Looking to keep track of global markets and cross-asset price action? Every morning in The Morning Lineup we provide commentary on developments since the prior US close, covering major macro catalysts, geopolitics, economic data, local market price action, earnings, and more. This morning we talked about the implicit market pricing of odds that the latest round of tariff announcements will be implemented on August 1. An excerpt from this morning’s note is below. The Morning Lineup is included in our Premium subscription tier. Sign up for a complimentary trial now!

US equity index futures legged lower in the wake of the 35% Canada tariff and 15-20% universal tariff but only by about 75 bps. They then gained back more than half of that selloff before falling again as Europe started trading to hit session lows down 84 bps versus the pre-headline level. Regardless of that small selloff, markets are clearly not pricing much in the way of risk premium that these tariffs actually go into effect. To estimate how much exactly is being priced, we can use S&P 500 EPS estimates, multiples, and prices to create a couple of scenarios and see how those relate to current prices.

We assume two scenarios: one where recent announcements are enacted into law as paid tariffs, and one where they are not. Since the recent wave of announcements is generally in-line with Liberation Day levels (and in some cases like Brazil is significantly worse), we assume that the post-Liberation Day valuation low is the correct multiple for that scenario. We also assume that the forward EPS multiple that number is based on would fall roughly 1% (which is what happened to forward EPS estimates in the wake of the Liberation Day announcement). Taken together, the 19.76x forward multiple and 1% decline in EPS estimates versus current gets to a 5516 level for the S&P 500.

In our second scenario, we assume current forward EPS are valued at the same multiple as the post-COVID valuation peak (23.41x versus 22.17x current). That implies a 6594 S&P 500 price. Given the market currently trades around 6240, we can back out how each scenario is priced in probability terms. As shown below, current market prices imply a 94% chance of no enactment for the current wave of tariffs. Of course, we are making a number of assumptions in this analysis, but we think they’re defensible. The key takeaway here is that the market is pricing very low odds of full enactment for the current wave of tariffs. At the very least, that creates asymmetry to the downside as far as payoff goes. That is one reason we advocated a relatively cheap hedging strategy in The Closer last night (link).

Looking to keep track of global markets and cross-asset price action? Every morning in The Morning Lineup we provide commentary on developments since the prior US close, covering major macro catalysts, geopolitics, economic data, local market price action, earnings, and more. This morning we talked about the price reaction to the latest tariff headlines and how cross-asset relationships between stocks, bonds, and the dollar are not behaving the same way as they did during market stress in the wake of April’s Liberation Day. An excerpt from this morning’s note is below. The Morning Lineup is included in our Premium subscription tier and higher. Sign up for a complimentary trial now!

As we’ve discussed a number of times over the past several months, the flow and market price data does not support the idea that non-US investors are fleeing en masse as was feared in the wake of the Liberation Day tariff announcement. We continue to watch price action and the relationship between movements in stocks, rates, and the dollar for signs of that dynamic, and they were again lacking overnight. While UST yields have moved higher as stocks have sold off, the bear-steepening has been relatively modest with 30y yields up less than 5 bps this morning. The dollar has actually rallied today. As shown below, unhedged investors denominated in EUR or JPY are actually seeing smaller losses on US duration overnight than USD-based investors, the opposite of what we would expect if new tariffs were generating a capital flight scenario.

Of course, that lack of pricing for capital flight could reflect the exact same dynamics that we see from equity market behavior with very low implicit pricing for the bad outcome. If markets reverse their behavior, the three-way correlation between stocks, bonds, and the dollar could re-emerge as part of a behavioral and narrative shift, but for now we are not seeing that behavior in how markets are behaving under the current narrative regime. We will continue to watch for any shift in that regime.

Albeit the move has been mostly recovered by now, the past week’s pullback from fresh all-time highs has resulted in investor sentiment shifting lower.  The latest gauge from the weekly AAII survey showed 41.4% of respondents reporting as bullish, down from a 30-week high of 45.0% headed into the July 4th weekend.

The drop in bullish sentiment meant that an increased share of responses shifted towards bearishness. 35.6% of respondents reported as bearish, up 2.5 percentage points week over week.

Given these readings, the predominant sentiment is still bullish as the bull-bear spread remains positive for a second week in a row at 5.8 points.

Even though the bull-bear spread was lower this week and current levels are far from earning any superlatives, the still positive reading did mark the first back-to-back positive readings in the spread since the last week of January.  Alternatively, that snaps a 22-week-long streak without back-to-back weeks of positive bull-bear spreads.  As shown below, such a streak has been uncommon. Throughout the history of the survey since 1987, there have only been five streaks that have gone on for longer.

In addition to the usual weekly sentiment gauges, this week also saw an update in the Schwab Trading Activity Index (STAX). Formerly the TD Ameritrade Investor Movement index, before the merger between the two companies, the index differs from other sentiment gauges that tend to ask if an investor is bullish or bearish. Instead, this index uses a proprietary system to assign sentiment scores to retail investors based on their actual account activity. As shown, the June reading only indicated a modest improvement in sentiment after falling for three months in a row.  In other words, since the April lows, retail investors had been fading the S&P 500’s recovery back up to record highs, with June only marking a minor shift back toward bullishness among this investor base.

The report also details a few anecdotes about single stocks popular among retail clients. This month’s report highlighted that—again contrary to the changes in these stocks’ prices—recent Tech favorites saw major net selling like NVIDIA (NVDA), Microsoft (MSFT), and Coinbase (COIN). On the other hand, other major Tech names like Tesla (TSLA) and Amazon (AMZN) were noted as seeing consistent purchases among retail investors.

Putting sentiment readings together, below we aggregate this STAX index with the AAII survey and two other weekly sentiment readings: the NAAIM Exposure index and Investors Intelligence survey.  Together and equally weighted, the average across these indicators pointed to continued improvements in sentiment in June, and readings for so far in July would point to further improvements down the road.