Today we’re going to focus on three key areas: trade/inflation, earnings, and money flows. Taken together, they offer a view into what may lie ahead.
To start, equities revived their rally this week, essentially reversing the declines from a couple weeks ago. This is a reminder that, as expected, pullbacks in this environment are shallow due to the excessively cautious positioning of many investors. For those not paying attention, the equity markets finished May with the best monthly performance since November 2023.
Yet still, based on our conversations with clients and other industry peers, we find that many investors continue to remain skeptical, especially because part of their view is that tariff headlines will keep resurfacing, pushing stocks lower. Last week was another example that at this point, this risk fear is mostly unfounded.
For example, equities fell after the White House tweeted a recommendation for 50% tariffs on Europe, only to see a backtrack and delay on that recommendation over the holiday weekend. That immediately led to equities rallying when markets opened last Tuesday.
We at Cornerstone think this is further clarity. Since February, White House initiatives have been a case where the bark is worse than the bite. This continued demonstration of some flexibility, when there are concessions to be had, created a stronger than expected environment for equity markets, as demonstrated multiple times over the past six weeks.
We're even beginning to see fear dissipate in new economic data expectations. For instance, last week the Conference Board’s forward inflation expectations dropped for the first time in five months:
To us, this is the perception gap beginning to close. That’s positive for stocks.
More support for continued equity strength is the fact that this is probably still the most hated rally in recent memory. There is still a staggering amount of cash sitting on the sidelines in money markets:
Some of the more than $7 trillion seems likely to come off the sidelines at some point.
Earnings
Let’s turn to earnings season, where there’s a less pessimistic outlook than initially expected. We’re at the end of earnings season, so we can better analyze forward-looking quarterly and annual guidance from companies.
You’d think with all the uncertainty around tariffs, many companies would have difficulty providing an estimate for future earnings. So, how many S&P 500* companies withdrew guidance for 2025 during this earnings season?
This required digging into earnings releases, presentations, even call transcripts. As of this writing, nearly all S&P 500 companies (478) have reported results. Of them, 259 commented on earnings per share (EPS) guidance for the current year. Just eight of these 259 companies (3%) stated that they were withdrawing or not updating previous EPS guidance for 2025.
Six of those eight companies# cited uncertainty associated directly or indirectly with tariffs as the reason for withdrawing guidance:
For comparison, during the first-quarter 2020 earnings season (the start of the pandemic), 185 companies in the S&P 500 withdrew or did not update prior annual EPS guidance. On the other hand, this past quarter, 251 companies provided EPS guidance for the full year 2025:
Of these 251 companies, 139 maintained guidance, 64 guided higher, and only 37 provided lower guidance; eight companies initiated new guidance where they had no prior outlook:
Drilling down to the sector level, the utilities and industrial sectors had the highest number of companies maintaining previous guidance; information technology and health care had the most companies guiding higher:
This contradicts expectations going into earnings season. Now we want to understand why so many companies are maintaining or increasing guidance for the year. On a macro level, we found four main reasons and highlighted one company among many associated with that reason.
- Stated desire to be conservative in their outlook (Equifax#, April 22).
- Other factors, such as a weaker U.S. dollar, are offsetting the impact of tariffs (Otis Worldwide#, April 23).
- Stated ablility to mitigate any impact of tariffs (Pentair#, April 22).
- Expect little to no impact from tariffs (Fiserv#, April 24).
After analyzing the details of these earning commentaries, we think it’s further proof of American corporate resilience, flexibility, and fundamental strength.
Money Flows
Understanding everything discussed so far, it may not be so surprising that one of the greatest risk-on environments has been unfolding before our eyes. In fact, we’re beginning to prepare for overbought market conditions. Should that occur, it would be evidence pointing to a sustained rally in the short term.
In the end, investing comes down to supply and demand, or in other words, money flows.
Many weeks ago, our data analysis signaled upside, even as headlines screamed fear. And the trusty Big Money Index from our friends at MoneyFlows (formerly MAPsignals) shows real-time demand for stocks:
The BMI is a 25-day moving average of “big money” investor activity netted. When it rises, it means money is flowing into stocks. As of this writing, it’s at 72.6% (80% is overbought). While the news has been frantic, “big money” has bought stocks.
Longtime readers know the BMI can stay overbought for a while. To visualize this, let’s re-examine the four phases of money flows:
When we enter Phase 1, which it appears we’re about to, it ignites extreme risk-on buying and positioning. This pattern has been repeated many times throughout market history.
A few weeks ago, we compared past similar instances to now, looking at 2020 and 2018. Revisiting them now, we can see how both periods saw prolonged time in the overbought zone after extreme reversals.
In 2020, the BMI flatlined in overbought territory for weeks:
The same happened in 2018:
Both of those periods reflect overall extreme risk-on environments that lasted for months.
Thus far today, this repeatable pattern seems to be playing out with the same playbook. Violent capitulation ignited forced buying, which we’re only seeing the beginnings of now:
This data exemplifies consistent inflows and supports a prolonged risk-on period. And it’s yet another example of why we focus on data instead of headlines to give the green light.
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*Past performance does not guarantee future results.
*Investing involves risk and you may incur a profit or loss regardless of strategy selected.
* The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
# None of the companies mentioned are owned in Cornerstone client accounts or by Daniel Milan personally.
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