PRO-EYES

Last Update: May 09, 2025
Jump to section: Valuation | Business Cycle Factor | Tactical Factor
Expect more volatility ahead. A good environment for traders and less for longer-term investors. Valuations are improving, but earnings likely still way above what we are likely to achieve. A hard economic landing seems highly probable and valuations remain elevated.
VALUATION
Risk Level: 87%
Forward based EPS expectations do not seem to line up with the economic realities of the day. Correction risks are elevated.
Enterprise Value to EBITDA
A reading above 90% historically means the average returns over the coming years will likely be well below average. While the market is expensive historically, this metric suggests returns will be well below average and should not be used as a timing indicator, but adds to the cautionary environment. Enterprise value, is the sum of debt and equity capital a company uses less cash like holdings on the balance sheet compared to earnings before interest, taxes, depreciating and amortization. In other words, how much capital is used to generate free cash flow. |
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Price-to-Sales
A reading near 90% historically means the average returns over the coming years will likely be well below average. While the market is expensive historically, this metric suggests returns will be well below average and should not be used as a timing indicator, but adds to the cautionary environment. The revenue a company generates is less subject to manipulation (financialization) like earnings per share can be and can be a better valuation metric than comparisons to earnings. Many industries have higher margins, so price-to-sales is not a perfect guide. |
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Forward P/E
A reading near 70% historically means the average returns over the coming years may be somewhat below average. While the forward P/E is above average, historically, this metric suggests returns will likely be below average and should not be used as a timing indicator, but adds to the cautionary environment. Earnings expectations are a key factor for market growth. Analysts are often too optimistic on forward expectations.Forward P/Es historically are 2 multiple points below trailing average. The historic average P/E for US large caps is about 16.5x earnings versus the current forward P/E of 21.62. Over the past 3-months forward EPS estimates have decreased by -2.23%. Over the past month, forward EPS estimates have decreased by -0.99%. The rate of EPS change is declining at a slower place. |
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Equity Risk Premium
A reading of 100% historically means the average returns over the coming years will likely be well below average. While the market is expensive historically, this metric suggests returns will be well below average and should not be used as a timing indicator, but adds to the cautionary environment. The equity risk premium is the discount factor investors are paying for stocks above the risk free rate. The inverse of the P/E called the earnings yield plus the long-term government yield is a reasonable estimate. Overall, the ERP declined 3.6bps last week. The yield of the 30-year bond increased 4.5bps. The earnings yield of the S&P 500 increased 0.9bps. The tightening of financial conditions is likely to continue in the short run. But we are very close to fully pricing in the terminal rate of Fed funds and weakening of the economy and earnings should start to balance out. Markets remain on the expensive side, but it’s mostly because of higher rates. |
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BUSINESS CYCLE FACTOR
Risk Level: 87%
A reading of 100% historically means the average returns over the coming years will likely be well below average. While the market is expensive historically, this metric suggests returns will be well below average and should not be used as a timing indicator, but adds to the cautionary environment. The equity risk premium is the discount factor investors are paying for stocks above the risk free rate. The inverse of the P/E called the earnings yield plus the long-term government yield is a reasonable estimate. Overall, the ERP declined 3.6bps last week. The yield of the 30-year bond increased 4.5bps. The earnings yield of the S&P 500 increased 0.9bps. The tightening of financial conditions is likely to continue in the short run. But we are very close to fully pricing in the terminal rate of Fed funds and weakening of the economy and earnings should start to balance out. Markets remain on the expensive side, but it’s mostly because of higher rates.
Slope of Yield Curve
A reading near 70% suggests the yield curve (3-months vs. 10-years) is somewhat flatter than the historical average. A normal sloped yield curve is healthy and is a positive business cycle factor. A curve getting flatter over time suggests financial conditions are tightening. The recent trend has been flatter. Last week, the 3M-10Y curve was 6.8bps steeper. The 12-Month forward expectation for SOFR is 3.47% which is pricing in 88bps of rate cuts. Over the past week, rates changed by 7bps and by -17bps over the past month. |
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High Yield vs. Investment Grade Credit Spreads
At a reading near 80%, credit spreads are near extreme low levels and suggest easy financial conditions and a strong economic outlook ahead. Investors are not likely adequatly compensated for credit risks if a shock develops, but this is never a moment in time, but a process over weeks or months. Narrow credit spreads correlate with high business cycle risk when a shock develops. The yield-to-worst (maturity) for junk bonds is 7.76%, which is -0.7 standard deviations below average. The FOMC and other central banks are reducing liquidity and e expect them to maintain tighter financial conditions than equity markets are pricing for an extended period. Looking out, we should expect tighter financial conditions and wider credit spreads until the economy troughs. Over the past month, HY-IG spreads are -60bps narrower. Over the past 3 months, HY-IG spreads are 52bps wider. Momentum is fading. |
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NY Fed Weekly Leading Indicators
Over the past week, the NY Fed weekly leading economic index increased. The trend over the past month is rising at a slower pace. The recent trend suggests evidence of weaker growth. Growth challenges are significant without deficit driven stimulus. For more details see: https://www.newyorkfed.org/research/policy/weekly-economic-index#/interactive We are now past the stimulative phase of the cycle and looking ahead, quantitative tightening (QT) will likely provide a major headwind for risk premiums. The labour market remains the stickiest part of the core inflation push with real assets showing signs of deflation. |
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Real Yields & Inflation Expectations
Over the past week, real 10-Year Treasury yields increased 6.6bps. Nominal yields increased 7.0bps, while long-term inflation expectations rose 0.4bps to 2.40%. Real monetary policy is restrictive relative to long-term expectations. Short-term inflation numbers remain extremely elevated, while longer-term market based inflation expectations are elevated relative to the range of the past decade. Based on recent curve moves, the market has likely priced in more tightening than the FOMC actually will need to do given increasing odds of a recession. |
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TACTICAL FACTOR
Risk Level: 46%
Following the multi-week rally, most tactical indicators are back in neutral ranges with only 2 (5-day put/call ratio, VIX) or 12 at cautionary extremes. Overall, the mix suggests a two-way market in the coming weeks. Resistance levels should be strong with important support levels considerably lower.
