This week: investor sentiment slide, fun flows, valuation heights, passive vs active, idiosyncrasies, cap-weights, IPOs, and bears mentioning.
Learnings and conclusions from this week’s charts:
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Sentiment is shifting; from euphoria to doubt.
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Valuations are at the upper end of a new higher range.
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Passive/index funds dominate vs active funds.
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The US overwhelmingly dominates in global equities.
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The bar is high for the US vs low for global equities (opportunity).
Overall, the evidence continues to show a shift in sentiment from previous extreme bullishness and frenzied flows to now increasing skepticism and concern as Trumphoria subsides and a new challenging reality sets in.
1. Waning Euphoria: The mood on the S&P 500 sure seems to be turning. My “Euphoriameter” indicator below (which combines: forward P/E ratio, smoothed surveyed sentiment, and equity risk pricing) peaked in November last year, basically, I would call that peak-Trumphoria as markets anticipated a repeat of the upside we saw coming out of 2016. But the reality is starting to set in as a rapid reform agenda, return to trade wars, and background setup of expensive valuations makes for a more volatile and may be less immediately up-sloping experience vs back then.
Source: The Euphoriameter from Topdown Charts
2. Manic Markets: And if you want proof of that, the latest Investment Manager Index survey showed a sharp lurch to the risk-aversion side as investment managers reassess the political/fiscal backdrop and US/global macro outlook.
Source: S&P Global Investment Manager Index
3. Furious Flows: Two things come to mind on this chart. First is how the above change in heart comes following a frenzy of flows into US equities (same message as the first chart: things are turning as doubt begins to replace optimism).
But perhaps more interesting is how Developed Market flows are turning up — pay special attention to the 2014-16 period where DM ex US flows surged while US flows slumped. This could be a playbook for 2025/26 as the outlook brightens for Global equities (e.g. as I recently noted on Chinese equities, European equities).
Source: @ISABELNET_SA
4. New Higher Range: Indeed, the US faces a high hurdle of high valuations. Even if we acknowledge the reality of a new higher range in P/E ratios for the US stock market, it’s still sitting at the upper end of that range.