The Week Ahead: Can Non-Tech Stocks Join the Rally?

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After a light week, U.S. economic data comes roaring back this week — one of the busiest of the quarter highlighted by the September Employment Situation report Friday. We’ll also get another key report Wednesday with the August personal income and spending report (our most complete look at incomes and spending which also contains PCE prices, the Fed’s preferred inflation gauge) as well as the third estimate of Q2 GDP. The BEA also drops its annual revisions to GDP and PCE Wednesday morning.

Other reports include September ADP job growth, Challenger job cuts/hires, final manufacturing PMIs and Conference Board consumer confidence, August JOLTS, factory orders, goods trade balance, and construction spending, and the July repeat home price indices, along with the usual weekly reports (although not ADP with the monthly report this week).

And the Fed speakers keep coming. Currently on the calendar we have Governors Bowman and Cook (both twice) as well as Barr, and regional Fed presidents Williams (also twice, his fourth and fifth appearances in the past two weeks), Goolsbee (twice), Kashkari, Logan, Schmid, and Barkin (three times in addition to the four times he’s already spoken since the Sept FOMC) — and, as always, there are usually more.

Non-Bill (>1yr in maturity) US Treasury auctions take the week off.

In terms of earnings, we’re still in that weird middle ground between Q2 and Q3 earnings, but larger reporters are picking up. Next week we’ll get seven SPX components, headlined by memory-maker Micron (MU) — a key AI read after Wednesday’s close — along with Accenture (ACN), the two names greater than $100 billion in market cap. The other components are Nike (NKE), Carnival (CCL), Jabil (JBL), FactSet (FDS), and McCormick (MKC).

Ex-U.S. highlights from Deutsche Bank:

Moving on to Europe, the focus will be on preliminary September inflation, with numbers for Spain due Tuesday, followed by Germany, France, and Italy on Wednesday. The Eurozone-wide measure is due Friday. Our European economists forecast Eurozone headline HICP inflation at 3.75% year over year, with core inflation at 2.53%. Their headline forecasts are 3.37% for Germany, 3.17% for France, and 3.69% for Italy. Elsewhere, Switzerland’s September CPI is due Thursday.

In Asia, Japan faces a busy week, with August activity data and September Tokyo CPI among the highlights, alongside BoJ releases. Our Chief Japan economist expects industrial production to rise 1.7% month over month in August. Tokyo CPI data on Friday are expected to show core inflation excluding fresh food rising to 2.2% year over year from 1.8% in August, while core-core inflation is forecast to rise to 2.5% from 2.0%.

The BoJ will also publish minutes from its July meeting on Monday, the Tankan survey on Thursday, and a summary of opinions from its September meeting on Thursday.

Elsewhere in the region, China releases August industrial profits on Monday and September PMI gauges on Wednesday. Australia has a rates decision on Tuesday and its August CPI report on Wednesday. Our economists expect the RBA to raise rates by 25bp.

And here is a link to TipRanks’ Economic Calendar.

And a link to Bloomberg’s Week Ahead (gift link).

And a link to Christophe Barraud’s international Week Ahead rundown.

This post will go through in order (in case you want to skip around): the economy, the Fed and interest rates, earnings, valuations, breadth, positioning, sentiment, seasonality, and then my Wrap-Up.

Is the Economy Accelerating?

Looking first at the economy, my intro has remained the same since the start of the Iran conflict (and longer term, more or less all of the past five years): “we continue to see it weathering the various storms remarkably well due in large part to resilient consumption (boosted by huge increases in wealth over the past few years despite slowing incomes) and AI-spending… with data of late showing a stable (and perhaps accelerating) economy, but one that is also boosting inflation.”

As noted previously, while things tailed off in July into the start of August, the past seven weeks have seen economic momentum rebound outside of the housing sector (although we did get a very strong new home sales report Thursday on the back of a surge in lower priced home sales).

While there was little new data this week week, as JPM’s Feroli noted “what there was came in strong, further raising upside risks for 3Q growth and lifting bond yields.”

So no reason to change my outlook at this point. As I mentioned four weeks ago “with the recent strength it seems that we’re back in green light territory, and one or two rate hikes (or 5% Treasury yields) won’t change that.” It’s for that reason though that many are talking about more than two hikes (or 5% Treasury yields) as discussed in the next section.

And the Citi economic surprise index last week continued its rise, now up to 46.5, the best since the end of July (when it was falling from 57.1 on July 24th).

Meanwhile Q3 GDP estimates are also continuing to look robust now averaging +3.26%.

BofA (who has been the most accurate over the past year) +3.0% (unchanged from +3.0% the prior week).
Goldman +3.4% (from +3.3%)
JPM +3.5% (+3.5%)
Morgan Stanley +2.5% (+2.0%)
Atlanta Fed +5.02% (from +5.08%)
NY Fed +2.33% (+2.33%)
St Louis Fed +3.24% (+3.14%)
Avg = +3.28% (from +3.26%)
Median = +3.24% (from +3.14%)

And as you know if you’re a regular reader, one of my favorite GDP trackers is the Weekly Economic Index from the Dallas Fed.*

In the week through September 19 (so doesn’t have last week’s data) was little changed at +3.03%, from +3.02% the prior week but +3.73% the week before that, which was the best since August 2022, and remaining over 3% for a fourth straight week, something it hasn’t done since 2022 as well.

