Image source: Pixabay

Monday will close a calendar quarter that has been nothing short of historic.

The beginning of the 2^nd quarter of 2025 will be remembered by investors for a long time. It began with the second day labeled as “Liberation Day” by the President which was set on the 2^nd of April because Trump himself said he didn’t want it to be on April Fool’s Day.

Based on Liberation Day’s impact on the market and the nicknames it created, like “Decimation Day” and “TACO” trades (“Trump Always Chickens Out”, so buy the tariff threats), the first would have been an ideal date, but hindsight is 20/20, and one day doesn’t make a difference in the long run – or does it!?

The end of the 2^nd quarter of 2025 will also be remembered by investors for a long time, as last Saturday the world sat on the edge of its seat, knowing that B2 bombers had been launched to attack Iran.

With bookends like that it hardly seems extraordinary to mention the domestic political history that was made when US marines were mobilized against the citizens of LA, or when a socialist candite for the mayor of New York City defeated a candidate who served as NY’s Governor and who’s family has been so prominent in NY politics for two generations that there is a major bridge named in honor of his father’s political service.

Perhaps we should adapt the clever acronym of TACO to mean…

Turmoil Always Creates Opportunity

The markets constantly teach and reward the open-minded, and humble overconfidence.

With such a historic domestic and international geopolitical back drop let’s look at how the stock market not only moved higher, but also impressively sits at all-time highs.

What Happened in Q2 2025?

The 2-10 yield spread widened, and the curve got steeper as result of the 2-year rates dropping and the 10-year rising.

The short-end dropping could reflect expectations of Fed rate cuts. The 10-year rising likely reflects the persistent strength in the economy and some concern over expectations of higher for longer inflation and the current legislation leading to higher deficit spending. These fears are further supported by the larger rise in the 30-year rates.

The rate of change in rates is often more impactful on the stock market than the level, so the chart below shows the rate of change of the futures market’s expectation for rate cuts looking out over future meeting dates.

As you can see by the annotation, at the end of March, the fud funds market was expecting 1 cut over the next 3 Fed meetings (red).

Right now, the market is pricing in 2 cuts within the next 3 Fed meetings (blue).

This expectation for more cuts looking forward than was previously expected in March continues over the next 12 meetings.

The market is more bullish on rate cuts now than at the start of the quarter!

Do Expectations for Fed Cuts Mean Fears of Recession?

This would be a normal expectation, but according to the market outcomes betting markets, the expectations for a recession in 2025 have dropped significantly during the quarter!

The chart below shows the expectations for a recession in 2025 have dropped from about 35% to about 25%

Investors Are More Bullish!

Despite all the chaos of the quarter, the retail investor has gotten more bullish as you can see in the chart below showing a collapse in the % of bears that corresponds with a rise in the % of bulls.

It’s also worth noting the rise in bearishness by this group of investors that preceded the market’s decline!

I’d like to think MarketGauge is helping retail investors become the “smart money” that this chart suggests they can be!

Wall Street analysts, on the other hand, have reduced their number of “buy” ratings over the quarter. This is shown by the decline in the last 2 data points on the chart below.

It’s a small change, but the first decline since Oct. 2024 and in stark contrast to the chart above.

The Market’s Leadership Has Been Consistent and Broad

The chart below shows sectors and index performance on a percentage change basis for the quarter with horizontal lines at the monthly breaks.

The bulls will be happy to see that the leaders have been consistent, tech, and broad if you consider not only the number of positive groups, but also note that the equal weight ETFs of QQEW and RSP are high on the chart.

Just When You Thought You’d Heard Enough History in the Making…

Last week, Barron’s published an article that describes the stock market’s quarter quite well. The article titled, “The S&P 500 Just Did Something Extremely Rare— and Concerning” by Jacob Sonenshine.

In my opinion, the word “concerning” was used to get our attention, but the content is (as always) appropriately balanced and very insightful.

In summary, the S&P 500’s  “rally since its April low has brought it to 22 times the combined per-share earnings analysts expect for its member companies over the next 12 months. Not only is that the top of its range in the past three-and-a-half years, but it has come back all the way from 18 times at the low.

The author goes on to explain...

“The price/earnings multiple hardly ever rises this much in less than three months. According to Rosenberg Research, such a fast expansion is a “4-sigma event,” which means the P/E multiple deviated from its mean, or its expected value, by four standard deviations. Based on data going back to 1990, the odds of it happening are less than 1%.

When it happens, it signifies the market is about to see another large move.”

The direction of the move, however, is less clear as the author describes as follows and supports with data that I’d suggest reading if you have a Barron’s subscription.

For the bulls…

“The good news is that sometimes, such a rise in valuation indicates another impressive rally is on the way.”

For the bears…

“But when multiples expand super quickly at the end of an economic expansion, not near the start of a new one, the market is usually in for losses.”

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