As we navigate the typical quarterly “quiet” macro period, we want to first take a step back and discuss the current data in detail. We at Cornerstone believe the market is acting like the start of a new bull market rather than a late-cycle top.
Here are five supportive factors to consider.
The ISM Manufacturing Index, which measures manufacturing activity, is still below 50, which is more consistent with an early cycle:
In the past 20 years, no S&P 500* bull run has topped off with this index still below 50. Typically, when the index is below 50, it’s during the “early cycle”.
Next, the housing deficit in this current cycle is a 1.7 million shortage of homes over the past decade:
The 1.7 million shortage number is a result of a cumulative 13.5 million new home starts versus 15.2 million household formations. Historically, we would expect a market cycle peak to coincide with the housing cycle peak.
Third, margin debt usage has declined by $90 billion since January:
This consistent decline over the past three months is not what we typically see at market tops.
Fourth, the six-month average reading of individual investor sentiment is still at -21:
Since 1995, every major market top coincided with this six-month rolling average ranging from +5 to +29.
Lastly, in our opinion this is still the most hated V-shaped stock rally:
That’s even though as of this writing, we’re within 3% of all-time highs.
It’s clear that if you turn on the financial news, the majority of investors remain negative. Ironically, that’s bullish considering how equities have continued to drift higher in the face of this “quiet” macro period.
Keep in mind, if the majority of investors are still positioned for downside, the pain trade is actually for stocks to keep rallying. Consequently, we can begin to wonder if the next move in equities is a painful melt-up rally with a sharp rise in stocks forcing shorts to cover.
Currently, the conditions are there. As you can see, short interest has risen to historical levels as hedge fund gross leverage has exploded, creating potentially forced inflows into equities:
As we've written before, this disconnect perhaps boils down to the mere fact that there is a significant perception gap. Markets seem to be telling us there is more clarity than economists believe regarding the potential risks of tariffs, inflation, and bond market spillovers.
If true, this further reinforces our belief that equities are still more attractive now than in February. It would confirm that stocks are beginning to look at a more fundamentally strong 2026.
How did we see this run on the horizon all the way back in April? And what is the same underlying data indicating might be around the corner?
Well, it comes down to ignoring the noise.
As a quick refresher, we discussed positive forward return expectations after MoneyFlows’ trusty Big Money Index, a 25-day moving average of “big money” investor activity, dropped below 36% in April.
Viewed another way, as you can see, the circled instances of the BMI being below 36% over the past three years corresponded with market runs afterwards:
Another reason we think this is a hated, unnoticed rally is the underlying money flows into equities since April 9. As most of the financial media wasn't looking, equity inflows have vastly exceeded outflows:
Perhaps most surprising is this extreme difference in buying versus selling thus far has been achieved without massive, forced buying (i.e., force inflows):
Forced buying is when there are single days of 400 or more inflow signals. Here’s what that looks like over the past three years (each after a severe dip in the BMI):
In the three instances highlighted above, it’s clear how outsized these forced buying days are on the chart. Right now, we haven’t come anywhere near that level of extreme fervor yet.
However, remember that hedge fund short leverage is at historical highs. There's a high probability that short covering will come into play in short order. If so, it could ignite an extreme, face-ripping cherry on top of the current run.
If that takes place, it could subsequently lead to a cooling off period that lasts a handful of weeks. The market will have to adjust to a significantly overbought environment.
I’ll ask for you: does that mean that we need to prepare for fear?
As always, the answer is to plan and manage based on data. This allows us to focus on the signal, not the noise. That way we can zoom out in the face of big rallies and overbought pullbacks.
For perspective, this is the daily returns chart of the S&P 500 from Jan. 1, 2023, through May 29, 2025:
Many will notice only the many drops and gyrations that caused pain and anxiety along the way. The financial media certainly amplified that noise, making it worse.
Now let’s look at the same period, but with quarterly returns:
That looks like a much smoother ride.
Going further, this is what you’d see when looking at just the annual returns:
This is the power of tuning out and zooming out. To further prove the point, below are market returns for the past 35 years. The chart on the left is the daily action, the one on the right is yearly performance:
One looks a lot smoother and simpler than the other, doesn’t it?
But this way of thinking isn’t profitable for brokers, traders, and the media.
But we find that filtering out the noise creates a road map for long-term success and profitability for our clients. Want to join us?
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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.
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