The 13-week average accelerated to 2.86%, just a tenth under the 2.87% on July 24 which was also the best since 2022, continuing to evidence economic momentum that is above trend.

*The WEI is scaled as a y/y rise for real GDP (so different than most GDP trackers which are Q/Q SAAR) and uses 10 daily and weekly economic series but runs a week behind other GDP trackers.

It has over time had one of the highest correlations with actual GDP of any tracker (see chart) although for Q2 it came in high predicting +2.80% y/y GDP growth vs the actual first estimate of +2.10%, while for Q1 it predicted +2.48% vs 2.66%. More importantly, it has consistently indicated no recession and relatively healthy growth since the pandemic (which is what we’ve experienced).

While Goldman upgraded their September U.S. Current Activity Indicator* a tenth to +3.7% the best since April 2022. That continues the strongest nine-month period since then as well.

*The CAI is their “real-time measure of inflation-adjusted economic momentum using 37 inputs.”

And BofA card spending (credit+debit) accelerated to a robust +6.9% y/y versus the year-ago period in the week ending September 19, up from +5.8% the prior week on a broad-based advance.

• Total +6.9% y/y (+6.1% four-week moving average)
• Ex-gasoline +5.7% (+5.1% four-week moving average)
• Ex-autos and gasoline +5.7% (+5.0% four-week moving average)

Gasoline climbed to +26.5% y/y (from +21.2%), the strongest reading in their tracking, as pump prices pushed higher.

And BofA flagged that those surging gas prices have “once again opened up a gap” in ex-gas spending growth between higher- and lower-income households — pricier gas squeezes lower-income discretionary budgets — after the firm had described the “K-shaped” divergence as an increasingly stale narrative just last week.

Among categories, in addition to gas, airlines were up sharply (+15.4%, from +9.3%), online retail rose to +9.1%, and general merchandise (+7.9%) and transit (+7.5%) were firmly positive. BofA attributed part of the breadth to earlier retail availability of new electronics releases (Apple, etc.) versus a year ago — a lift that now shows up in categories like online retail and general merchandise, since electronics is no longer broken out separately.

Entertainment (+0.2%), home improvement (+1.1%), and department stores (+1.7%) were also more marginally positive (note the last after last week’s corrected data — see note below). Furniture (−1.9%) and grocery (−1.0%) were the two categories negative y/y.

Correction to last week: BofA has re-issued its week-ending-Sep-12 report with a corrected department store figure. The +57.3% y/y we cited was a data error — BofA overstated the entire department-store series — and has been revised to +7.7%. The revision was isolated to that one category: the +5.8% headline, furniture’s +26.5% Labor Day jump, and every other category line are unchanged, so the underlying Labor Day-timing story is intact. Department stores did rise on the holiday-sale shift, just far more modestly than the original data implied.

Redbook sales* similarly decelerated to a still very solid 8.2% y/y growth the week of September 18 (from 8.5% the prior week), well above the 2025 average of 5.8% y/y.

*Redbook sales are same-store sales across a panel of large general-merchandise retailers, such as department stores, discount chains, apparel retailers, drugstores, and warehouse clubs.

And Ed Yardeni on the “G-Shaped Economy”:

Multiplying mean income by the number of households shows that the 65+ group collectively received $3.87 trillion in income in 2025, more than any other age cohort (chart).

And Baby Boomers have accumulated enormous wealth over their working lives and can continue to spend out of those balance sheets in retirement (chart).

Taken together, the story is straightforward. America has more households, those households are increasingly older, and a growing share of income is attributable to older and higher-income consumers. That helps explain why aggregate spending remains resilient even as younger and lower-income households face more financial pressure.

It also fits our “G-shaped” economy thesis: Consumer strength is increasingly supported by generational wealth, not current income alone.

Meanwhile, the CFO Survey from Duke University and the Federal Reserve Banks of Richmond and Atlanta (fielded from Aug 17th to Sept 4th) found corporate financial leaders “expressed general optimism about the U.S. economy and their own company’s prospects,” although the results were bifurcated.

“Rising optimism among large firms is accompanied by strong expectations for revenue and employment growth in 2026 and 2027,” but “optimism declined among small firms,” with “20 percent reporting financial constraints that prevented them from covering costs or pursuing new business opportunities, compared to about 10 percent of large firms.”

And “CFOs’ report an uptick in their expectations for revenue, price, unit cost, employment, and average wage for the rest of 2026. Expectations for 2027 remained steady.”

Although “[f]irms’ plans to invest in structures and equipment declined from the last time we asked this question, in the first quarter of 2026. The decrease was larger for equipment (about 8 percentage points) than structures (about 2 percentage points).”

