For the mean reversion to continue there needs to be fundamental support in the form of earnings. That support is happening. Since 2014 the US has dominated the global markets as US earnings growth has been better than EAFE and EM, and the payout ratio (dividends plus buybacks as a percent of earnings) has been higher.  A one-two punch in favor of the US, which went a long way to earning its higher P/E multiple. The chart below shows how companies in the US have retired way more shares than in both EAFE and EM.  Especially EM has been chronically in dilution mode until recently. Say what you will about financial engineering, it does have an impact on valuations. But guess what? In recent months EAFE (more so than EM) has become more competitive to the US, perhaps not so much on the earnings front, but definitely on the payout, both for the dollar amount and the percentage of earnings (payout ratio). Below we see that the payout ratio for the US is 75% and for EAFE it’s now 76%. Interestingly, while the payout ratios are the same, the composition is not. In the US, dividends are 30% of earnings and buybacks are 45%, while for EAFE dividends are 49% and buybacks are 27%. Which do you prefer? Dividends are considered more sacred and less cyclical than buybacks, so I would take the former over the later, which puts EAFE at an advantage (not to mention its lower valuation). This tells me that the world stage, at least for developed markets, has become a more level playing field. I would consider that good news as we navigate a very top-heavy US Market.

The long-term uptrend for international equities remains intact as well, both in USD and local currency terms. The momentum curves continue to converge, suggesting that the mean-reversion could continue.  The leadership inside the US may be narrow, but there is a global bull market going on.

Meanwhile, earnings season has been on fire with 82% of the 330 companies reporting (so far) beating estimates by an average of 806 bps. The expected growth rate has jumped more than 6 percentage points since earnings season started. That is well ahead of the norm. Below we can see the massive bounce in the quarterly dollar estimate.  A $3 EPS gain in only a few weeks! Those blockbuster Q2 earnings results have pushed 2025 earnings growth up to 8.9%, retracing a good chunk of the markdowns during April’s Tariff Tantrum.

The soft jobs data pushed the forward curve back down to 3%, with the market now expecting the next rate cut in September. With the TIPS break-even curve stable at the 2.50-2.75% range, in my view a neutral policy would be around 3.50-3.75%. That means that the market is expecting that the Fed will go past neutral and into the accommodative zone. While a neutral policy seems reasonable enough, I’m not so sure about the need for an accommodative stance. Per the chart below, the employment situation seems to be quite balanced in terms of the supply of labor and the demand it. Both the JOLTS excess labor demand and the U3 unemployment rate (relative to the natural rate of employment) are at zero, which is neither hot nor cold. Yes, the trend is down, but it was too high to begin with following the labor shortage during COVID.  For the forward curve to be right, the labor market will have to continue to weaken from here.

Following Friday’s jobs disappointment, rates went down and the dollar went up. That’s a change from the last few selloffs but consistent with how things have tended to work in the past. Risk-off episodes lead to a demand for safe assets, including Treasuries and the US dollar. We will see if it lasts, but since 2022 every dip towards 4% on the 10-year yield has been short-lived. For now, the coiled spring of the 10-year yield continues to grind.

Investors are juggling very strong earnings with ongoing tariff threats, a Fed facing political pressure to ease but reluctant to do so, and now a modest growth scare per the lackluster jobs report on Friday. It’s a series of cross currents that makes it challenging to stay ahead of the market. This is why we look at charts, so let’s see what they say. Zooming out to a monthly timeframe (and with July now in the bag), the chart below remains firmly in the “I like” category, with the caveat that market breadth remains less than desired. The daily chart below shows a series of negative breadth divergences as the S&P 500 index keeps making higher highs and higher lows. It’s nothing new, with the Mag 7 as dominant as ever, but it’s not ideal.

I will be joining @Fidelity's Market Sense at 2pm ET today to break down a very busy week of earnings, economic data and tariff developments. Register to tune in live here:

Let’s go!! @PanMass

If the Fed lowers rates beyond what deems justified by the Taylor Rule, the yield curve could well bear-steepen unless the Fed engages in yield curve control. That would restart the QE engines, which is something that both gold and Bitcoin appear to have been anticipating. The Fed’s balance sheet is only 23% of GDP, which is a far cry from the BoJ’s 117%.

this weekend I am riding in my 27th consecutive @PanMass, the world's premier athletic fundraising event with every penny going to cure and treat cancer. I feel good and the weather looks great. Plus I get to eat copious amounts of pasta tonight!