June 2026: The BakerAvenue Prudence Indicator

BakerAvenue Prudence Indicator Says... 

Long Term: Positive  |   Short Term: Neutral

Weighing Investor Sentiment: Too Euphoric or Too Skeptical?

"Quality without results is pointless. Results without quality is boring."
- Johan Cruijff

Bull markets tend to die on euphoria, not skepticism. Weighing investor sentiment helps determine whether the market narrative is driven by sustainable fundamental realities or unbridled emotion. With markets near all-time highs, investors are conflicted as a volatile macro backdrop and concerns about new supply (IPOs) are being offset by record corporate profitability and sustainable investment themes. The velocity of the recent equity market rally has increased investor anxiety about the sustainability of the bull market and spurred a search for signals that the peak is nearby.

Upcoming high-profile IPOs are drawing comparisons to the exuberant dot-com era. We see notable differences with the most important being the number of IPOs remains below average and well below prior cycle peaks (only ~40 so far year-to-date vs. over 400 in ’99). Additionally, the fundamental dynamics that have marked the peaks of prior bull markets (e.g., historically high valuations, lack of profitability, unsustainable debt issuances, etc.) are generally absent today. Admittedly, they appear closer than at the start of the year, but on balance we don’t see the preconditions.

May saw another move higher across markets (e.g., the S&P 500 was up 5%) as investors became increasingly comfortable with the resilient growth backdrop, and tail risks tied to the war in Iran receded. Corporate fundamentals remained increasingly supportive, with earnings growth accelerating this year to over 20%. Earnings growth has driven all the gains this year as valuations have compressed. Earnings season learnings include another leg higher in the AI compute/capital expenditure narrative, bookings strength in industrial machinery and infrastructure, steady capital market activity, and resilient (but inconsistent) consumer spending.

Importantly, we’re seeing broader market participation as every sector is showing higher sales growth expectations today than at the start of the year. Operating margins have also expanded meaningfully and set a record. Growth resiliency is key to our market call (e.g., we have never seen a U.S. recession with corporate profit growth staying positive), and we continue to see more accelerating vs. decelerating fundamentals.

While the dynamic macro environment should keep volatility elevated over the next few months, growth resiliency has proven to be sustainable, and our base case assumes the Iran conflict won’t change that view. We remain constructive. Investors should find plenty to do in portfolios while staying mindful of the lingering risks. More than a few investors have overlooked the tailwinds of sustainable growth, enduring industry themes, and repositioning that have propelled markets toward all-time highs over the past several months. While the uncertain macro environment raises the odds of a consolidation, we would expect investors to use potential dips as buying opportunities as the tailwinds for earnings growth remain underappreciated.

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

From a long-term perspective, price trends remain positive as we move into June. Support lines remain upward sloping and leadership has been supportive with pro-growth sectors still outpacing the more defensive groups. The market is still concentrated, but small cap and equally weighted indices are performing admirably. The market is highly rotational, but we continue to see an opportunity for tactical repositioning as leadership shifts. We are intently focused here as we consider portfolio tilts.

We are looking for a sustained momentum thrust (e.g., expanding advance/decline lines, an expansion in new highs vs. lows, etc.) and lower volatility to help markets stay at, or eclipse, all-time highs. Internals are in decent shape with ~54% of the S&P 500 trading above their respective 200-day moving average. A strong technical foundation raises the odds that corrective weakness, should it continue, is more likely to be contained. As active managers, we are encouraged by the higher performance dispersion within sectors and industries, as it supports more tactical oversight. We expect the lower correlation backdrop will continue this year, an environment we welcome.

The level of bullishness is more modest than what many suspect, given the strong price performance of late. We view that dynamic favorably. Our investor sentiment reads are still supportive (e.g., bears slightly outnumbered bulls in the latest AAII sentiment survey). We have been noting that positioning (e.g., investors have poured well over $7.8 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 Iran conflict has added to the crowded macro headlines. Even prior to the conflict, the uncertainty surrounding shifting policies (e.g., trade, tax, monetary, etc.) had raised market volatility. Fortunately, a global fiscal spending cycle and decent economic growth are serving as powerful offsets. Current GDP growth estimates for ’26 are hovering around 2%; we see upside to those forecasts. We believe peak tariff uncertainty is behind us, which should create more visibility for corporate investment decision-making just as the benefits from the OBBB accrue and serve as a tailwind for growth.

Interest rates will continue to carry outsized significance. We are encouraged by the fact that interest rates have been somewhat rangebound over the past couple years despite the volatility. We believe ultra-low interest rates are a thing of the past and investors should embrace more normalized levels. With decent growth, the Fed doesn’t need to be aggressive with the size and number of rate cuts. Good economic growth and persistently high energy prices are set to keep headline inflation elevated, boosting bond yields. New Fed Chair Kevin Warsh has a tough job as tightening talk is back on the table. We feel the new Chair will tweak the Fed’s approach while maintaining a growth bias.

The year has already proven that geopolitical events will represent increasingly material considerations for investors. Besides the war, policy announcements are moving at a fast pace. Already this year we have had major energy, housing/mortgage, defense, etc. announcements with potentially material sectoral implications. Encouragingly, most are stimulative. Regulators have flooded the system with $700bn of stimulus through tax refunds, 100% expensing of business investment, MBS purchases, and financial deregulation. We are aware of the uncertainty associated with the administration’s approach but see counterbalances in many of their announcements. We are focused on judging the materiality of any declaration by assessing its impact on the key pillars of market performance (e.g., interest rates, earnings, investor sentiment, etc.).  

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 quarters and were a stalwart defense against any bearish forecast. The most recent earnings season was strong, highlighted by another quarter of double-digit year-over-year profit growth and record margins. S&P 500 earnings growth for ’26 has jumped to over 22% from 10% expected at the end of last year and is up to 15% for '27.

Profits are moving faster than prices, keeping valuations in check. The market is cheaper now than it was a year ago. 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. This is a key factor in our preference for staying active. We continue to advocate for themes like infrastructure and power demand, accelerating capital market activity, and AI-related efficiency gains.

The credit backdrop will be important to monitor as a check on fundamentals and a proxy for risk tolerance. The private credit concerns have yet to impact the public markets materially and credit spreads remain tight. Both investment-grade and high-yield spreads vs. Treasuries remain well below recessionary levels, and support our strong fundamental, and moderate economic growth views. Corporate cash flows remain healthy, and balance sheets are in good shape. 

Concluding Thoughts

Weighing investor sentiment helps determine whether the market narrative is driven by sustainable fundamental realities or unbridled emotion. We see investor sentiment as prudently balanced with neutral bull-bear surveys and asset flows. We continue to think consolidations or corrections will be bought. The market’s resilience amid the complex web of considerations has been impressive. Already this year the Iranian conflict and associated oil price shock has joined AI disruption and private credit concerns to rattle fragile investor sentiment. Fortunately, while the dynamic macro environment is keeping volatility elevated, growth resiliency has proven to be sustainable and is keeping 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.