PULSE Monitor: Threading The Needle

Research evidence excerpt

PULSE Monitor: Threading The Needle

Market Outlook Key Takeaways

P: “Price” stays negative. Traditional and cross asset valuations remain

stretched.

Positive Neutral Negative

U: “Unanticipated” holds neutral. Equity implied vol remains divergent.

VIX (S&P 500) and RVX (R2000) are low, VXN (NASDAQ) is elevated.

L: “Liquidity” remains neutral. We witnessed outflows for US Equity

funds again, but 4-week moving average remains positive. Price

S: “Sentiment” stays negative. Levkovich Index breaches the 1.00 level

for the first time since the post-COVID recovery period.

E: “Earnings” stays positive. Revision trends are ahead of seasonal

Unanticipated averages. 74% of S&P 500 revisions are higher in July.

Weekly Highlights

The Q2 earnings season kicks off next week, with the big banks as the

usual early reporters. Positive revision data continues to support our Liquidity

expectations for solid reporting season, with a normal positive

surprise outcome. Yet, we need to stay wary that with strong revisions

headed into reports, expectations are also high. We continue to expect

management commentary that is incrementally more constructive as

Sentiment the Iran-triggered oil price backdrop is quite different than a quarter

ago. All told, we expect earnings results to support our broadening

playbook for Q3.

At the same time, the PULSE chart showing S&P 500 correlation to

economic data surprises is approaching multiyear negative levels. This Earnings

suggests that inflation concerns, with resultant Fed tightening, remain

an ongoing macro issue to be balanced with Q2 reporting micro

considerations.

Source: Citi Research. So, the needle to thread is expectations for solid earnings reports but

with macro data that takes the edge off of inflation concerns such that