Fed Rate Hike Expectations and Bond Yields Push Ever Higher

Turning to interest rates and the Fed, I had mentioned last week that

I don’t have a strong feeling at this point as to whether they go in October. A lot probably depends on how the September data (NFP, CPI, PPI) come out (even as the Chair says the committee doesn’t pay much attention to any one data point). We’ll also get a lot of Fed speakers this week, so we’ll see what they say.

And so far, as discussed in the economic section above, the data has continued to come in very solid which has taken Fed rate hike expectations to the highest we’ve seen this year.

Market expectations via the CME’s Fedwatch tool see a 64% chance of an October hike (up from 55% the prior Friday) and a 93% chance of one more hike (up from 90%) and 51% chance of two more hikes this year (up from 43%). There are a total of over three hikes expected through the end of next year (91 basis points up from 81).

And just another reminder the equity weakness we’ve seen since the September rate hike is not unusual:

Goldman: The S&P 500 has generated an average 3-month return of -2% at the start of seven hiking cycles during the last few decades. However, the S&P 500 then generated an average 12-month return of +9%, with positive returns in every episode but 2022. In 1997, for example, the S&P 500 declined by 10% alongside the Fed’s 25 bp hiking “cycle.”

And from Carson Research:

Five recent hiking cycles started with 0.25%. Stocks were lower a month later all five times. A year later, they were higher all five times, up 12.5% on average.

And those increased rate hike expectations have pushed the 2-year Treasury to now around 100 basis points above the Effective Fed Funds Rate, nearly the levels we were at before the September FOMC (confirming markets have added another rate hike to expectations over the next two years from where we were then).

And inflation expectations are creeping higher with the Fed favorite five-year, five-year forward rate (expected inflation starting in five years over the following five years) Wednesday hitting the highest in a year at 2.34%.

But term premium (extra yield investors demand to hold a longer-term bond instead of continually rolling over short-term bonds for the same period) remains the main source of pressure on the long-end with the Kim-Wright model for the 10-year now the highest since 2010.

Pushing the 10-year real rate (via the hypothetical constant-maturity, 10-year Treasury Inflation-Protected Security) post-2008 high of 2.85%. As I mentioned last week, “While this doesn’t mean much to the hyperscalers of the world, it does mean Main Street is facing the most restrictive rates in nearly two decades.”

And this is another explanation for why we’ve seen weakness in equities:

The real 10-year US Treasury yield has risen by 53 bp during the past month, crossing the two standard deviation speed limit that has historically been associated with negative equity market returns.

1-month average S&P 500 returns are ~-4% following such a move.

Equities can typically digest rising yields when the changes in interest rates are gradual, especially if those changes are driven by improving economic growth expectations. But this has not been the case in recent weeks.

And while it remains off the highs of the year, the MOVE index of expected 30-day Treasury volatility now the highest since March.

Which DB says is the “key for equities,” as opposed to the level of rates.

Overall, on yields, as mentioned in the daily updates we’re now above my new ranges established at the start of August for the 2-year and 10-year: “I still think that 5% on the 10-year and 5.75% on the 30-year represent areas where we will see very strong buying. On the 2-year I think a lot depends on whether the Fed hikes. If they do, there’s potentially another ~30 basis points to the upside (~4.75%). If they don’t, I think we’re going lower from here.”

I’m not yet raising my ranges, as I think bonds have overshot, but 5% on the 10-year in particular is starting to look like it might be too low.

In that regard, we continue to remain extended in short positioning in bonds (bets on higher yields). As BofA reiterated again this week CTAs are nearly max short Treasuries (and are max-short the 10-year). As mentioned last week “at some point this will unwind in a vicious short covering rally, but for now cover triggers remain distant.”

DB similarly says CTA “bond shorts remain extreme” at just the 10th percentile to 2012 for the U.S.

And FWIW, Morgan Stanley late Thursday changed their Treasury yield forecasts, looking for yields to soften from here, reflecting their view the Fed will make two more rate hikes before pausing — one increase short of what the market expects.

“A dovish shift in the policy path should lower nominal yields even if it lifts inflation expectations because real yields tend to fall by more than breakeven inflation rates rise.

“A hawkish shift works in reverse. Growth, inflation, and oil prices matter mainly through the reaction function investors expect from the Fed, which policy pricing already reflects.”

Earnings Expectations Remain Very Solid

For a breakdown on Q2 see the August 31 Week Ahead.

I didn’t get a chance to update the FactSet data this week on earnings expectations, but we’ve got another two weeks before we unofficially start Q3, so I’ll update on that next weekend.

But one thing I wanted to note is that we saw our first week of negative earnings revisions since the week of April 10. That breaks a 21-week streak. I’m not too concerned about a few weeks of that, especially as you can see, there is a loose relationship with earnings revisions and EPS (we saw the worst revisions post-pandemic in late 2025 even as 12-month ahead earnings expectations steadily climbed higher).

The 20-week moving average (black line) for now remains near the best since October 2021, and 12-month out EPS estimates (red line) continue to rise to new highs, as they’ve done each week since the turn of the year.

