The market theme of daily volatility continued. But even with this day-to-day uncertainty, month-to-date performance essentially remains flat as of this writing:
This has masked far greater dislocations taking place underneath the surface, especially in thematic areas of the market. So, is this a speed bump or a warning sign?
Today, Cornerstone will analyze and explore what the underlying data is actually saying.
The best place to start is the overall market’s leverage risk. U.S. margin debt has increased from 49%-54% year-over-year, depending on the point-to-point dates used.
Since 1960, any margin rise over 50% year-over-year has been followed by a period of consolidation in the broader market:
That makes sense because firepower needs to be replenished. Specifically, investors employing such high levels of margin debt are subject to margin calls and subsequent forced selling as the AI quantum space and other high-beta trades come under pressure.
Current underlying data regarding this dynamic begins to help explain some of the dislocation or disconnect we’re seeing in recent market activity, which we’ll further explore in this post. It’s critical to note any forced selling causing daily market volatility isn’t showing up in any meaningful way where it matters most though, which is institutional outflows throughout July:
The lack of outsized outflows indicates any current consolidation is a natural speed bump, not an overall market destruction warning sign.
This next development over the past week or so we think is the most significant foundational support for the market. That is the extraordinarily positive downside in both the June core consumer price index and producer price index.
This data validates our longstanding view that the long-term inflation trend continues to “fall like a rock.” June’s core CPI is -0.02 for the month, which was the first deflation print since COVID:
Under the surface, the inflation data is even more positive than the headline. Only seven of the 108 items in the calculation had enough inflation to actually contribute to a higher CPI.
Most importantly, the largest and stickiest contributor to inflation since COVID – shelter – came in at just 0.1% month-over-month, also the lowest reading since COVID.
We now have the data to confirm that shelter inflation peaked a while ago:
In fact, housing as a contributor to inflation has now decreased from 55% of overall inflation to 45%:
This reversal is the most significant development in our inflation data in the last couple of years. And while it may surprise some, the year-over-year shelter inflation sits at 3.28%, which is below the 40-year average of 3.36%.
This inflation data is another extraordinarily positive development. At the same time, it seems to be disconnected from the current day-to-day market volatility so far in July.
A third disconnect we’re seeing is the stronger-than-expected corporate earnings data. As of this writing, 19% of the S&P 500 companies (95 firms) have reported actual earnings results for Q2 2026.
Of them, 93% have reported per-share earnings results above estimates, beating the five-year average of 78% of the 10-year average of 76%.
In aggregate, those companies have reported earnings that are 15.5% above estimates. That’s more than double the five- and 10-year averages of 7% and 7.4%, respectively:
As a result, the overall index is once again reporting higher earnings for Q2 relative to the end of the quarter as well as a week prior. For perspective, the blended earnings growth rate for Q2 (actuals and estimates) now sits at 25.2%:
That figure is well above the 22.5% from last week and the 23.2% at the end of Q2.
Since corporate earnings remain exceptional, we can confidently say those companies haven't changed overnight as they continue to deliver results.
But the market digestion for this information has seemingly become more complicated. Why?
A perfect example of this complicated disconnect is Taiwan Semiconductor. It beat earnings, raised guidance, and reported profits increasing 77% year-over-year and 23% quarter-over-quarter.
Still, shares fell 4%. This type of disconnect or dislocated market behavior historically is almost always due to forced liquidation.
That’s why we now turn back to margin debt data. It helps explain the dislocation’s source.
As we noted earlier, we’ve seen record increases in how much investors borrowed to buy stocks. As of June 2026, it’s over $1.5 trillion.
That’s 60% higher than the previous record from October 2021.
To help understand how this affects market volatility, brokers lend clients cash against their portfolios and charge a floating interest rate often pegged to the daily SOFR rates plus an additional 2%-3%. In exchange, the broker holds the client’s securities as collateral. But when stocks drop, the investors who overextended their loan-to-value borrowing thresholds quickly see their accounts fall below maintenance levels causing brokers to issue margin calls.
Most investors can’t deposit additional cash fast enough. So, their stocks are sold at whatever price is available at the time.
But most brokers don’t wait for the margin call to fail. When they see an eroding client position, they start moving so the client’s problem doesn’t become their problem. This is why these brokers are highly motivated to move early and fast.
This matters in the current market, where it’s reasonable to surmise that the $1.5 trillion in borrowed money is concentrated in the same handful of high momentum names due to the parabolic price increases in Q2. This creates a dynamic where unwinding leverage can cascade quickly, creating a spiral of lower prices and margin calls.
This sloppy market action appears to be what we’re seeing and it occurred in 2021 too. Margin debt peaked in October of that year, and the names hit hardest over the following months were the exact ones that ran up the most. Roughly $328 billion in margin debt came out of the system over the next 14 months.
Similar action is causing the dislocation or the disconnect between the underlying strong fundamentals in comparison to the actual market price day-to-day action.
Understanding this current headwind, we can begin to develop an honest forecast. As readers know, August and September are the two historically weakest months in the calendar:
In midterm election years, that seasonal weakness is further amplified.
History also tells us most of that amplified volatility arrives well in advance of the midterm elections. So, it's reasonable to expect this historical seasonal weakness to coincide with leverage being unwound.
This is where the data gets interesting and provides evidence that the disconnect isn’t due to fundamental structural issues but instead just the seasonal weakness we've been expecting since the beginning of the year.
For an example of this underlying data evidence, look to the recent rise in the Big Money Index of more than five points in four trading days over two weeks ago, even as the market price of the Nasdaq Composite fell:
On Thursday, July 16, the Nasdaq dropped nearly 1.5% while also seeing some of the strongest daily institutional flows in the recent past.
This disconnect where prices fall while institutional conviction rises is not an indicator of a market breaking down. Instead, it’s a market repricing, which is consistent with our expectations over the past few weeks.
History provides us with further intermediate- and long-term confidence. Since 1990, there have been 28 instances in July where the BMI rose sharply while the Nasdaq fell. One year later, the market was higher in every single instance, averaging a gain of more than 15%.
Drilling down further in midterm years specifically, seven comparable environments produced an average one-year gain of nearly 22% with a perfect win rate at both six and 12 months:
Now we understand the disconnect causation and can remain confident in our initial 2026 outlook expectation. As election uncertainty subsides and leverage leaves the system, uncertainty will begin to clear, especially as we get closer to the seasonally historically strong fourth quarter.
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