Macro Monitor, July 7, 2025

Summertime, and the Living is Easy

Normally, the weekly Macro Monitor comes at the end of the post. This week, I am going to lead with it:

First, a quick review of how the table works. On the left are the seven “Macro Factors” that I believe determine the future price of the S&P. The colors on the left indicate whether the long-term trend is positive for the markets (green), negative for the markets (red), or simply neutral (blue). On the right, the colors are based on the previous week’s news and price action and therefore reflect the short-term trend of each factor.

Wall Street banks put together “risk-on”/ “risk-off” heat maps that are far more sophisticated than my simple table. But therein lies the utility of my way of analyzing the markets - “less is more.”

Scroll back up and look at the table. You will notice that the preponderant color on both the left and the right is green. This should not be surprising; when a market makes an all-time high, as the S&P did in late February before the April Liberation Day panic, it tends to keep rallying until an unexpected event ruins the party.

Here is the daily chart of the S&P marked up to show you the breakout.

Hopefully, the Monitor is useful to you because of its visual simplicity. Today, though, I will try to put the message of this week`s Monitor into words:

While Fed policy remains on hold as the FOMC waits to see if tariffs goose inflation significantly, the economy, particularly the job market, continues to show resilience, despite higher interest rates slowing down the real estate sector. The employment report released on Thursday even indicated that the unemployment rate ticked down in June.

The main risk facing the market continues to be geopolitical, including coming tariff announcements by the Administration as the July 9th deadline for the end of bilateral negotiations approaches. President Trump demonstrated his political strength by ensuring that the “One, Big, Beautiful Bill” was signed into law on July 4th.

The momentum in the market has been strong enough for it to “compartmentalize” tariff uncertainty, and sentiment is not sufficiently bullish to make the market technically vulnerable. In layman’s terms, markets only reverse course when a consensus develops - that is, maximum bullishness or bearishness. The (now resolved) question of Israel and Iran and the persistence of tariff risk have been “excuses” for investors not to buy into the momentum. That means that these potential buyers have been left behind, and as they throw in the towel, their buying can help the market make new highs.

Next week, the large money center banks will kick off the second quarter earnings season. With the S&P at new highs, the price/earnings ratio has expanded to around 22. That makes the market expensive by historical standards and reflects three developing views: that the persistence of fiscal stimulus makes recessions nearly impossible,* that inflation will settle nicely back to the Fed’s 2% target, and that the bond market will continue behave benignly, which means a 10 year note now yielding 4.30% today doesn’s rise higher than 4.75%.

George and his brother, Ira Gershwin, wrote the song “Summertime” almost a hundred years ago. It is a classic that has been covered by dozens of artists, including Janis Joplin. The first stanza encapsulates what the Macro Monitor is telling us this week:

“Summertime, and the livin' is easy
Fish are jumpin' and the cotton is high
Oh, your daddy's rich and your ma is good-lookin'
So hush little baby, don't you cry.”

Here is Ella Fitzgerald crooning “Sumertime.” LISTEN TO IT!

And here is Janis Joplin’s iconic rendition, also a live performance. LISTEN TO IT!

Have a nice week.

David

*Vincent Deluard of Stone X has written about the unlikelihood that the US will enter a recession.