Week of June 29

3Q officially begins. Dont get bearish at the lows.

Recap of last week

Last week we called out the significance of quarter end rebalancing and how that might foreshadow weakness for stocks in the coming week.

I also said I believe we are headed to new highs. I still do. Last week we saw the flows dominate the tape (quarter end rebalancing) and this next week we will see the same thing except with the flow now favoring the bulls. The data is pretty clear.

Next move for markets

Up. Everyone knows that July is a very bullish month for stocks. This is true. Not everyone knows the true extent of it. The next two weeks are the most bullish two weeks for stocks out of the entire year. And its by a landslide. Every year when this time comes around, the question isnt if you go long. The question is why should you not go long. There’s probably a 80%+ chance you make money here going long, on the off chance you lose you have no regrets because the trade was obvious and not really debatable.

Not only the most bullish month of the year, but its by quite a significant margin. The next best month after July’s hefty 1.67% return is December at only 1.28%. Some people can fall into sort of a seasonality trap, as they think it override everything else. There are many factors at play in determining short term market direction. However, this is an extreme outlier in seasonal returns, it takes on more significant than usual. Not only is it the most bullish month, its the most skewed month (bullish or bearish) of the entire year.

But wait theres more. On top of being the most bullish month of the year, in July that excess return is actually even more concentrated in the first two weeks. As you can see, just the first two weeks alone account for a roughly 2.43% average return. For some perspective, the SPX returns about 9% a year on average going back 100 years, so this is quite significant. Whats even more bullish than that, is its a straight line up. There are, in a typical July, no significant dips either in those first two weeks. Of course this is an average over a very large sample size, so you cant read too much into it. But the trend is as clear as can be.

A natural question one might have about this data is what causes such outsized performance, I mean a 98 year sample size is not random. It is two things, one, the start of the 2H of the year and all the associated new inflows and capital deployment. Second, its the start of earnings season. Earnings growth are the biggest driver of stocks, period. We just happen to be in the most robust earnings environment right now, since 2021 when the economy opened back up after the COVID shutdowns. Its common knowledge how strong earnings have been driven by AI investment, with the upcomings earnings growth estimated to come in at around 22%. Here this chart shows multiple years, and you can see what was “normal” earnings growth for a long time, and seeing that juxtaposed with the current years is really quite shocking. These are the largest companies in the entire world. Look how fast they are growing. Furthermore, you look at what SPX did in 2023, 2024, 2025, those were extremely strong years for stocks! And now what we have is an earnings environment where YoY growth has practically DOUBLED.

Id argue 2026 is actually an even better year than it looks, the YoY comps we had in 2021 were quite depressed, both because of COVID and because post COVID we saw a huge inflection upwards of earnings. 2025 was a great year, for 2026 to show such explosive growth using that as a benchmark is really remarkable. There’s been a ton of FUD lately, whether its Iran, or SPCX, or the AI bubble popping 10x a week. In the end explosive earnings growth will keep pressuring the market higher and higher. Dips are mostly buying opportunties until this changes.

There are uneducated people out there who keep screaming about a stock market bubble. A bubble with forward earnings at 20x is laughably stupid. 99% of people just repeat what other people say, they lack the capability to think for themselves. For reference, the 5 year forward PE average is 19.9. The entire rally the last 12 months is 100% explained by earnings growth, there has been zero multiple expansion. You look at MU, or Korea, these are companies/sectors that trade in the neighborhood of 7x forward PE right now. Yes they are cyclical companies, but its hard to argue thats at all euphoric. I dont see euphoria right now, I see fear and apprehension.

As you can see earnings and SPX price always end up converging over long periods of time, and they follow the same general trend. Right now we are undershooting, and quite a large gap is growing. The FUD machine has been working in overtime lately. But price always catches up to earnings, as smart money realizes its a buying opportunity. When price starts to overshoot earnings growth, thats when you should be leaning more cautious.

