SignalPlus Macro Analysis Special Edition: Indomitable

Another week, another all-time high. The S&P 500 hit a new record high on Friday, marking the third time this week and the sixth time in July that it has set a new record. The market continues to ignore ongoing tariff escalations (30% tariffs on Mexico and the EU), the initial signs of price pressure transmission in the latest CPI data, and the latest farce of removing Fed Chairman Powell for "just cause."

The recent rally has pushed the S&P 500's price-to-earnings ratio close to its own historical highs, just as the second-quarter earnings season is about to kick off, with investors paying a premium for any form of stock exposure.

Meanwhile, emboldened by the stock market's performance, President Trump has reignited his tariff escalation war and is drawing up plans to add industry-specific tariffs on top of existing country-specific tariffs, reportedly to be implemented within two weeks. The initial target industries will be pharmaceuticals and semiconductors, aiming to comprehensively cover U.S. import sectors.

Despite the new threats, the market has almost entirely ignored this round of tariff escalation, with "tariff-sensitive" thematic sectors continuing to underperform the benchmark. Whether due to expectations of an eventual "TACO" moment (referring to trade tensions easing), a reduction in targeted attacks on major trading partners (expected Xi-Trump meeting in South Korea), or confidence in the private sector's ability to withstand shocks, the market is likely to remain deaf to trade conflicts until further notice.

Speaking of policy, the Trump administration has stirred up another round of Fed controversy, with media reports suggesting that Fed Chairman Powell could be removed over severe budget overruns in a building renovation project. Yes, you read that right!

Some renovation projects at the Fed's Washington headquarters, costing about $2.5 billion, have landed Powell in hot water over project management issues, with the project costing about $600 million more than initially expected. When asked on Tuesday whether the expensive renovations constituted a fireable offense, Trump said, "I think to a certain extent, yes." -- The Hill

After leaking this absurd claim, Trump quickly walked back the threat, and the market overwhelmingly consensus is that Powell will serve out his term until 2026.

Meanwhile, Fed Governor Waller made a somewhat unconventional move by expressing a "dissent" in advance, publicly stating his preference for a rate cut at the July meeting, citing that "the private sector is not performing as well as everyone thinks," and the U.S. labor market is also "on the edge," as most employment is concentrated in the public sector.

With Fed rhetoric turning dovish and stocks continuing to hit new highs, the market is currently in the same risk-on mode as it has been for the past two months. Is this strange? Or is the market front-running an expected dovish Fed by pricing in upcoming rate cuts, leading to a "Goldilocks economy" narrative?

In any case, inflation expectations have quietly returned, with global long-term yields remaining high, while inflation breakevens have climbed to multi-year highs, and financial conditions remain loose.

Data from the past week also played along nicely, with the University of Michigan reporting slight improvements in consumer confidence in both current conditions and future expectations, while 1-year inflation expectations have dropped to pre-tariff implementation levels (4.4% vs. previous 5.0%).

This week's earnings season will reach its climax, with Tesla and Google parent Alphabet reporting on Wednesday. According to Bloomberg, 58 of the S&P 500's 498 components have already reported earnings, with profits beating expectations by 7.8%. Even as earnings grow, the price-to-sales (P/S) and price-to-earnings (P/E) ratios for U.S. and global stocks have risen to or above historical highs, with investors paying "full price" to increase exposure at this moment.

Surprisingly, despite the market's continued rise, we have yet to see extreme sentiment readings in traditional momentum indicators: the AAII Bull/Bear Ratio remains hovering near the middle of its range, and search engine queries for "melt-up" stories remain at historically low levels.

Have the macro doomsayers finally gone extinct? Has everyone accepted the creed that "stocks only go up"? Don't fight the trend by shorting...

The crypto space, of course, hasn't missed our own "FOMO" moment. Ethereum is performing exceptionally well, approaching the $4,000 zone (up 22% in 5 trading days), with some major altcoins also posting double-digit gains this week. Bitcoin has also set its own all-time high, breaking through $118,000, albeit with slightly restrained excitement. Until further notice, it feels like the good times are back.

The ETH/BTC ratio has temporarily risen from the grave, improving to its best level since the first quarter. Some attribute this to the focus on stablecoins/real-world assets benefiting proof-of-stake networks, while others see Ethereum's new treasury strategy as a catalyst for the rise. Personally, we think it's just a classic risk-on spillover, as most mainstream traditional finance money over the past 7 months has been fully deployed in Bitcoin.

As a positive milestone, Congress did finally pass landmark stablecoin legislation last week, trading stricter federal and state regulation for more stablecoin payment channels. This may have provided some structural tailwinds, as evidenced by record inflows into Ethereum ETFs over the past two weeks, with total July inflows exceeding $3 billion, and daily inflow trends ($300 to $500 million) being 5 to 10 times the daily inflows in the first half of the year.

At the risk of repeating the summary of most of the past 8 weeks... never fight the trend by shorting a dull market, and enjoy the rolling good times. As we step into the height of summer, good luck and happy trading to all friends!

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