Read this week's Major Trend. 

There is consistent evidence that bank stocks behave like macro proxies. Both domestically and in other major economies across the globe, there is a strong and steady link between lending conditions and subsequent economic activity.

Q3 was characterized by two traits that typically favor a passive investment process while creating a drag for active portfolios: Convincing leadership of growth stocks and high absolute returns.

The return landscape has been good for a passive “own-everything” asset allocation policy. Our hypothetical “All Asset No Authority” (AANA) portfolio has seen a few more cylinders firing this year. In fact, YTD, none of AANA’s asset class constituents have negative performance.

As AI-growth heavyweights keep pushing the S&P 500 to new all-time highs, value investors have been completely left out. Usually, buying high-quality value names is the best defense, but that has been a disaster in the current cycle. Junky value is substantially outpacing quality value.

November ushers in a tropical breeze for risk-seeking investors. The six-month stretch from November through April has proven to be an exceptionally profitable time, particularly for those exposed to factors, such as size, value, and volatility.

S&P 500 performance is being propelled by its disproportionate concentration in the Magnificent Seven stocks, while the Russell 2000’s leadership is powered by unprofitable small caps, thereby resulting in breadth of quantity, not quality.

S&P 500 Q3 estimated bottom-up operating EPS shot 5% higher with results for the first month of reporting (Chart 1). This pop is much more impressive than the 2% gain we saw in July (after the first month of reporting for Q2). The current Q3 estimate of $70.27 is about a percent better than the last reading prior to the “Liberation Day” announcement. The tariff-induced bottom-line reckoning feared this spring has yet to materialize. We’d surmise that the still L-shaped EPS snail-trail for Q4 will bounce higher, too, come January.

Read this week's MTI

The latest CPI numbers were slightly softer than consensus. The Fed had to pause its easing cycle when the CPI returned to 3% in January this year. But not this time. Our Inflation Scorecard indicates a modest disinflationary reading.

From its December 1989 inception through the end of 2022, the Dividend Aristocrats (DA) Index handily outperformed the S&P 500, posting an 11.8% annualized return compared to the parent index’s 9.7% gain. However, the AI mania driving the market today has erased much of that 33-year advantage, and Dividend Aristocrats rank as the worst performing style since the beginning of 2023. We were intrigued by this turnabout and what it means for investing in dividend growers going forward.

Read this week's Major Trend. 

Read this week's Major Trend. 

Interest-rate cycles driven by Fed-policy changes can be the most powerful determinants of economic and market conditions. Decisions to raise or lower the fed funds rate impact sectors and styles differently; September’s rate cut prompted us to review equity winners and losers from prior episodes.

While our traditional breadth and leadership studies advise the market is quite healthy, we’ve lately observed some broader disagreement from long-term leaders, including the Magnificent Seven—of which only two have made new 52-week highs over the last month.

Officially, as of September 30th, five of our eight bellwethers have confirmed the latest S&P 500 high. That’s typically good enough for the boat to stay afloat—and looks healthier than at February’s high.

The stock rally and associated wealth effect make an imminent recession less likely (data that corroborates our Up/Down Earnings figures). Yet, things can change quickly when so much is riding on the market. Employment is still the biggest threat.

While the U.S. is the center of attention for global investors, Chinese stocks have quietly outperformed. At first glance, it might be tempting to give credit to the surge in Chinese Tech names. In reality, the upswing is much broader and began long before the Alibaba rally.

In contrast to its solid showing through the mega-cap-growth boom of recent years, Quality was a Q3 outlier, trailing SPX by over 5%. Part of the cause is sector allocation, as defensive stocks are badly out of favor. The other force was stock selection—for example, the absence of NVDA.

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Levered ETFs have been on the scene for almost 20 years, but their popularity has exploded during the post-pandemic bull market led by the tech titans that dominate the Artificial Intelligence evolution.  Two characteristics of levered ETFs suggest to us that this asset class could possibly be a useful barometer of investor sentiment.  First, their exaggerated payouts mean that investors will win big when they are right and lose big when they are wrong, implying a high degree of confidence in their outlook.  Second, with their effectiveness measured in days, these instruments are best used to reflect an outlook that will come to pass in a fairly short time.  These two properties are suggestive of a particular mindset, and our study considers this signaling potential from a number of angles.

Read this week's Major Trend. 

CPI data from August was hottest since January but mostly inline with expectations. The market is looking for three rate cuts in the last three meetings of 2025. Tariff-related price increases are starting to show up but importers seem to be eating at least some of the costs.

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The Up/Down ratio reads 1.52 and is the highest “two-month” tally since the beginning of 2022. Like our “one-month” figure from July’s reports, this observation is just slightly above the study’s 41-year average. Forward earnings for small- and mid-cap indexes are finally coming alive as well.

There are unmistakable parallels between September’s likely Fed rate cut and the initial lowering of rates preceding the GFC. In each case, despite leading inflation gauges still trending up, a housing slump and deteriorating labor market served to justify the move. In 2007, after the Fed cut, measures of real growth failed to respond and inflation, in fact, shot higher.

The Fed has been neither correct nor anticipatory for an extended period of time. Ironically, if a September rate cut were followed by a decline into recession later this year, the Fed may be hailed as both correct and anticipatory—and some semblance of Fed independence could be maintained.

An examination of how large- and small-cap companies allocate cash across three main uses: investment (Capex and R&D), shareholder returns (dividends and buybacks), and M&A. We further evaluate how, over time, the market rewards or penalizes each.

The second quarter of 2025 posted another “all green” earnings waterfall, as each component of our profit breakdown gained ground. Sales growth was a robust 6.9%, paving the way to a 17.6% gain in net income for S&P 500 members

The Magnificent 7 constitutes 34% of the S&P 500 and comprises seven of the eight largest companies in the index. We explore a few of the disguises the market has been wearing during this mega-cap growth era, looking behind the mask at the broad swath of equities hidden by the Mag 7’s dazzling veil.

The S&P 500’s Q2 estimated bottom-up operating EPS has now increased 4% since the start of reporting. This V-shaped recovery has erased the discount in earnings seen after “Liberation Day”; EPS estimates now stand even with those at the end of March. Despite the higher revisions for the current quarter, projections for the final two quarters of 2025 have only leveled off from their tariff-scare down-leg.

Read this week's Major Trend. 

• Read the latest MTI update

Read the latest MTI commentary.

· The latest CPI numbers were in line with consensus. Our Inflation Scorecard maintained a modest disinflationary reading. There are signs that demand-pull indicators will add to inflationary pressure over the coming months.

Read this week's update

The U.S. dollar has seen some interesting dynamics this year, so we’ve updated our U.S. Dollar Monitor. Currently, the model implies a higher likelihood of dollar strength, or at least a decent rebound over the next few months.

The Cyclical/Defensive Relative Valuation Ratio jumped to yet another record in July, with Cyclicals commanding a valuation premium of 23%. Put differently, investors have a very strong implicit bet that the economic expansion will continue.

Given the prevailing conditions at the beginning of this bull market, the S&P 500 has been an overachiever, though the same can’t be said of the broader market. This translates to an opportunity for active equity managers that nearly matches conditions in Y2K—and at a time when the active manager pool is now dwindling.

As a testament to the severity of the 2000-2002 Tech Wreck, performance of recent years’ laggards, like the Equal-Weighted S&P 500, S&P MidCap 400, and S&P SmallCap 600 are still well ahead of large-cap Growth on a 25-year basis.