Is the US equity rally really just about AI ????? Or are there cracks forming under the surface? A few things Qi is watching:
1/ Inflation expectations creeping higher ????
- 5y breakevens are back above 2.5%. Real yields falling. Equities still climbing.
- 30y yields back 5%, but credit spreads remain near record tights.
? Equities believe higher costs can be passed to consumers? For how long? Quant Insights risk model shows higher inflation as one of the biggest impediments to risky assets
2/ Tariffs starting to bite ?
- Core goods CPI has turned after quarters of drag.
- 2018/19 playbook says tariffs take 34 months to pass through. This time, inventory front-loading may delay impact.
? Do we hit an air pocket in demand later this year? What gives consumer, margins, hiring? Economic growth is a top driver for risky assets on Qis model
3/ Trumps tariff talk the August 1st deadline ????
? Does the lack of equity market trepidation lower the probability of any pivot?
4/ The high bar for Earnings season ????
- The SP 493 now trades 20x 12mth fwd PE
? To judge by what happened to banks and NFLX last week, the bar is quite high this earnings season. Any signs of margin pressure or softening demand could test investor confidence
5/ Sentiment ????
- In the recent BoA Global Fund Manager Survey investor sentiment was the most bullish since February 2025 and cash levels fell to 3.9% triggering a sell signal
? Whos left to buy?
6/ Seasonality ????
- Worth remembering, history suggests August and September are some of the weakest months for equities
And through the lens of Qis Risk Model? Anxiety likely to build
1/ Multiple expansion has accelerated BUT macros grip on equity risk has not faded to the same extent (???? chart 1)
2/ SP500 return acceleration over the last month has been dominated by idio drivers macro factor momentum is waning (???? chart 2)
