July 2025: The BakerAvenue Prudence Indicator

BakerAvenue Prudence Indicator Says... 

Long Term: Positive  |   Short Term: Neutral

Halftime Ruminations: Plenty of Discourse — and Resilience

"It's not whether you get knocked down, it's whether you get up."
- Vince Lombardi

The first half of the year had enough material headlines to fill a multi-year cycle. As we cross the midpoint of 2025, market resiliency amidst the turbulent backdrop of tariff uncertainties, geopolitical tensions, and fiscal debt discourse, to name a few, has been impressive. More than a few investors overlooked the tailwinds of sustainable growth, enduring industry themes, and repositioning that have propelled markets to all-time highs. Geopolitical event-driven market volatility is especially difficult for investors because markets discount outcomes while humans focus on the present. This leads to uncertainty, which, when combined with fear of financial loss, can lead to flawed decision-making. Markets often focus on directional improvement as opposed to simply focusing on the headlines (e.g., climbing a “wall of worry”). In that light, uncertainties on trade and geopolitics have likely peaked, and growth/liquidity fundamentals remain supportive on balance.

Following May’s best performance in 35 years, momentum carried into June with another strong month of gains. We have always felt that even the most damaging outcomes were man-made, and thus correctable. Of course, investors trying to get a clear picture of the backdrop still face a set of challenges. Investing has been made more complicated by the continued shifts in tariff and fiscal policies. These policies are impacting both the economy itself and the data by which we monitor it. Moreover, the policies keep changing, adding a further layer of uncertainty that can complicate the analysis. We focus on leveraging the output from our analytical disciplines while trying to assess policymakers’ responses, the interplay of economic and non-economic forces, and the eventual outcome.

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, fundamental, and macro 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 slow, but non-recessionary, growth. Given the tariff news and associated volatility, there are adjustments to consider, but our overarching views remain the same. Ultimately, another year of economic and earnings growth will overcome the macro headwinds and 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

From a long-term perspective, price trends have bounced off key (upward sloping) support levels and remain positive. Tactical signals remain choppy with elevated volatility. Leadership has been supportive with pro-growth sectors outpacing defensive groups in the rebound. Equally weighted indices have started to pick up relative strength and have helped to broaden the (still) narrow market. There is work to be done here, and it remains an opportunity for tactical repositioning as leadership shifts. We are intently focused here as we consider portfolio tilts.

We are looking for a momentum thrust (e.g., expanding advance/decline lines, an expansion in new highs vs. lows, etc.) to help confirm the recent move. The improvement off the early April lows raises the odds that any corrective weakness is more likely to be contained (e.g., dips are being bought). Nevertheless, “v-bottoms” are historically rare, so some tactical choppiness makes sense. We are encouraged by the higher performance dispersion within sectors and industries, as it supports more active oversight. We suspect the correction, and corresponding bounce, has shined a light on this development. We expect the lower correlations backdrop will continue as the year progresses, an environment we welcome.

Encouragingly, investor sentiment is still supportive (e.g., flows are only recently starting to pick up, bull-bear surveys reflect a neutrals bias, short interest has climbed, etc.). Bull markets tend to die on euphoria, not skepticism, so we continue to like this input. We have been noting that positioning (e.g., investors have poured well over $7.0 trillion into money market funds) should act as a buffer to sizeable pullbacks. While not the overriding factor, investor positioning often influences the order of magnitude in market moves (higher or lower). While there is certainly a high bar for allocations given elevated risk-free rates, our view is that investors have room to increase equity exposure.

The Macro Perspective

The uncertainty surrounding new policies (e.g., trade, tax, fiscal, etc.) raise volatility, but a global easing cycle and decent economic growth are serving as offsets. The economy registered slightly negative growth in the first quarter, but real-time gauges have last quarter running ~2.5% (note: there are tariff-related accelerated inventory adjustments that are making the data choppy). We continue to see slow, but non-recessionary, growth for the balance of the year. Prior to the tariffs, globally, there were encouraging signs of economic optimism. China, and increasingly Europe (stimulus related), had seen their economic surprise models turn positive. For some time, macro worries have centered on slow global growth and still tight financial conditions (i.e., restrictive monetary policy). We can add tariffs and fiscal budgeting to the list. We understand the concerns but continue to see plenty of growth optionality and view easing global central bank policy as a sustained catalyst.

Interest rates will continue to carry outsized significance. We believe ultra-low interest rates are a thing of the past and investors should embrace more normalized levels. We expect lower, but not low, interest rates going forward with a milder cutting cycle in which the Fed recalibrates the policy rate. With decent growth, the Fed doesn’t need to be aggressive with the size and number of rate cuts. The Fed is trying to find a neutral rate, which in their eyes is neither accommodative nor restrictive, and we suspect they find it this year. We see two more rate cuts by the end of the year. For some time, one of the most pressing questions for investors has been: Can the Fed find a neutral policy rate without causing a deep recession? So far, so good.

Geopolitical and political events will represent increasingly material considerations for investors. While particularly difficult to position for, we have several market- and non-market-based factors to lean on that help assess materiality and support positioning. We are aware of the uncertainty associated with a new administration, but see counterbalances (e.g., tariff uncertainty vs. deregulatory tailwinds and lower taxes) ultimately offsetting much of the impact. 

The Fundamental Perspective

Fundamentally, we continue to focus on the trend in corporate profits and credit metrics. Headwinds, such as higher financing and input cost pressure, have been more than offset by acceptable demand trends. Estimates for revenues and profits have been revised higher over the past few years and were a stalwart defense against any recession forecast. Earnings season has gone better than anticipated; first quarter YoY growth rates ended up more than double (+14%) what was expected before reporting season started (+6%). We see a similar setup for the upcoming earnings season, albeit at lower levels. After this quarter, we expect growth rates to accelerate to close out the year.

Valuations are now above their long-term averages. However, valuation dispersion within sectors and industries remains elevated with a historically sizable gap between the highest- and lowest-priced assets. We see opportunities in both groups (continued leadership in one, reversion to the mean in the other). Several of the secular growers are commanding high multiples, but also market-leading profitability. Value-oriented pockets offer opportunity, but investors will need to be selective. We continue to advocate for themes like power demand, accelerating capital market activity, and AI-related enthusiasm.

The credit backdrop will be important to monitor as a check on fundamentals and a proxy for risk tolerance. Credit spreads have tightened with the rally in stocks, helping to substantiate the move. One of the defining criteria between recessions and slowdowns has been the behavior of the credit markets. Both investment-grade and high-yield spreads vs. Treasuries are stable and remain below recessionary levels. Encouragingly, corporate cash flows remain healthy, and balance sheets are in good shape. 

Concluding Thoughts

The market’s resilience amid the uncertainty has been impressive. There has been plenty of discourse in the first half of ’25, but equally as much (if not more) resilience as several indices are now trading at all-time highs. Directional improvement in the most pressing macro issues, combined with strong earnings results and bearish investor positioning, catalyzed the recovery.

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 continue to 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.