Is the US equity rally really just about AI ? Or are there cracks forming under the surface? A few things Qi is watching:
1/ Inflation expectations creeping higher
- 5y breakevens are back above 2.5%. Real yields falling. Equities still climbing.
- 30y yields back >5%, but credit spreads remain near record tights.
Equities believe higher costs can be passed to consumers? For how long? Quant Insight's risk model shows higher inflation as one of the biggest impediments to risky assets
2/ Tariffs starting to bite
- Core goods CPI has turned after quarters of drag.
- 2018/19 playbook says tariffs take 3–4 months to pass through. This time, inventory front-loading may delay impact.
Do we hit an air pocket in demand later this year? What gives — consumer, margins, hiring? Economic growth is a top driver for risky assets on Qi’s model
3/ Trump’s tariff talk & the August 1st deadline
Does the lack of equity market trepidation lower the probability of any pivot?
4/ The high bar for Earnings season
- The S&P 493 now trades > 20x 12mth fwd PE
To judge by what happened to banks and NFLX last week, the bar is quite high this earnings season. Any signs of margin pressure or softening demand could test investor confidence
5/ Sentiment
- In the recent BoA Global Fund Manager Survey investor sentiment was the most bullish since February 2025 and cash levels fell to 3.9% triggering a "sell signal"
Who’s left to buy?
6/ Seasonality
- Worth remembering, history suggests August and September are some of the weakest months for equities
And through the lens of Qi’s Risk Model? Anxiety likely to build
1/ Multiple expansion has accelerated BUT macro’s grip on equity risk has not faded to the same extent ( chart 1)
2/ S&P500 return acceleration over the last month has been dominated by idio drivers – macro factor momentum is waning ( chart 2)
