Today in the podcast, two big things you need to know: First, we highlight how and why old leadership in the US equity market has returned with a vengeance and run through our latest thoughts on what might get the rotation trade going again. Second, several of the gauges of investor sentiment and equity market risk that we track are keeping us neutral on stocks through year end for now, and tactically cautious.

If you’d like to hear more, here’s another five minutes. While you’re waiting, a quick reminder that if you’ve found this podcast, and our research generally, helpful, we’d appreciate your support in this year’s All America Research survey. Voting is open now and lasts through the end of the month. We hate asking for favors, but for better or worse, many people in our industry look at these rankings to gauge who’s good and who’s not. We think we’ve done a better job than most of our peers on the sell-side this past year, and have earned the votes. If you agree, we hope you’ll list us on your ballot.

Now, the details…

Takeaway #1: Old Leadership Has Returned With A Vengeance

There are a few reasons for this sudden stall in the rotation trade. First, the shift has occurred alongside a move up in 10-year yields and fading optimism around cuts.

Qualitatively, the past few weeks of earnings have dampened economic enthusiasm, with comments from companies suggesting that inflation has started to impact consumer behavior in a more significant way. While some consumer companies are starting to discuss price cuts (good for the inflation/Fed narrative), we’ve also been struck by indications from some companies (including one that previously seemed somewhat immune for the economic cycle) that corporate customers are delaying decisions and in some cases struggling to even make them.

What’s needed for the rotation trade to get going again? Valuations are already favorable for the broader market ex the top 10 S&P 500 names, so the driver will need to be something else. Our work suggests that the 10-year yield needs to stop rising, the market needs more clarity and certainty around the path of monetary policy and the timing of cuts, earnings trends need improve for the broader market such that they look better than the biggest growth names, and economic excitement needs to build again.

The trigger for a renewal of the rotation trade may also come from positioning. CFTC data suggests that the large cap growth trade (as expressed through Nasdaq futures positioning) is no longer frothy. But it also doesn’t look washed out suggesting overbought conditions could return rather quickly.

Hopefully, the transition to new leadership in the II survey this year for portfolio strategy will be a little easier to come by than the transition to new leadership in the stock market.

Moving on to Takeaway #2: Several of the gauges of investor sentiment and equity market risk that we track are keeping us neutral on stocks through year end for now.

While our AAII sentiment indicator still hasn’t technically hit overbought levels, CFTC positioning on the buyside in US equity futures moved up last week and is close to all-time highs again. Both keep us in the neutral camp on US equities for now when we think about where the S&P 500 will be at the end of the year.

Separately, equity put/call and TDEX (a gauge of tail risk) moved up last week. The shift off extreme lows adds to our near-term equity market concerns.

That’s all for now. Thanks for listening. And don’t forget to vote – in II that is.