And here is Ed Yardeni from this weekend giving his always nice update on earnings:

The forward EPS of the S&P 500 edged down last week from its record high the week before (chart). We expect the uptrend to resume as companies report Q3 earnings in October. The quarter’s real GDP is tracking at 5.0% saar, according to the Federal Reserve Bank of Atlanta’s GDPNow model.

Industry analysts slightly lowered their EPS growth estimates for Q3 and Q4 last week (chart). That’s typical as a reporting season approaches.

Nevertheless, the uptrends in the forward EPS of the S&P 500, S&P 400, and S&P 600 remain intact.

Analysts meanwhile collectively continue to think that the S&P 500 has a lot of upside with FactSet’s compilation of analyst bottom-up SPX 12-month price targets up to 9,275 (+15pts w/w, ~980 pts since March 31, ~+2,155 pts since Thanksgiving, and ~+3,105 pts since July 1, 2025) although that’s slowed as is typical in between earnings seasons. That would be +20.4% from Thursday’s close.

With the selloff, Utilities (+28.0% up from +21.6% the prior week) is now the sector expected to see the largest 12-month price increase followed by five others over 20%: Consumer Discretionary (+26.0%), Industrials (+25.1%), Tech (+22.8% down from +27.5% two weeks ago prior to the rally), and Materials (+20.9%). On the other side Energy (+10.6%) remains the sector with the least upside but even that is expected to see double digit gains over the next year.

As a reminder we started the year with a 12-month bottom-up price target of 8,000 and according to FactSet the last 20 yrs (through 2024) analysts have been on avg +5.9% too high from where they start the year, but they have underestimated it five of the past six years (including 2025 when they saw 6,755 at the start of the year and we ended at 6,845). Currently we’re about 4.6% away.

In terms of analyst ratings, buy and hold ratings continue to dominate with buy ratings at 59.9%, up 0.6% w/w. If it holds to month-end it will be a new month-end record to 2010. The five-year month-end average is 55.8%.

Hold ratings are at 35.5%, near the 35.4% record low (to 2010), and vs. the five-year month-end average of 38.7%, with sell ratings at 4.7%, remaining in their narrow range since 2009 but below the five-year month end average of 5.6%.

Tech & Communications lead in buy ratings (70%) while Staples leads in sell ratings (7%).

Valuations Remain Relatively Attractive But Pressured By Rising Rates

And while we did see P/Es for the Mag 7 rebound some this week for the other indices they remain near the lows of the year, with small-caps falling to the least since liberation day.

From Goldman:

As investor positioning has declined, the S&P 500 P/E multiple has contracted to 19x, and now matches its 10-year average. Year to date, the S&P 500 has risen by 13% but the consensus forward 12-month EPS estimate has risen by 29%. The result is a 13% decline in the forward P/E multiple, which has declined from 23x a year ago to 19x today.

While they note that the derating is in part due to higher rates, they note another part is due to investors seeing current earnings trends as unsustainable, a topic I’ve discussed in most previous weeks:

The decline in P/E multiples also reflects the investor view that companies are currently “over-earning” relative to both cash flows and a sustainable level of profits. The hyperscalers are on track to spend $800 billion on capex this year, which is flowing through to the earnings of semiconductors and other AI infrastructure stocks. We estimate that hyperscaler capex is driving roughly half of S&P 500 earnings growth this year. As hyperscaler capex growth slows and depreciation expenses rise, the impact of AI investment spending on S&P 500 earnings growth will begin to fade and eventually become a drag. Supply constraints that have boosted semiconductor profit margins and accounting gains from appreciating private equity stakes have also lifted recent earnings growth but will likely contribute less to profits going forward.

And they note that

Free cash flow yields are unaffected by some of the factors distorting current earnings, and those valuations currently register near historical norms. Free cash flows avoid the earnings inflation created by the timing mismatch between current capex spending and future depreciation expenses. The US equity market trades at a free cash flow yield of 3.3%, below the historical median of 4.4% but comparable to many other periods in recent decades.

And they estimate that the rapid rise in interest rates and fears of “over earning” have resulted in an approximately 10% discount to multiples:

Our macro model for S&P 500 P/E valuation incorporates Treasury yields, inflation, and return on equity (“ROE”) as a measure of corporate profitability. Today’s P/E of 19x is about 10% lower than the multiple those macro and fundamental variables would imply today. We think this reflects justifiable market skepticism regarding the sustainability of current profitability but not an overly pessimistic earnings outlook. Given current inflation and interest rates, today’s S&P 500 multiple of 19x would be consistent with an ROE of roughly 22%, more than 200 bp below the current level but otherwise matching 2021 as the highest on record.

The Bad Breadth Continues to Get Worse

Breadth continued to deteriorate, with more metrics getting into “oversold” levels arguing for a bounce at some point (although I’ve said that for three weeks now).

The McClellan Summation Index (red line, broadly whether the typical stock is doing relatively better or worse than the index) continues to approach the liberation day lows. Before that you have to go back to November 2023. As you can see, though, when it does rebound, rallies are generally fairly powerful.

Percentage of stocks over 200-DMAs (red lines), continue to see more deterioration on the NYSE which are now the least since May 2025. Nasdaq is far from those levels.