Why has price failed to make new highs? I think there a couple of factors to blame. Firstly, was Warsh’s first FOMC. He was widely expected to be hawkish, and he was. What really was tough for the market to digest was how opaque and vague he was. He refused to answer the most basic questions and kept on stonewalling with “we have a task force for that” over and over gain. That was not appreciated by the market. But now that more than a week has passed, we have seen market pricing reverse all the post FOMC hawkish moves, with the 2yr being ground zero. Yields are falling rapidly, oil is falling rapidly, I dont believe there will be hikes this year. Warsh’s whole MO is no forward guidance. That’s his defining character. Yet the market consensus last week was that he was guiding to hikes. The fact that the committee couldnt bring itself to hike with CPI at 4.2%, now with inflation falling rapidly, how do they justify a hike from much lower levels? I believe FOMC was a hawkish overreaction, and we are seeing markets walk back some of that hawkish pricing the week past.

Besides obviously bonds and oil, for a further clue on the Fed’s next move you can use Biotech as a clue. Biotech is infamously the most long duration asset. Companies borrow huge amounts of money, to develop drugs for years and decades that may one day pay off in the future. We are seeing a huge rally in biotech post FOMC, the last thing you would see before a hiking cycle. Biotech led the turn (down) in late 2021 before the market itself as it sniffed out a hawkish Fed.

I prefer to let the market do the talking, but my genuine view of FOMC was that he was quite dovish. He was extremely firm on inflation going back to 2%, but then who wouldnt be? His first goal was to establish credibility, and he did that. How many times did Powell reaffirm the 2% target, yet we spent 5 years above it? I think the dovish tilt was that, he was going to be the one to ultimately decide how that 2% target is measured. They will get to 2%, it will just be a handpicked Kevin Warsh basket of inflation measures.

The other reason for the market wobble, was the huge pension rebalancing flows we called out last week. We knew about those ahead of time, so hopefully that helps you avoid too much of a bearish bias. These are multi billion dollar behemoths rebalancing out of necessity, not of choice. Many of these mega funds target something like a 7% CAGR, to fulfill their pension obligations. So if equities are up 15% in a quarter, it would be downright irresponsbile to not deglide and sell equities to buy bonds. This is a flow that has a beginning, middle, and an end. Historically the flow is pretty much done at T-1 or T-2, which would be Monday or Tuesday.

The last factor for the market wobble was a good old fashioned positioning reset. Things got a little overheated in April/May as SPX rallied almost 20% off the lows, as massive move by any standard. We got a healthy correction in both price and time, but none of the underlying bull factors have changed I believe.

I was surprised to find out the GS hyperscaler basket (basically Mag 7 ex tsla/appl) had its worst month in over 14 years. This was the weak hands selling mega caps as they are afraid they will go bankrupt on Capex. Whether they are right or not is TBD, but I think after such a massive move to the downside, going into July and earnings season, we will likely see some mean reversion and dip buying.

This is hedge fund exposure to Mag 7. Quite the precipitous drop this year on CAPEX spending fears. If you omit Liberation day (event driven) we have rarely been this low in exposure to Mag 7 the past 5 years or so. These are still the highest quality businesses in the world. Last quarter we saw pockets of acceleration in growth due to AI, Google being the primary winner. Will we see more of that this quarter? That could set off this cohort in a big way. There is also speculation that the market will reward handsomely any hyperscalers who take on a more restrained view to CAPEX and given some horrid performances of their respective stocks this year we could be seeing that too. MSFT and META are the main “losers” so far of this CAPEX binge so they are primary candidates. I think ultimately, theres not much meat left on the bone of the sell Mag 7 trade.

As for hedge fund positioning writ large, I would say its in depressed territory. Overall gross and nets on a 1yr lookback are 0% and 24%. Its rare to see them this low or any lower. NDX was just down 4% last week, SOX actually had its worst week since Liberation Day. Going into earnings season and the most bullish month of the year I imagine we see hedge funds as an aggregate net buyers. With momentum especially weak in July seasonally, that could be a rotation from out of Semis into Mag 7 and other.

To sum up, we enter the most bullish month of the year, and the most bullish 2 week period of the entire year. The SPX over a 98 year period delivers on average a 2.43% return from July 1 to July 15. The positioning backdrop is quite favorable going into this period also, as the market corrected pretty nicely in June, and it seems the general market participant is quite fearful due to Iran, IPO worries, AI bubble worries, and run of the mill pension rebalancing. This market remains a fundamental story of outstanding earnings growth, and I believe it will prove that again in July. I think market overdid some hawkish market pricing, which has already been walked back in many assets. I think all time highs are on deck by mid July.

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