August 2026: The BakerAvenue Prudence Indicator

BakerAvenue Prudence Indicator Says... 

Long Term: Positive  |   Short Term: Neutral

Rolling Rotations & Record Earnings

"The measure of intelligence is the ability to change."
- Albert Einstein

The S&P 500 was flat in July even as leadership rotated meaningfully beneath the surface. Sharp rotations, elevated single-stock volatility, and changing market leadership are keeping investors on their toes. Encouragingly, record corporate profitability and broadening earnings growth have catalyzed a move back to all-time highs. Capital continued to move out of the market's most crowded winners and into cyclical, previously neglected corners, while rolling correlations among individual stocks fell near an all-time low. We view this as a constructive, if occasionally uncomfortable, dynamic for active managers. 

Growth resiliency is key to our market call and July's data flow reinforced that view. Earnings and revenue growth continued to accelerate, and 2026 economic growth expectations moved higher yet again, extending a steady climb off last year's lows. 

Our base case remains moderate growth. The tailwinds of record profitability and broadening participation continue to be underappreciated, in our view. We are, however, entering a seasonally difficult stretch, with late-summer volatility compounded this cycle by the midterm election calendar. Should consolidation or correction materialize, our inclination is to view it as a buying opportunity rather than a warning sign. 

In times like these, it is important to have an investment process in place that removes emotion from the equation. At BakerAvenue, we maintain analytical independence from pre-written market narratives. We remove preconceived biases and defer to our analytical output. Ultimately, our views are only as optimistic or pessimistic as our technical, macro, and fundamental analyses indicate. Currently, our short-term metrics are in a neutral position while our longer-term view is positive. 

For those who have been following our market updates (view previous market update videos and commentaries), you will be familiar with several of our key concerns and opportunities. We have continually stated our expectations of moderate growth. There are plenty of adjustments to consider, but our overarching views remain the same. Ultimately, economic and earnings growth will support a grind higher in equities. We believe it is a good time to be active and want to be thoughtful regarding portfolio construction and risk control. 

The Technical Perspective

Price trends remain constructive, with the S&P 500 setting a fresh series of all-time highs while both its 100-day and 200-day moving averages slope upward and sit comfortably below current levels. Leadership has rotated toward cyclicals and away from the mega-cap growth names that dominated earlier stages of this advance, and we are intently focused on this shift as we consider tactical portfolio tilts. The more notable development, in our view, is that rolling correlations among S&P 500 constituents have fallen near an all-time low, and single-stock volatility and dispersion have risen accordingly (e.g., a ‘market of stocks, rather than a stock market’). 

We are watching for a sustained momentum thrust to help the market extend, or at minimum defend, its highs into a seasonally difficult stretch. Internals are supportive but leave room for improvement, with the S&P 500 overall at a respectable 70% of constituents above their 200-day moving average. Encouragingly, sentiment reads remain constructive for the bull case precisely because they are unremarkable; bull-bear surveys register a neutral bias rather than euphoria, and bull markets tend to die on euphoria, not skepticism. Elevated money market balances continue to provide a buffer against sizable pullbacks. While the bar for adding equity exposure is higher than it was in an era of near-zero rates, our view remains that investors have room to increase allocations, particularly as lower stock-to-stock correlation widens the opportunity set for disciplined, active security selection. 

The Macro Perspective

The geopolitical backdrop has improved modestly; we believe the worst of the Iran conflict is behind us. Fortunately, a resilient domestic economy is providing a powerful offset to whatever uncertainty remains. 2026 GDP growth expectations have climbed above 2%, extending a steady upward revision trend, and ISM Manufacturing has returned to expansion territory. The labor market remains tight by historical standards (unemployment is near 4.3%), a dynamic we continue to characterize as "slow to hire, slow to fire." 

Interest rates will continue to carry outsized significance. The tailwind of a global easing cycle has effectively come to an end, and we expect new Fed Chair Kevin Warsh to continue tweaking the Federal Reserve's approach to policy while maintaining a growth bias. Importantly, rates have moved higher alongside resilient growth rather than in spite of it, a distinction we view as constructive. 

The midterm election calendar adds a familiar seasonal wrinkle. Related headwinds have historically peaked in the late summer months, with volatility subsiding and returns improving markedly on the other side. We expect this cycle to result in little material legislative change, and we remain focused on judging the materiality of any policy announcement by its impact on the key pillars of market performance: interest rates, earnings, and investor sentiment.

The Fundamental Perspective

Fundamentally, corporate profits and credit metrics remain in good shape. S&P 500 earnings growth expectations for the next twelve months have climbed to over 30% year-over-year, and revenue growth is tracking near 15% for the second quarter, roughly double its longer-term average (e.g., double-digit revenue growth is a rare occurrence in the middle of an economic cycle). Growth is broadening beyond the largest technology names: consensus now calls for the remaining 493 companies to out-earn the Magnificent Seven in both the third and fourth quarters of 2026, a meaningful narrowing, and eventual inversion, of a gap that has persisted for two years.

Profits continue to move faster than prices. The average stock trades at 17 times next-twelve-month earnings, in line with its longer-term average and comfortably within one standard deviation in either direction. We see this as evidence that valuations remain in check despite the market's proximity to all-time highs. 

One area warranting continued scrutiny is artificial intelligence-related capital spending. Hyperscaler capital expenditures are projected to approach $800 billion this year and exceed $1.3 trillion by 2028, though the pace of growth is beginning to moderate (e.g., growth is expected to decelerate from 94% this year to 22% by 2028). We suspect performance within this cohort will increasingly be driven by idiosyncratic, company-specific factors rather than a rising tide lifting all AI-related equities, reinforcing our preference for staying active and selective. The credit backdrop remains a source of comfort, with spreads tight, well below recessionary levels, and corporate balance sheets healthy.

Concluding Thoughts

Rolling rotations and record earnings have defined the market in recent weeks, and we expect both threads to persist. Correlations among individual stocks have fallen near an all-time low, rewarding the disciplined, active management we believe this environment demands, while record profitability continues to validate the move back to all-time highs. Factors within our technical, fundamental, and macro disciplines continue to skew positively on balance, even as we approach a seasonally volatile stretch tied to late-summer and midterm election patterns. Adapting to this rotation, rather than resisting it, remains our priority. Growth resiliency has proven sustainable and continues to keep us constructive. 

Our investment philosophy is based on a dual mandate of growing and protecting client assets. We continue to focus on "how" one is positioned, not "if" they should have exposure at all. We are staying active, using volatility to harvest losses while opportunistically deploying capital where appropriate. At this point, our cash weightings remain residual in nature, and we are focusing on strategy positioning vs. our respective benchmarks to control risk. Of course, should the backdrop destabilize, we will take a more defensive stance. 

Should you have any questions or comments, please contact BakerAvenue. We are happy to share our thoughts in greater detail, and we welcome the opportunity to speak with you.