Market Wrap
Outlook
The conclusion of Week 7 represents a critical juncture where multiple market forces are converging to challenge the prevailing narratives that have driven asset prices higher. January's CPI print, showing core inflation at +0.446% month-over-month (the highest reading since April 2023), has forced a fundamental reassessment of the disinflation thesis that underpinned much of the previous market advance. This inflation surprise arrives at a particularly sensitive moment when market structure metrics suggest increasing vulnerability to positioning-driven volatility. The fundamental backdrop remains remarkably strong, evidenced by Q4 earnings growth exceeding expectations at 13.3% and a notable broadening of market participation, with the "Magnificent 7" contributing only 0.2 percentage points to the S&P 500's 4.0% YTD gain. However, this strength is being tested by what appears to be a front-loaded series of growth-negative policies and deteriorating technical conditions. The market is attempting to price a complex transition from a real/asset-heavy to digital/asset-light economy, highlighted by the stark contrast between tech capital expenditure plans ($331B in 2025, $359B in 2026) and traditional cyclical sector weakness, particularly evident in homebuilders' historically reliable negative divergence pattern.
The macro risk spectrum has evolved to encompass more extreme potential outcomes on both tails. The left tail risk scenario now centers on the possibility that the combination of tariff increases, immigration restrictions, and potential fiscal tightening could create a more substantial growth shock than is currently discounted in market prices. This risk is particularly acute given the emerging parallel to the 2017/18 period, when rapid transitions between economic regimes (Recovery → Expansion → Slowdown) catalyzed significant market disruption. The right tail scenario envisions a rapid pivot to growth-supportive policies combined with accelerated technological productivity gains sufficient to offset labor market constraints. However, this optimistic scenario appears increasingly improbable given the recent inflation data and the Federal Reserve's likely response function to persistent price pressures.
The technical landscape has evolved into a particularly complex setup characterized by multiple conflicting signals. The S&P 500 has maintained a tight consolidation pattern within 5% of its record high, with historical analysis suggesting a 77% probability of upside resolution over the subsequent two weeks. However, this historically constructive pattern is now colliding the emergence of a historically reliable negative divergence between the broad market and the homebuilding sector. When homebuilders trade in the bottom 2% of their 52-week range while the S&P 500 remains in the 90th percentile of its range, the broader market has declined in all but one instance over the subsequent two months. This divergence takes on added significance given that the homebuilding sector often serves as a leading indicator for broader economic conditions.
The market's capacity to successfully navigate this complex transition period will largely depend on whether technological productivity gains can adequately offset the demographic and policy-induced constraints on labor force growth, while simultaneously managing the inflation pressures evident in recent data. The technical backdrop suggests increasing vulnerability to positioning-driven volatility, particularly as we approach the seasonally challenging April period with systematic strategies holding elevated exposure levels that could be forced to adjust rapidly to changing conditions. SPX gamma levels jumped significantly on Thursday to +$11b (86th 1y percentile), primarily due to short-dated options. This elevated gamma is expected to potentially gap lower as these options expire, which could increase market volatility.
Looking ahead to Week 8, market participants will focus on a series of critical economic releases that could provide clarity on these competing narratives. The calendar progresses from the NAHB home builders index on Tuesday, through housing starts and permits alongside the FOMC minutes on Wednesday, to the Conference Board Leading Index on Thursday, before culminating in the preliminary February S&P manufacturing and service sector PMIs on Friday. The housing market data takes on particular significance given the sector's recent weakness and its historical role as a leading indicator for broader economic trends. The February PMI data will be crucial in determining whether January's inflation surprise reflects broader economic momentum or transitory factors, while the FOMC minutes will be scrutinized for any evolution in the Federal Reserve's reaction function to persistent inflation pressures.
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Forward Earnings
Metric | UpDn | This Week | Prior Week | % Change | % Baseline | Baseline | Baseline TF |
|---|---|---|---|---|---|---|---|
Forward 4-qtr Estimate | 🔴 | 270.46 | 271.24 | 263.39 | January 1, 2025 | ||
Forward 4-qtr PE | 🔵 | 22.6 | 22.4 | 22.7 | January 1, 2025 | ||
Nominal Earnings Yield | 🔴 | 4.42 | 4.46 | 4.41 | January 1, 2025 |
Volatility & Correlations
Metric | UpDn | This Week | Prior Week | Net CHG | % CHG | Excess |
|---|---|---|---|---|---|---|
VIX3M - VIX1M 10d Z | 🔵 | 1.45 | 0.72 | 0.73 | 101.39% | |
COR1M | 🔴 | 7.7 | 11.14 | -3.44 | -30.879999999999995% | |
COR3M | 🔴 | 12.13 | 13.48 | -1.35 | -10.01% | |
Equity Put/Call Ratio | 🔴 | 0.46 | 0.52 | 0 | -11.54% | |
SPX/SPXW Put/Call Ratio | 🔵 | 1.47 | 1.25 | 0.22 | 17.6% | |
VIX Put/Call Ratio | 🔴 | 0.26 | 0.34 | -0.08 | -23.53% | |
OEX Put/Call Ratio | 🔴 | 2 | 3 | -1 | -33.3% |
S&P 500 Futures
ATM IV30 11.07% v HV 12.24% IV-HV -1.17%Bulls will seek to breakout above WHI 6146.75 and ideally above YTD HI 6162.25 on a closing basis. Upside: ATH 6184.50 (+0.86%) is within +1σ (W) 6240 (+1.76%).Bears will seek to offer below last week’s upper distribution and ideally below WVAL 6053.00 (and 50d MA) on a closing basis. Downside: HL 6020.75 is just beyond -1σ (W) 6028 (-1.70%).
Last Week: 6132.00 MAR25 +1.40%Bulls will seek to breakout above Friday’s pullback high of 6078.50 on a closing basis. Upside: WHI 6123.25 and YTD High 6162.25 are within +1σ (W) 6169 (+1.98%).Bears will seek to breakout below 6046.50 and offer < MM 6014.50 on a closing basis. Downside: WLO and extending 1TFD is coincidental with -1σ (W) 5935 (-1.89%).
Indicators
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