While SPX percent of components above their 200-DMAs is now down to 46%, approaching the lows of the year:

And in case you needed another statistic comparing the current breadth environment to the dot-com bubble, MarketWatch has you covered:

52% of S&P 500 member stocks were trading below their long-term 200-day moving averages as of Tuesday’s close even as the index was 0.44% shy of a record high.

According to Dow Jones Market Data, the last time there were that many S&P 500 components below their 200-day moving averages with the index within 1% of its record high was indeed March 27, 2000 — right around the dot-com bubble peak.

“I seem to come across a stat every day that we ‘haven’t seen since 2000,’” Jonathan Krinsky, a top technical strategist at BTIG, told MarketWatch via email.

And the situation isn’t much better for shorter-term 50 and 20-DMAs which overall continue to deteriorate although all remain above the lows of the year.

50-DMAs

20-DMAs

SPX new 52-week new highs minus new lows fell to three Friday, the least since March, but the 10-DMA (blue line) drifted sideways near the least since May 2025.

And the ratio of the equal-weight SPX to the cap-weighted continues to drop, now just above the May low which was the lowest since 2003.

While the ratio of small-caps to large-caps (Russell 2000 to SPX) is the least since January.

While S&P 500 growth/value remained just off its all-time high from May.

As the ratio of forward earnings for growth/value remained at an all-time high at 2.14. That is up from around 1.0 at the start of 2025.

Positioning Remains Bifurcated

Turning to equity market positioning, after having eased back for two weeks, positioning moved higher last week, but as with last week the headline masked a large divergence between discretionary traders and rules-based (systematic).

Deutsche Bank:

Our measure of aggregate equity positioning rose this week to modestly overweight (0.25sd, 58th percentile).

Discretionary investor positioning (-0.29sd, 28th percentile) jumped from notably underweight to modestly underweight, while systematic strategies’ positioning (0.91sd, 89th percentile) continued to move higher, marking a new high since Oct 2025.

Overall, large cap equity positioning rose this week and is overweight but not elevated (79th percentile).

Systematic strategy positioning has continued to rise and is now in the top decile (91st percentile), and vulnerable to any vol shocks. Discretionary large-cap investor positioning however is only moderately overweight (64th percentile) despite very strong earnings growth, weighed down primarily by the sharp jump in rates volatility.

Likewise, positioning in MCG & Tech has risen to about 0.8sd (80th percentile) above neutral, clearly overweight but well below prior peaks such as in early June when it topped out almost 2sd above (99th percentile). Positioning elsewhere is neutral or modestly below, for both defensive and cyclical sectors (with a modest overweight for Energy the exception).

In terms of last week’s flows they note that equity funds saw their first outflow in three months “driven primarily by largest outflows from the US (-$21.2B) in six months,” while inflows to bond funds “picked up” and “money market funds also attracted inflows.”

“Financials (-$2.5bn) saw their biggest weekly outflows in six months, while Tech (-$1.9bn) and Industrials (-$1.0bn) also experienced notable outflows.”

Goldman’s prime desk (mostly hedge funds) also saw selling last week although the sector make-up was different:

US equities were net sold on the week (-1.0 SDs 1-year), driven by long sales in Macro Products and short sales in Single Stocks… 7 of 11 US sectors were net sold, led in $ terms by Comm Svcs, Health Care, Energy, and Staples, while Info Tech and to a lesser extent Real Estate were the most $ net bought.

Info Tech was the most $ net bought US sector for a fourth consecutive week (+0.5 SDs 1-year), driven by risk on flows with long buys outpacing short sales (2.2 to 1), though the pace of buying moderated vs. the prior few weeks. Semis & Semi Equip and to a lesser extent Tech Hardware, Storage & Peripherals were the most net bought subsectors (driven by long buys), while Software was the most net sold (driven by short sales). Info Tech Gross/Net allocations (as % of total US Prime book) now stand at 20.8%/20.4%, in the 79th/84th percentiles vs. the past year and 96th/80th percentiles vs. the past five years.

Overall positioning remains light with U.S. Long/Short Fund gross leverage at the 42nd percentile one-year (but up from 33rd the week before, and at 83rd five-year percentile), but U.S. net leverage is at just the 5th percentile (9th five-year). The US Fundamental long/short ratio (MV) decreased to the 3rd percentile one-year (4th five-year).

BofA saw more selling from CTAs last week, but they say further selling remains the predominate risk in their models, outside of the Nasdaq 100 where they could continue to be buyers, although their base case has improved to a flat week from selling:

We noted last week that most upside scenarios generated limited incremental CTA buying, implying that CTAs were unlikely to have been major drivers of the broader rally. Looking to next week, trend followers could be buyers of the Nasdaq 100 as already-bullish signals strengthen further, while continued underperformance in small caps leaves the Russell 2000 vulnerable to further CTA selling. Positioning remains mixed across model speeds in the Russell 2000, Euro Stoxx 50, and Nikkei, while trend followers are long S&P 500 and Nasdaq-100 futures across all model speeds.

