We’re squarely in November, and as we look towards the 2025 finish line, there are six macro-level things capturing our attention here at Cornerstone. They are:
- Third quarter earnings are some of the best we’ve seen in several years, with 84% of companies currently beating estimates.
- AI continues to gain visibility.
- Tokenization is driving accelerated crypto adoption.
- Inflation is continuing to weaken as the Federal Reserve remains doveish.
- Private credit concerns continue to linger in the background.
- Overall investor sentiment remains muted, indicating this bull rally still has room to go before reaching over-exuberance.
Let’s start with what’s most important: earnings fundamentals. As of this writing, it’s the stretch run of third-quarter earnings season with 411 of the S&P 500* companies reporting. Of them, 84% beat earnings estimates and the overall surprise beats are now sitting at 7%.
That implies an overall 13% rate of per-share earnings growth on a year-over-year basis. This earnings strength is present across many sectors posting double-digit EPS growth:
This isn’t just an AI narrative. In our opinion, it demonstrates once again how U.S. companies with strong management can generate big earnings gains despite the largest tariff increase in U.S. history earlier this year.
Recall how many economists earlier in the year predicted American profit margins would collapse by the third quarter due to tariff costs. But it’s now clear the U.S. fundamental earnings picture remains on solid ground. Plus, current projections indicate continued acceleration of U.S. corporate earnings strength throughout 2026:
It's important to acknowledge and point out the two most likely lingering concerns for the markets in the short term that we’re eyeing:
- Any indication of private credit issues widening.
- Short-term uncertainty amplified by the continuing U.S. government shutdown as it enters its second month with no signs of improving. (*Editors Note: this was written before the short term Senate agreement reached over the weekend to end the shutdown)
Both concerns are most likely transitory. Still, there’s an increasing probability that a further lack of clarity could create short-term bouts of volatility.
That said, it’s understandable there could be near-term choppiness in the markets as they continue to digest healthy October gains. We clearly do not see any evidence of over-exuberance yet. Individual investor data shows significant bearishness over bullishness, even as markets rise:
Historically, this would need to reverse to indicate a bull market cycle becoming overheated.
Disconnect in the Market?
Understanding our view on the macro picture, let’s turn to what we’re seeing underneath the market’s surface. First, MoneyFlows’ trusty Big Money Index, which is a 25-day moving average of institutional investor buys and sells netted, drifted lower to a fresh six-month low of 55.6%, even as markets hit new highs:
Peeling back the onion, we can clearly see why the BMI has recently increased the speed at which it's drifting lower. It’s due to outflows that have picked up over the last week or so:
This may seem to conflict. That is, outflows are increasing as the S&P 500 sits at or near historical highs. Quite frankly, the answer is simple. It comes down to the fact that a handful of mega-cap stocks have recently been propping up the market weighted index, including Alphabet, Amazon, Microsoft, and Apple^.
To illustrate this disconnect, notice how over the past week outflows of small- and mid-cap stocks have outweighed inflows by a two-to-one ratio as mega-caps saw a two-to-one inflow ratio:
For us, the question becomes which areas have seen selling pressure? Some of the biggest culprits recently have been discretionary, financials, industrials, and technology:
Those four sectors alone make up 58.3% of the outflow distribution over the past week plus:
On its own, that could cause alarm for some.
But it’s interesting to note how at the same time technology, industrials, and financials were also three of the top four sectors receiving inflows, accounting for 48% of total inflows during the same time:
What does this seemingly contradictory information tell us?
It's important to note how the recent uptick in outflows hasn’t been extreme. That fact drew our attention to a rare metric that’s happening right now.
The following chart shows elevated trading volumes. When bars increase in size, it indicates there's a lot of trading happening under the surface. As you can see on the far right, there have been six straight days of 1,000 or more stocks and exchange-traded funds trading at outsized volumes:
This volume of trading combined with the same sectors receiving inflows and outflows is an immediate indication of churn and rotation underneath the surface. This is typical action when the market is digesting large gains and looking to settle on a new foundation moving forward.
This level of elevated trading volumes for so many consecutive days is extremely rare. Over the last 12 or so years, we've only seen 11 times when there were four or more days with 1,000 plus volume trading days.
Interestingly, some of those previous 11 instances were earlier this year in April. That time period laid the foundation for the market rocket fuel that began once trading volumes subsided to normal.
Understanding this is important because when we are in these periods of consecutive days of elevated trading, the market performance is almost unanimously in the red:
But once those consecutive large trading levels decrease, there’s often a market springboard moving forward (with the exception of a couple of outliers). For us at CFS, this elevated trading volume data is what we’ll be monitoring closest to identify when elevated churn underneath the surface and the market calms down, likely allowing the market to build its new floor.
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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.
^ Alphabet, Amazon, Microsoft, and Apple are owned in Cornerstone client accounts. Daniel Milan owns Alphabet and Amazon personally.
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