Research.LeutholdGroup

We’re intrigued that Industrials was the first broad sector to eclipse its pre-correction high, and is still the only one to accomplished that. A market technician might argue that the divergent strength in such an economically sensitive segment is a bullish portent for the economy and stock market—but history doesn’t support that view.

Since the low in Oct. 2022, SPX is up 66%—typical for a bull market of this age; however, the broad-market stampede distinguishing a youthful bull never happened. Yet, those four years of futility were not in vain—the valuation profile for the average stock has improved markedly.

There have been wild gyrations in the S&P 500 Cyclical/Defensive Ratio over the last year against a backdrop of historically high Cyclical valuation premiums. In other words, there’s no recession bet priced into the equity segments that should most reflect it.

Net income soared almost 24%, with each step in our earnings growth waterfall registering in the green. Pretax margin expansion contributed 9.2%; however, this last step of the waterfall is always influenced by unusual items—and Q1 saw an abnormally positive impact from lower write-offs.

Growth quickly U-turned and led the market higher over the last two months, while low volatility stocks have been discarded. Momentum has weathered the volatility well so far—especially within small caps.

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The S&P 500’s estimated bottom-up operating EPS for Q1 lost altitude during the second month of reporting. (Chart 1). That resumes the rounded downslope of estimated EPS erosion for the quarter that seems foreign (though normal) after the resiliency of the 2024 data. The next three quarters of 2025—periods that will be affected by the trade war—continued their post tariff decline. The waning projections still have the index inline for 10% YOY EPS growth. At this point in the game, 5% growth is probably a stretch.

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As tactical investors and market historians, we are intrigued by the long cycles of market leadership, always curious to understand what drives these seismic shifts.  One idea that continually pops up in our studies is the notion that bear markets frequently tend to produce changes in asset class superiority.  This study examines the relative performance of three pairs of major asset classes: small vs. large, value vs. growth, and international vs. domestic.  The historical record seems to corroborate our intuitive thesis that bear markets and asset class leadership rotations are connected, either due to changes in fundamentals or market psychology.

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April’s cooler than expected CPI figures continued the recent trend of soft readings—welcome news to the Fed. Tariff related price spikes were not pervasive in the first few weeks of the shifting trade policy landscape.

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In exploring how cross-asset behavior differs between recessionary and non-recessionary market selloffs, a more striking conclusion emerged: The presence of a Fed put—or the absence there of—looks to be the more powerful force in shaping market dynamics across assets.

While the stock market has reversed about half of its February–April decline, the risk of a self-fulfilling confidence collapse remains elevated. In April, the Conference Board’s Consumer Expectations Index dropped to a level that’s been observed only once outside of a recession (mid-2011).

A Zweig Breadth Thrust (triggered in late April), has historically been a boost for the seasonal market doldrums common from May through October, with stock gains much higher during that period than in the absence of a ZBT. Maybe that explains why the “Sell In May” phenomenon hasn’t received the usual attention this year.

Out of necessity, bear market rallies and the first leg of a new advance look nearly identical; if they didn’t, the game would be too easy. However, the action (or lack of it) within the most economically sensitive groups would seem to support our bearish take. 

Our research shows that weaker equity markets are favorable for active managers, and this quarter’s overall success rate of 57% is consistent with that expectation. Active managers outperformed in six of nine style boxes, led by an excellent 82% win rate for small-blend managers and a 74% success rate in large value.

Today’s disproportionate outflow from gold miners even as physical gold continues to attract new money, is the proverbial “canary in the mine” that serves as a warning of looming trouble. When the miners are bleeding assets, investors may wish to take precautions against the impending risk of lower gold prices.

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The S&P 500’s estimated bottom-up operating EPS nosed slightly higher during the first month of Q1 reporting. This is a welcome development following the steeper-than-usual decline over the past six months. Projections for the next three quarters of 2025 weren't as fortunate in April, as they all experienced a noticeably steep leg down of around 3%. The full-year 2025 operating EPS estimate for the index now sits at $260.72, down a conspicuous 4% since the beginning of the year.