Sell triggers now sit around −2.9% for the S&P 500 while the Nasdaq 100 continues to retain more cushion (~−5.4%). We’re already into the Russell 2000 deleveraging. They see a buy trigger at +3.0%.

Specifically they see:

• no change in a flat market (from −$25B of selling last week);
• +$4B of buying in an “up” market (from +$8B; “up market” defined as the 97.5th percentile price path or ~+3.5%, similar to Goldman); and
• −$84B of selling in a “down” market (from −$157B the last two weeks; “down market” defined as the 2.5th percentile price path or ~−2.9%, different than Goldman who uses −4.5%).

And Goldman also says they saw notable CTA selling over the past month which they think has passed absent more selling:

We also model a reduction in net length among CTA/systematic investors, from $145 billion of global equity exposure in August to around $70 billion currently. As a result, the technical setup for equities from this risk factor is now more favorable—or less unfavorable—than before.

In the baseline scenario, we do not expect systematic selling to continue. As of midweek, CTAs had sold nearly $75 billion of global equities over the previous month. However, under the current setup, we expect nearly $25 billion of buying over the next month.

Chart 2 below shows this baseline outlook alongside the usual conditional upside and downside scenarios

DB though says they see global CTA positioning as having “edged up slightly” to the 82nd percentile to 2010 (from the 79th the prior week but down from the 89th two weeks ago) but jumping in the US to the 90th percentile (from the 79th), with the Nasdaq-100 continuing to lag at the 66th percentile (but up from the 47th the prior week), while SPX and RUT are at the 89th and 95th (the latter confusing given the price action).

“Further increases in equity exposure are still likely to depend more on declining volatility than on stronger trend signals.”

DB’s estimate of vol control* positioning also “remains elevated” at the 98th percentile and becoming a bigger risk on selloffs:

Sensitivity to selloffs also increased, making funds somewhat more responsive to downside moves than in the prior week. With positioning still stretched, capacity for further equity addition remains limited, while the flow backdrop has become modestly less supportive during market drawdowns.

*vol control strategies enter and exit based on changes in volatility over past windows (mostly 1-month and 3-month).

Looking at the upcoming week, it’s not favorable for potential vol control buying. Just a single 1%+ day dropping off, and in the one-month space.

(as a reminder from three weeks ago “1-month realized volatility has now fallen back below the 3-month measure, shifting the 3-month reading into the primary volatility input for funds that deploy volatility scaling as a way to manage risk”):

While for risk parity DB says “equity allocations declined this week,” only the second time in six weeks with the U.S. though still at the 82nd percentile from the 86th the prior week. Bond exposure saw a rare increase to the 30th percentile (down from the 26th) while commodities remain elevated at the 95th (unchanged).

While put/call buying (which adds incremental downside/upside pressure) finally broke out of its seven-week sideways chop falling, although well off the lows of the year.

But interestingly DB said the 5-DMA of call/put volume “rose sharply this week (90th percentile), driven by a rise in net call volume across single-stock, index, and ETF options. Within single-stock options, volume in MCG & Tech rose sharply.”

While Goldman says “the story in vol this week was the steady addition of exposure through short-dated gamma spurred by enthusiasm around agentic AI. Earlier in the week, NDX experienced its 3rd largest 1m put-call skew decline on record, as well as its first record close since June. The chase was evident in the call wing as the 5-day average of 5d calls to 25d calls reached right around the highs on a 3y lookback.”

Like call buying, leveraged positioning acts as a “negative gamma source” as Charlie McElligott has put it (meaning that there is added buying/selling pressure from them in the direction of daily flows as they rebalance each day).

Rebalancing flows for Nasdaq 100 and SPX leveraged ETFs climbed for a second week, but again mostly for the former along with the Tech rally, although both are at historically elevated levels.

Single-stock leveraged ETF AUM also rose a second week led by Micron (MU) and AMD (AMD) leveraged ETFs, with the former displacing Nvidia (NVDA) as the largest.

Turning to retail positioning, BofA client retail equity positioning continues to see AUM in stocks near all-time highs at 66.1% (all-time high was 66.5% four weeks ago), while bonds remained at 17.2% (16.9% three weeks ago was the lowest since March 2022), while cash fell back to the 9.4% record low after “a $3.9bn outflow from cash (largest since May’26) [and] $3.4bn inflow to equities (largest in 6 weeks).”

While Vanda Research says they have seen one-month net buying from retail falling.

And looking at gamma (which plays an important if nebulous role in market volatility —positive gamma means options market makers will buy/sell in the opposite direction of moves in price dampening volatility, while negative gamma means the inverse and market makers accelerate rallies/sell-offs adding to volatility):

BofA saw SPX gamma last week hit the second highest in the past year Tuesday before easing off but still remaining solidly positive at least through the end of the month, although they noted last week that “hedger gamma is currently net positive in every single expiry through 9-Oct.”

Currently they model spot in a small valley and it builds on any declines as well as rallies above ~7,800 so it should dampen volatility next week.

