Buy The All Time High?

30 June 2025

One of our mentors used to ask, what is your quarrel with price? From our vantage point there is a divergence between price, beliefs, and fundamentals. There are several major questions that remain unresolved and yet the market is behaving as though it is all clear. The S&P500 – the global risk proxy – is trading just below the all-time-high and at 22.7 times forward earnings (86th percentile of the 30-year valuation range). The next key deadline on tariffs is July 9th.

As we noted this week, a UBS basket of tariff losers is back to pre-Liberation Day levels (chart 1). The prevailing bias likely assumes that the deadline for tariff negotiations will be extended for most countries when the current 90-day reciprocal tariff pause ends. From a market perspective, an extension would be a positive outcome, given little hope for a roll back of baseline tariffs. The prevailing bias likely has the probability of “extend and negotiate” at ~60% or more. Put another way it is well-priced. Alternative outcomes, like a reversion to high reciprocal tariffs would be negative for equities and credit.

Chart 1

Source: Bloomberg

Another probable reason for a likely extension of the tariff deadline is that the US fiscal legislation (the Big Beautiful Bill) might not be passed by the 9th of July. We doubt that the Donald would want to add market volatility (downside risk) before the fiscal bill is completed. Delaying difficult negotiations for one to three months, along with warnings of stern measures to follow appears the most plausible outcome.

We would not expect a large market reaction to a likely extension given the benign outcome is already the consensus belief and well-priced. In the very near-term equities are likely to grind higher and credit spreads tighter through July. Further modest depreciation of the US dollar is also likely.

An extension could be USD-positive if risk premia on US assets fall. Our sense is that the risk-positive, modestly USD-negative outcome is more likely, but only by a small margin.

While inflation expectations are elevated, there has been a deterioration in both the Citi US economic surprise index and the labour market under the surface (chart 2). That likely explains recent weakness in the dollar. However, our sense is that short/underweight US dollars is a crowded consensus belief and vulnerable to reversal despite the tension on the dollar’s haven status and portfolio flows.

Chart 2

Source: Bloomberg

Although the unemployment rate remains low, partial indicators of the labour market (job openings, temporary hires, monthly revisions, and layoffs) undercut the “resilient labour market” narrative. The Challenger layoffs time series now rival those from September 2008 right before the systemic rupture went mainstream. The data might indicate fragility under the surface: where headline strength masked a rolling deterioration. Just like in 2008, we may be mistaking lagging indicators (like the unemployment rate) for structural health, when leading indicators (job cut announcements) are screaming stress.

The S&P500 (global risk proxy) trades at 22.7 times forward earnings or in the 86th percentile of the 30-year valuation range. Equity and credit volatility tends to rise in a recession as the cash flow and profit cycle deteriorate. Of course, we don’t know if this will be the outcome. What we do know is that risk compensation is poor given the deterioration in some of the key leading indicators and policy risk. An extend and negotiate of the tariffs is modestly risk positive into July, but only at the margin. Several major questions that remain unresolved and yet the market is behaving as though it is all clear. Moreover, the benign outcome is already well-priced.

20250627_Buy The All Time High.pdf

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