Dear Friend and Clients, 

 

In recent months, the market has staged a strong rebound from its April lows. At that time, recession concerns were mounting, fueled by weak sentiment data and worries that tariffs would drive up inflation which would weigh on consumer spending.

 

There are a handful of points we hope you take away from this note: 

 

 

In our last note, we mentioned that “a pullback was overdue given stretched valuations and a market that had become top-heavy and overly reliant on tech.” We’re once again seeing a similar setup: the rebound from April’s lows has brought us back to elevated levels, now with some volatility complacency, while the risk/reward appears increasingly tilted toward a pullback.

 

Best regards,

 

Brad Banken, Investment Advisor Representative

 

Allison Banken, COO

 

We are unable to mention specific companies and or tradable investment products in order to follow compliance guidelines as the content cannot be construed as our individual view or recommendation on any investment product.  Please reach out if you have any questions or would like more specific information on anything below.

All performance metrics are as of date of publication.

 

 

Since April, the markets have digested an erratic tariff policy, broader trade tensions, fiscal concerns and geopolitical flare ups.   That said, after April saw a historically sharp sell off with the market closing down (19.9%) intra month, but it closed down (80bps)!  Since then, the market has rallied 30% from the lows and made new highs.  Mid April it became apparent the impact were less severe than initially expected and since then we have seen notable resilience in consumer spending and corporate earnings. 

Source - Seeking Alpha

We’ve emphasized the importance of staying invested with a long-term, disciplined approach—it's a foundational principle of successful investing. If you missed just the 5 best days of 2025, your return would be -12%, compared to the market’s gain of roughly +6%. That’s an 18% swing, simply from stepping aside during moments of media-driven panic and weak economic headlines. Keep in mind: the market has delivered an average real return of about 7% annually over the past 200 years. Let that perspective sink in.

During the rally, the S&P500 closed above its 20 day moving average for 60 consecutive days, this only has occurred 8 times since 1950. 

 

We are back to historically high concentration of the technology sector as well as the mega cap weightings as well. 

-The tech sector rallied ~45% off the April lows s ~30% for the S&P500.  

-This ferocious rally created ‘overbought’ conditions, which has been for 40 straight days - 11th time this has occurred since 1990.  

-Nasdaq 100 went 60 trading days without closing below its 20 day moving average - 2nd largest streak in its history back to 1985.

-US Info Tech market cap is ~$18.5 trillion - larger than the entire market cap of every country outside the US.

The tech sector weighting in the S&P500 is now close to an all-time high, especially if you adjust for the companies that used to be considered “tech”. 

The Information Technology sector is bigger than Materials, Real Estate, Utilities, Energy, Consumer Staples, Industrials, Healthcare and Consumer Discretionary COMBINED!!!

Comparing the Mag 7 performance and earnings growth versus the other 493 demonstrates how dominate the Mag 7 has been the last 4 years. Looking forward the earnings growth should converge. 

Large caps vs Small Caps continue to be at historical levels: 

With the S&P500 hitting 16 new highs this year, it is worth showing that small caps have been lagging significantly

 

A common bearish argument is that the market appears overvalued compared to historical norms. Metrics like the Shiller PE, market cap-to-GDP ratio, S&P 500 dividend yield, and price-to-sales all point to elevated valuations.

 

However, when you adjust for the tech dominance and concentration at the top of the index, the picture looks more reasonable. In fact, the equal-weighted PE, along with valuations for mid-cap and small-cap stocks, are all notably lower than those of the broader S&P 500.

If we look at profit margins, could some of the ‘expensiveness’ be explained or justified? 

If you look into different sector valuation, it tells us a different picture as well.  Given the historic weighting of technology of the S&P500, look at the P/E vs S&P500 rank vs history.  Other than industrials, the rest of the market is below the fortieth percentile!!!

This can also be seen by comparing the market cap weight S&P500 vs the equal weight below. 

Fed Fund Rate and Expectations

The Fed kept interest rates steady for the fifth straight meeting in July, staying focused on its dual mandate of managing inflation and supporting employment. Chair Powell has been warning about the inflationary impact of tariffs since last November, but those effects have yet to fully show up in the data, partly because the implementation timeline keeps getting pushed back. If the August 1st tariff rates are indeed final, we likely won’t see the inflationary impact until September or October, as the costs work their way through the supply chain.

 

We’ll sound like a broken record here, but it’s worth repeating: CPI and PCE—the Fed’s two preferred inflation gauges—are, in our view, outdated and lagging indicators. Much of the attention is on shelter inflation, which is both miscalculated and backward-looking in the CPI. We continue to favor Truflation, which pulls from around 30 million real-time data points, compared to just ~80,000 used in the CPI.

Truflation has remained below roughly 2% for most of the past six months. We believe inflation is overstated, largely due to the way the CPI calculates the shelter component. The full effects of tariffs may not be visible until September or October. Until then, reading between the lines, inflation appears to be under control. In fact, the latest report showed shelter prices rising at their slowest monthly pace since February 2021.

 

On the jobs front, the first half of the year saw surprisingly strong employment reports. However, the July 1st report for July showed weakness, with significant downward revisions to May and June payroll numbers—the largest two-month adjustment since May 2020.

 

The Fed has three meetings remaining this year—in September, October, and December. If the labor market begins to cool while inflation remains subdued, the chances of a rate cut in September will grow. The Fed has signaled two cuts in 2025, and the market currently prices in an 80% probability of a September cut and a 95% chance of a December cut.

At first glance, the market appears vulnerable to a pullback after the rapid 30% rally from the April lows. Volatility has been unusually low as gains have been driven largely by Tech and Mega Cap stocks hitting new highs. We expect inflation to remain contained and for the economy to absorb tariff impacts better than anticipated. Meanwhile, the job market is likely to continue slowing, paving the way for a Fed rate cut in September. It seems tariffs are already priced into the market.

 

Bottom line: Over the next three months, the focus will be on the back-and-forth around the likelihood and magnitude of a September Fed cut. In this period, jobs and inflation data will probably have more influence than earnings reports. Could we see a sharp 5%+ sell-off following an unexpected inflation or jobs report? That seems likely.

 

Small/Mid/Equal vs Mega/Tech - do not be surprised if you see trimming of mega cap and technology ETFs and a rotation in small, mid or equal weight ETFs.

 

Construction/Building theme:  Exposure was added during the quarter on weakness; the consumer is spending, individual balance sheets are in solid shape, and prices are near highs.  When mortgages start to get cheaper, there could be plenty of pent-up demand.

 

International -

Questions? Feedback?  Drop us a line at info@oakstreaminvestments.com

 

(908) 271-8788

The opinions and forecasts expressed are strictly those of Brad Banken's and may not actually come to pass.  

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