Tier1Alpha’s update was also as of Thursday night (so likely improved with the Friday rally):

Our GVT index continues to lean modestly positive at 2.67, but more importantly, it remains closely aligned with 10-day realized volatility at 11.69, which is in line with expectations. Again, this is not the worst regime to be in, but it also does not imply much downside support, with positioning becoming considerably less favorable on a move toward the 7650 strike.

Turning to corporate buybacks (an important source of underlying demand), we have now passed the peak of the open buyback window but still will have around 70% of discretionary buybacks by index weight for S&P 500 companies active this week on average (discretionary buybacks represent ~30% of all buybacks), but note it now falls sharply with just over 20% active by October 10 (and see Goldman’s note next that we’re already just about at that level).

As noted, Goldman sees us more firmly into the blackout window at around 85% but also, unlike BofA, saw buybacks the week before last solidly above year-ago levels:

Steady flows again this week. Volumes finished at 1.4x versus 2025 YTD ADTV and 1.3x versus 2024 YTD ADTV, with activity primarily concentrated in the Tech, Industrials, and Financials sectors.

We are currently in the blackout window, with approximately 64% of the S&P 500 estimated to be in their quiet period as of today. We estimate that roughly 85% will be in blackout by the end of the week.

Reflecting our desk’s transition toward blackout, we are seeing an increasing number of 10b5-1 plans start on the desk. The current execution mix is 21% OMR versus 79% 10b5-1, compared with 30% and 70%, respectively, the prior week.

Once earnings season begins in October, we expect blackout restrictions to roll off progressively. Financials are typically the first sector to emerge, reflecting their position at the front of the reporting cycle.

BofA in contrast says buybacks “buybacks slowed for a 2nd week” after having accelerated five of the previous six weeks (consistent with the reopening of the buyback window and now consistent with the closing). They remain well under the historic average normalized by market cap and on a four-week average basis they are to -34% y/y from +5% five weeks ago.

YTD they say and annualized cumulative buybacks YTD are tracking ~25% below 2025 levels and more than 40% below 2024 levels, though above 2010-23 annual levels. Rolling 52-wk buybacks as a % of S&P 500 market cap are currently the lowest since Aug. 2021.”

And one thing you’ll probably hear more about this week is pension fund rebalancing given the selloff in bonds. From Rubner:

The quarter-end rebalance also starts from an unfavorable cross-asset move. The S&P 500 is still up roughly 1% in Q3, while bonds are down 2.2%, increasing the potential need for pensions to sell equities and buy fixed income into quarter-end.

The top 100 US pension plans are approximately 112% funded, their highest funding levels since 2001. Strong funding levels continue to incentivize plans to de-glide and immunize portfolios, creating the potential for mechanical equity selling and fixed income buying into quarter-end.

And Goldman notes:

Heading into month end, our pension model estimates $32bn of US equities to sell … $10bn monthly + $22bn quarterly. This ranks in the 95th percentile amongst all buy and sell estimates in absolute dollar value over the past three years and in the 97th percentile going back to Jan 2000.

Sentiment Not a Headwind But Not Yet a Tailwind

Sentiment (which I treat separately from positioning) is one of those things that is generally positive for equities when it’s above average but not extreme (“it takes bulls to have a bull market”, etc.), although it can stay at extreme levels for longer than people think, so really it’s most helpful when it’s at extreme lows (“washed out”).

Currently we are not near either extreme:

American Association of Individual Investors (AAII) sees bears ease back from the highest since May 2025 the prior week while bulls edged up off the least since last September:

AAII bulls (those who see higher stock prices in 6 mths, blue line) rose to 32.7% from 28.8% the prior week, the least since September 2025 remaining though below the long-term historic average of 37.5%.

Bulls also remained under the level of the bears (who see lower stock prices in 6 mths, red line) with the bears easing to 48.1% from 53.3%, the highest since May 2025. That is the 9th week in 10 (and 24th in 30) Bulls have been below the Bears. Bears also remain above the long-term average of 31.0% for a 32nd straight week (and they’ve only been below it 9 weeks since Dec 12, 2024).

The Neutral camp (yellow line) rose to 19.2% from 17.9%. It remains under the long-run average of 31.5% and has been over that only twice since July 2024.

DB notes the bull-bear spread still is at just the 12th percentile to 1987.

With bearish sentiment at the 94th percentile.

NAAIM’s survey of investment professionals* jumped to 88.1 from 71.9 the prior week, which was the least since April 14, the second largest one-week jump (after this April) in the past year. Still well below the 102.66 at the end of August (meaning they were on margin) which was the highest since July 2024.

*The index according to NAAIM “represents the average exposure to US Equity markets reported by our members” and which ranges from -200% (2x short) to +200% (2x long).

While the Investors Intelligence (independent investment-newsletter writers) survey saw the bull/bear ratio jump to 3.40 from 2.88 pushing further above its average since 2008 but “not providing either a buy or a sell signal” according to Ed Yardeni.

And Goldman’s U.S. Equity Sentiment Indicator*, was little changed at -0.91, easing back ever so slightly from the -0.92 the prior week, the least since August 2025.

The current reading is the second worst bucket consistent with a one-month average return of around 0.3% since 2009 with a positive rate around 53%.