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The latest CPI report came in softer than consensus. The market ignored it. We expect a stagflationary scenario over the near term, but the longer term outlook has tilted materially toward a recession.

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This cycle’s earnings performance has been exceptional. If EPS were to top out today, the peak-to-peak annualized performance from the last cycle high will have been the strongest among six cycles since the early 1970s. Nonetheless, nominal growth in EPS has been boosted by elevated inflation, which has supplied almost one-half of the last five years’ growth rate.

It’s worth considering that “this time” is not different. In fact, this time and may well be the same as it ever was, and the recent stock market collapse could morph into a perfectly normal cyclical bear market. Based on the average loss of the last 13 (non-recessionary) bear markets, SPX could drop to 4,153. 

The stock market declines of April 3rd and 4th were a mass liquidation with no distinguishing between Growth or Value. Still, there are signs that a rotation from the former to the latter is underway. And keep in mind that the most reliable catalyst for a transition in leadership is a bear market.

The risk is now extremely high that the breakdown in confidence will become self-fulfilling. The near 30-point collapse in Consumer Expectations from the post-election high could translate into a reduction in real-GDP growth of more than two percentage points over the next year.

The stock market losses in 2025 have materialized so rapidly that many investors might feel trapped, hoping for a bounce that provides better exit prices. The challenge may be that an imminent bounce and the “new narrative” to support it will seem so compelling that the urge to exit may dissipate.

A synopsis of ten historical bubbles, with price charts detailing the scope and duration of each, beginning prior to the onset of the hysteria through the aftermath of the bursting of the bubble. At the end of these cycles, the asset typically returns to the base trend in place before the insanity took hold. These quick anecdotes may be of particular interest to those whose tenure as professional investors has not yet reached the quarter-century mark.

March marked the second consecutive month of historically poor growth performance, capping the worst back-to-back stretch since the global financial crisis. While low volatility and value surged, growth and momentum were hit hard—raising big questions about how much downside remains and whether safety now comes at too steep a price.

Uncertainty surrounding Trump’s second term and the risk of escalating tariffs have shifted market focus from inflation to growth, raising fresh concerns about a potential recession. Our updated Recession Dashboard shows a delicate balance, with risk now slightly above 50%—driven largely by weakness in equities and full-time employment. While some indicators have improved, the market remains the most important signal to watch. A sharp selloff could tip the economy from slowdown into recession territory.

S&P 500 performance turned negative in the first quarter of 2025 and factor returns responded as expected. Defensive factors including Low Volatility and dividend-focused styles produced positive returns, and Value managed to eke out a tiny gain.

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Extended bull markets are the primary attraction of equity investing and play an integral role in generating long-term returns.  However, investors must take heed when psychological excesses turn a garden variety bull market into mania-induced price chasing.  Instead of reaping the customary gains offered up by a typical bull, the risk and reward tradeoffs become exponentially larger when exuberance overpowers prudence.  Recognizing the difference between a bull market and a bubble is critical for building a respectable long-term track record.   There are subjective attributes common to most manic equity markets, and although these signposts are not mechanical or quantitative, taken together they tell a coherent story.

With yesterday commemorating the 25th anniversary of the S&P 500 Y2K peak, it’s worth evaluating the long-term results of the unlucky purchases of U.S. equities occurring at that time. Of course, it’s doubtful that many investors decided to dump their money-market funds and go “all in” on stocks that day. Instead, think of this analysis as a review of how one’s dutiful, monthly 401(k) contribution for March 2000 has likely performed over the subsequent 25 years.

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This essay takes a broader view of Manias, Bubbles, Panics, and Crashes by expanding on these terms, considering the benefits of studying stock market bubbles, and looking for commonalities that mark each phase of a euphoric price cycle.  The most practical reason to study bubbles and crashes is the simple fact that they appear far more often than one might expect. Rational investors may be inclined to dismiss the periodic appearance of bubble conditions as just so much noise and frivolity, leaving us to focus on real world issues like the economy, profits, and expected returns. However, we believe the impact of manias and crashes on investment performance over an entire career is significant to the point of being decisive, and that is the most compelling reason to study the history of financial manias.

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