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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 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.

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• 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.

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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.

Our hypothesis is that true active managers are more diversified than their style box indices and when one style has a prodigious quarter, active portfolios of that variety will surely lag. Q2’s low success rate for actively-managed growth portfolios is exactly what we expect in such a stylistically lopsided period.

These days, the rate of inflation is a much-discussed topic, as it hovers near the threshold that would allow the Fed to begin cutting interest rates. The CPI’s latest reading of 2.9% is down significantly from pandemic levels, but not quite low enough to claim victory in achieving the Fed’s 2% target.

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The S&P 500’s Q2 estimated bottom-up operating EPS shot 2% higher after the first month of reporting. This recovery effectively negates some of the earnings markdown associated with trade uncertainty in the months leading up to this reporting season. The EPS snail trails for the coming three quarters also leveled out or have even turned higher.

And just like that, we’re thrust back into the good ‘ole days where Roaring Kitty was a household name and SwaggyStocks.com was one of our bookmarks in Internet Explorer (RIP). Highly-shorted stocks are back in vogue among the retail crowd. Those virtuous crusaders—or perhaps compulsive gamblers—brave or stupid enough to crowd into names with almost 50% of shares sold short have returned for another round of “sticking it” to the short-sellers*.

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The relative valuation across major themes can be highly informative of investor sentiment and economic expectations. July’s Green Book observation of the unusually high valuations of cyclicals vs. defensives is suggestive, indicating a positive outlook on the business cycle and hinting at a risk-on mentality. Periods when the reverse is true would reflect concerns of an economic slowdown and a desire to play it safe when it comes to equity risk exposure.  Whether one is a portfolio manager looking to play the momentum in cyclicals or a relative value opportunity in defensives, it is worthwhile to keep an eye on this telling relationship.

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• The latest CPI numbers came in slightly below consensus again.
• Our Inflation Scorecard saw a few signal changes but maintained a modest disinflationary reading.
• The demand-pull side has started to show more inflationary pressure.

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“Sell In May” has been better advice historically than random chance suggests. Still, that seasonal pattern has so far been “Trumped” this year, with SPX +12% since late-Apr. Technicians tend to view new market highs as bullish, but that’s not always the case. The NYSE Daily A/D Line provides a clue as to whether the mid-year strength is apt to persist.

Housing activity remains at very depressed levels, with 30-year mortgage rates near 7% keeping those with low-rate mortgages frozen in place, and those wishing to get into a home are frozen out. Qualifying income to buy a median-priced home is almost $105,000—up 122% from Feb-2020.

On the whole, the probability of an imminent recession has declined since our last update in April and now stands below 50%. Only two signals changed in this update, the most significant being the S&P 500, which improved from yellow to green.

Economic resilience that prompted the Fed’s pause is consistent with past cases. Equities and bonds have largely followed historical patterns. The exceptions—gold’s outsized return and the dollar’s weakness—highlight the unique risks introduced by the current political environment.

The risk-on rally since April produced a complete flip in factor performance vs. Q1. The year began with Low Volatility and Dividend factors leading the pack, posting positive returns even as the S&P 500 lost 4%. Q2 performance has High Beta, Momentum, and Growth far outpacing SPX’s nearly 11% gain.

Those who follow an investment approach embracing thematic groups, sectors, or industries will enjoy superior results if they construct a universe using narrower baskets. Our GSS process assigns stocks into well over 100 themes, offering the advantages of wider opportunity sets and greater diversification.

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Price momentum is one of the essential factors in a quantitative investor’s toolbox, consistently demonstrating its effectiveness across different asset classes and multiple market cycles.  The dimension of periodicity indicates that time frame is a key determinant of Mo’s potential. Shorter time frames exhibit a reversal pattern, however 9- and 12-month windows show nicely positive results.  Furthermore, Momentum's success at the stock level translates into excellent returns when companies are grouped into sectors and industries. Our research indicates that Mo is at its best when industries are more narrowly defined rather than being applied at the sector level.

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Read the latest MTI commentary.

The latest CPI report came in softer than consensus. The impact of tariffs is not there yet. Our Inflation Scorecard maintained a modest disinflationary reading (43) this month.

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