plus per year, and we haven’t seen such a setback in almost four months.
Thus, we anticipate further consolidation of the recent sharp gains and a reset in sentiment, within the confines of an ongoing bull market.
Business cycle indicators – A shift in tone
Markets have entered August on shakier footing. The reinstatement of “reciprocal” tariffs by the U.S. has reignited trade policy uncertainty, just as the latest payrolls report revealed a cooling labor market. Our base case remains that the U.S. economy is in a muddle-through environment.
However, these developments have pushed the market-implied probability of a September Federal Reserve (Fed) rate cut to just above 80%, up sharply from 40% the day before the employment report. There is growing concern that the Fed may be behind the curve in reducing short-term rates.
Fundamentals – Valuations elevated, but earnings supportive
Valuations remain elevated, with the S&P 500 trading near cycle highs at ~22x forward earnings. However, the “average” stock, as measured by the equal-weighted S&P 500, is trading closer to historical norms, suggesting some dispersion beneath the surface and reflective of the current premium in mega cap growth stocks.
Importantly, forward earnings estimates have continued to improve, led by strength in the technology and communication services sectors. Sustained upside from here will likely depend on continued earnings growth. While the bar for positive surprises has risen, the earnings backdrop remains a key support for the broader trend.
Market Signals – Uptrend intact, but entering a choppier period
Despite the headlines, the S&P 500 remains in a well-defined uptrend. We see initial support in the 6100–6150 range, with stronger footing near 5800–5900. These levels align with key moving averages and prior breakout zones.
Investor sentiment had become stretched, with recession odds (as measured by Polymarket) falling from over 60% in April to just 12% recently. This sharp reversal underscores how much good news had been priced in, and why the market is now reacting to renewed uncertainty. Thus, a choppier near-term period and a cooling of investor sentiment is likely over the near term.
Tactical positioning amid complexity
We maintain a growth-oriented tilt, with a preference for U.S. large caps, where earnings momentum and relative strength remain most compelling. While valuations are elevated, our work suggests the underlying trend still favors secular growth and innovation-driven leadership.
- We currently hold a closer to neutral stance on international developed markets after being more negative over recent years, acknowledging improved technical trends, more supportive fiscal and monetary policy dynamics, and its potential role as a U.S. dollar hedge given a wide range of potential market outcomes.
- In fixed income, we emphasize high-quality bonds and patiently await a better opportunity to add to credit given that current spreads do not appear to be adequately compensating investors to take on added risks.
- We see value in holding modest positions in gold as a portfolio diversifier—particularly valuable in an environment where both equity and bond volatility could reemerge.
- Alternatives should help qualified investors navigate market complexity and embrace a wider range of outcomes amid and likely the ongoing market crosscurrents.
Bottom line – A pause, not a pivot
The equity uptrend still deserves the benefit of the doubt. But after a powerful rally, some digestion is warranted, as is a reset of high investor expectations.
This resembles a classic “two steps forward, one step back” setup. We expect continued choppiness through the next few months, within the confines of an ongoing bull market.
On pullbacks, we would focus on opportunities in U.S. large caps, particularly in growth and technology areas, as well as an improved entry point within credit.
As always, we will continue to follow the weight of the evidence.
Our full report is reserved for clients only. Let’s work together.
A caring advisor can help you uncover opportunities and take on challenges—and provide greater confidence, clarity, simplicity, and direction.