5-Day Put/Call Ratio Risk Level: 95% The Put/Call ratio measures a degree of speculation and hedging in the options markets. A reading near 100% suggests an all-time extreme degree of bullish speculation. Last week, the average put volume declined 1,371 contracts per day while the average call volume incresed 292 contracts per day. ![]() |
Speculative Position S&P 500 Futures Risk Level: 75% Positions of long only speculators in the S&P 500 futures contracts offers a potential future source of supply or demand. Current readings are elevated, it’s not until the position gets to an extreme that it becomes a good contrary indication. As of May 6, S&P 500 E-mini long only speculators reduced their net long position last week by 662.0 million dollars. This group of long-only asset managers are as long as they have been since November 2021. ![]() |
Percentage Deviation from 200-Day Moving Average Risk Level: 28% When the market is close to the 200-day average, it could go either way. If recently trends are bearish it can act as resistance. If recent trends are bullish, it can act as support. In volatile markets, it has somewhat less meaning. Timing can be difficult and we need other confirming indicators to identify the opportunity. The 50-day average is below the 200-day average with the trend of the 50-day average falling and the trend of the 200-day average rising over the past week. ![]() |
AAII Bull vs. Bear Sentiment Spread Risk Level: 7% When the percentage of Bulls is well below bears Bears, there should be lots of cash ready to buy. Last week the percentage of bulls increased 8.5% while the percentage of bears decreased 7.8%. Sentiment in the past month is less bearish than average. The 1-month average reading is 2% compared to the 3-month average reading of 4%. ![]() |
Seasonal Pattern (All Years) Since 1928 Risk Level: 56% The 1-Month forward based return is slightly below average based on the 4-year presidential cycle model. Seasonal patterns thus far in 2024 have been meaningfully off trend. We do not expect seasonal trends to matter too much this year. Clearly, we are facing a unique US election period. ![]() |
Presidential Cycle (Current Year) Since 1928 Risk Level: 75% Positions of long only speculators in the S&P 500 futures contracts offers a potential future source of supply or demand. Current readings are elevated, it’s not until the position gets to an extreme that it becomes a good contrary indication. As of May 6, S&P 500 E-mini long only speculators reduced their net long position last week by 662.0 million dollars. This group of long-only asset managers are as long as they have been since November 2021. ![]() |
Current vs. Average Volatility (VIX) Risk Level: 28% When the market is close to the 200-day average, it could go either way. If recently trends are bearish it can act as resistance. If recent trends are bullish, it can act as support. In volatile markets, it has somewhat less meaning. Timing can be difficult and we need other confirming indicators to identify the opportunity. The 50-day average is below the 200-day average with the trend of the 50-day average falling and the trend of the 200-day average rising over the past week. ![]() |
Current vs. Future Volatility (VIX) Risk Level: 18% Last week, current volatility was -2.1% below the previous week. Future volatility was -0.6% below the previous week. The ratio of current volatility to future volatility is now close to inverted. Volatility readings are swinging with the latest headlines. We expect elevated volatility readings as long as geopolitical risks are high. ![]() |
Percentage of S&P 500 Holdings Above 50-Day Average Risk Level: 60% The percentage of stocks in the S&P 500 above their own 50-Day averages is 62.6%, which is 5.6% above the previous week. It is 23.0% above the average of the past month. Tactically, only slight above average. Shorter-term breadth in the past month is weaker than average. The 1-month average reading is 40% compared to the 3-month average reading of 41%. ![]() |
Percentage of S&P 500 Holdings Above 200-Day Average Risk Level: 16% The percentage of stocks in the S&P 500 above their own 200-Day averages is 43.8%, which is 0.0% below the previous week. It is 7.3% above the average of the past month. Longer-term breadth in the past month is weaker than average. The 1-month average reading is 36% compared to the 3-month average reading of 45%. ![]() |
Breadth-McClellan Summation Index Risk Level: 52% The breadth of the market is weak. Fewer stocks are participating in the advance. The McClellan Summation Index Breadth Oscillator over the past month is weaker than average. The 1-month average reading is 456 compared to the 3-month average reading of 768. ![]() |
Overbought-Oversold 13-Week Relative Strength Index Risk Level: 46% The 13-week RSI is a neutral 49. Overall, RSI has much higher signal efficacy at extremes and better at bottoms than tops. When interpreting the RSI, we are typically looking for divergences. Currently, there is no strong evidence of divergence. ![]() |