Source: TruthSocial / @realDonaldTrump
By Guest Blogger Ryan Lewenza
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It’s been a decent first half for the equity markets despite all the headline risks and uncertainty (e.g., Trump tariffs, multiple wars, bond market jitters). Currently, the S&P 500 is up around 4%, the TSX is up 8% and international stocks are up double digits.
The markets have had a huge recovery from the April lows, what we call a ‘V-shaped recovery’. President Trump’s reciprocal tariffs caused the big sell-off in March and April and then the ‘TACO’ trade – Trump Always Chicken’s Out – led to the recovery in May and June. But we now expect a period of consolidation and maybe even a pullback over the seasonally weak summer months. Why?
Year-to-date performance for the S&P 500 and TSX
Source: Stockcharts.com
First, with the big recovery the S&P 500 is back trading near its all-time highs/resistance. We see the S&P 500 facing some initial challenges around the resistance level of roughly 6,100. Also, with the swift recovery, the US markets have gotten a bit stretched on a short-term basis. One indicator we track is the percentage of stocks in the S&P 500 above the 50-day moving average (MA) and that is currently at 75%. Above 70 indicates overbought so this suggests markets could be due for a breather.
Current technical profile for the S&P 500
Source: Stockcharts.com
Second, the summer and fall tend to be weaker months for the markets. As seen in the chart below, the May through September period tends to be weaker months for the US markets. On average, the S&P 500 returns 7.5% from October to April and just 1% during the summer months. Make note of September, which historically is the weakest month of the year for the markets.
Now, these are just long-term averages, and there are times when the markets buck these seasonal trends. So, this is just one factor that could impact the markets over the summer/fall.
S&P 500 average monthly performance
Source: Bloomberg, Turner Investments
Third, with the big rally the US markets have gotten a bit expensive. Currently, the S&P 500 is trading at a 23x P/E ratio, which is elevated and above the 10-year average of 20x.
S&P 500 P/E ratio
Source: Bloomberg, Turner Investments
Fourth, we have a couple of key dates coming up that could lead to an increase in market volatility. The US Senate would like to pass Trump’s spending bill by July 4th and on July 9th Trump’s 90 day pause of the reciprocal tariffs expires. Will he announce trade deals keeping the tariff rates low, will he reverse course and slap on the high tariffs again or will he do another extension of the pause? We just don’t know so we’re watching those dates closely.
Finally, the geopolitical situation is getting worse with the recent bombing of Iran’s nuclear facilities and Isreal taking out many of their top military leaders and scientists. These are regional conflicts which shouldn’t drag down the global economy, but they could pose a risk to the markets.
Apologies for diving deep into the weeds with talk of P/E ratios, overbought indicators, and V-shaped recoveries. The bottom line is: we remain optimistic about global equity markets, but we wouldn’t be surprised to see a pause or some consolidation during the typically softer summer and fall months – a development we’d view as both normal and healthy for the overall market trend.
Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Investment Advisor, Private Client Group, of Raymond James Ltd.