And just like that, fears of last weekend dissipated and equities continued marching higher throughout the week.
While the events of early last week (i.e., the Israel/Iran cease-fire and Federal Reserve Chair Jerome Powell’s Congressional testimony) were positive, in our view, stocks’ outsized rise was more reflective of the extreme negative positioning of many investors.
As our readers know, for months we've been saying this is the most hated V-shaped rally in history. Investor skepticism has stemmed from too much subjective uncertainty related to tariffs, oil prices rising, war conflicts, the Fed, the economy tanking, and even the belief that “only retail bought the April lows.”
Now, please allow objective data to correct each baseless belief.
For tariffs, renowned and respected research firm Geopolitical Intelligence Services (GIS) offers data and analysis contradicting a direct connection between tariffs and inflation.
On oil prices, they're lower than before the conflict began and show a downward trend:
As for concerns over war, we mentioned last week how data is largely positive, and “big money” investors are not de-risking yet. Also, previous conflicts haven’t yielded market disasters.
The situation with the Fed will be covered in more detail later in this post.
Regarding the economy, the “GDP Now” forecast from the Federal Reserve Bank of Atlanta refutes concerns of tanking. Forecasts show a recent upward trend well above 3% Q2 GDP growth:
Lastly, while some suggest only retail investors bought the market lows, “big money” investor data from our friends at MoneyFlows shows market-moving investors have participated too:
Also, MoneyFlows’ Big Money Index, a 25-day moving average of netted “big money” investor activity is sharply up since April lows, now sitting in overbought territory:
To be clear, we acknowledge all the skepticism. But to be clearer, we at Cornerstone examine doubts with data.
Analysis like the kind above is why we've held contrarian stances relative to the skeptics. The data has allowed more and better visibility. It’s why we remain constructive in the face of current skepticism.
As a final reminder, at CFS we think the high yield market is the best economist when it comes to predicting recessions. As we said over a month ago, high yield spreads didn't foresee a recession after early April tariff announcements.
Equity And Bond Markets Are Seeing Through This
Turning to the current hot topic, let’s discuss the Fed. The recent Fed meeting along with Powell’s testimony in front of Congress yielded a notable quote:
This has been the Fed’s stance for a while. But what’s most frustrating to us is that in the same breath, Powell hedged the views around inflation flaring up this summer when he expressed uncertainty about tariffs’ effects on consumers:
Powell’s back-and-forth creates unnecessary confusion for investors and economists. But if you put aside these contradictory statements and look at data, it sure seems like equity and bond markets are seeing through this.
One-year inflation (i.e., inflation now and what’s projected over the next 12 months) is 2.38%, which is lower than at the start of 2025:
Yes, this is the bond market indicating it unemotionally sees lower inflation.
The dramatic decline in stubbornly sticky shelter costs is further proof of tamed inflation:
Many will argue whether tariffs are inflationary or a one-time price rise. At CFS, we’ll always choose to follow the data.
Right now, the frustration currently lies in the disconnect between Powell’s warning of rising inflation in the second half of 2025 during his Congressional testimony and the Fed somehow still “seeing” two rate cuts in the second half of 2025:
Go figure? These are contradictory in nature.
With so many fluid and contradictory factors dominating a slow, headline-driven period, the second-quarter earnings season can't get here fast enough.
Our Hunch on The Upcoming Earnings Season
Considering all that’s occurred in the first six months of the year, the next quarterly reporting season may resemble a fantastic double feature movie – less inflation discussion by business owners and more commentary about increased productivity.
Like actual inflation, there’s been a downward trend when it comes to talking about inflation during earnings calls. In 2025’s first quarter, 228 S&P 500* companies discussed inflation:
Interestingly, this number was consistent with the average during the four previous quarters and is below the five-year average. Our hunch on the upcoming earnings season is it will produce even fewer inflation-related discussions.
Instead, the conversation could center on the value of AI productivity increases relative to earnings and profits. If we're correct about this double feature, it's realistic to believe the focus will begin to concentrate heavily on the pace of AI-focused capital spending, which could produce some of the most intriguing forward guidance in recent memory.
If earnings season data bears this out, the biggest determinant for analysts, chief market strategists, and economists could change the expectation on where inflation might trend due to the technological advancements and the resulting productivity gains.
We think it’s already happening. A popular phrase in corporate circles is, “If you’re hiring people, you're doing something wrong.”
After all, productivity increases can lead to big payoffs for investors if AI is a major contributor to sales, profit margins, and earnings. If it is, quarterly reporting will show it.
Now, people may believe we’re in a unique time. But human history tends to repeat itself.
Look no further than 1966 and one of the best speeches of all time. In Robert F. Kennedy’s “Ripple of Hope” speech in Cape Town, South Africa, he said:
Six decades later, these words are still fitting, especially considering how this year has transpired. Interesting indeed.
The full speech:
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