Research.LeutholdGroup

“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.

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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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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.

Developed due to the growing interest in private debt and equity, these vehicles offer a degree of liquidity and transparency within a regulated, standardized fund format. While fees and expenses are lofty versus OEFs and ETFs, interval funds’ relatively high current income may be very appealing to some.

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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Read this week's Major Trend.

Read this week's Major Trend. 

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.

Read this week's MTI update

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.