*The indicator combines “six weekly and three monthly indicators that span [across the more than 80% of the US equity market that is owned by institutional, retail and foreign investors]. Readings of +1.0 or higher have historically signaled stretched equity positioning. Readings of -1.0 or lower have signaled very light positioning and have historically been a statistically significant signal for subsequent S&P 500 performance”.

But Goldman’s Risk Appetite Indicator* remains more elevated at 0.8, while the momentum index continued its rebound to 0.4.

*”Goldman Sachs Risk Appetite Indicator (RAI) aims to track the level of global market risk appetite and risk aversion based on various market variables. A sharp rise in the index can send a warning signal that investors have more risk appetite and are potentially exposed to a correction if consensus views are tested. Similarly, a sharp decline indicates a reduction in risk appetite, and at extreme levels it can indicate that markets may have overshot. RAI signals are most powerful when the level of risk appetite is very low below -1.5, with levels closer to -2.0 giving the clearest signal over longer time horizons, as at such levels the asymmetry of subsequent medium term equity return becomes very positively skewed. RAI momentum is designed to track short term shifts of market risk appetite, and subcomponents of the RAI.”

The CNN Fear & Greed Index (blue line) rebounded to 37.0, after hitting a local low of 28.0 Tuesday, up from 29.1 a week ago, and remaining in “Fear”. I mentioned it was “in the area it bottomed in June and July.”

Now have two indicators above Neutral (from none) and three below (from five).

Extreme Greed = None

Greed = put/call options (5-day put/call ratio) (from Fear); junk bond demand (vs investment grade) (from Neutral)

Neutral = market volatility (VIX & its 50-DMA); safe haven demand (20-day difference in stock/bond returns) (from Fear)

Fear = market momentum (SPX vs 125-DMA)

Extreme Fear = stock price strength (net new 52-week highs); stock price breadth (McClellan Volume Summation Index)

https://www.cnn.com/markets/fear-and-greed

And I noted in previous weeks if you have any questions on the indicator, TheStreet Pro’s own Jason Meshnick is your guy, as he helped create it. Well it just so happens he gave an updated breakdown when he filled in for Doug’s Diary Friday:

Stocks

Overall, breadth remains narrow, with net new 52-week lows dominating new highs by a big margin on the NYSE. Downside volume has swamped upside volume, too. As a result, even though the S&P 500 is near all-time highs, it’s gone sideways for the last 6 weeks.

Options

The options indicators have gone sideways and show no fear. They seem to reflect only the performance of the mega-caps and not the performance of the other 490ish stocks. RSP is down about 6% since August, and small caps (RUT) are off 7%. Helene Meisler says that investors are getting complacent, and I don’t disagree.

Bonds

So, how are bonds doing? The Safe Haven Demand indicator includes Treasuries, while the Junk Bond Demand indicator is corporate-focused, high-yield corporates (HYG) vs. investment-grade (LQD), so the Treasury decline isn’t reflected there. What we see is that stocks are beating bonds. No surprise. Small surprise, however, is that Junk is beating Investment Grade. Not by much, and both are down, but Junk has the edge.

Final Thoughts

So, like Helene said, investors are complacent in the face of a market that is not holding up as well as the big-cap weighted indexes would have us believe.

Fear & Greed hasn’t been over 60 since last spring, and that’s my line in the sand. Until we can get above that level, stocks may rally, but it will likely be narrow and not be a healthy rally.

Bringing this back to the Diary, as Crazy1 said this morning, there could be some good tax loss harvesting opportunities this fall.

And BofA’s Bull & Bear Indicator eased back two tenths to 9.3, now four tenths from the joint highest since 2021 but remaining well above its sell signal (8.0) which it crossed back above the week of May 26:

eased back to 9.3 from 9.5 as equity outflows only partially offset by inflows to EM and HY bonds; more broadly, Bull & Bear Indicator remains elevated due to extreme long stocks-short bonds, long cyclicals-short defensive sector levels per BofA FMS.

[From prior weeks]:

BofA Bull & Bear “sell signal” remains in place, extreme bull positioning says markets “toppy”, reduce equity exposure, retreat or rotate much smarter summer tactic for risk assets than reload.

17 “sell signals” since ‘02, average loss for global stocks over 2-3 months is 2-3% (hit ratio of ~60%), with max drawdowns of 15-20% (caveats always “tops are a process, lows are a moment”, i.e. greed harder to reverse than fear).

Wake Me When September Ends

I’ll have more on October seasonality next week, but as a reminder, the payback for the poor August/September seasonality is our two best months in midterm years….

And at least in all months since 1950 that strength is front loaded with the first half of October the third best half-month of the year with an average return of ~1.3%.

Wrap-Up: Can Non-Tech Join the Rally?

I entered the post-Labor Day period with my caution levels at the highest since late July.

At that time I mentioned Citadel’s highly regarded Scott Rubner gave a detailed look at why he was looking for a September pullback (see last week’s post for that) due to a variety of factors from the post-earnings season lull (also mentioned by DB), weaker seasonal flows and typical equity market performance, the rally in equities coming into September, etc.

And that was even without knowing we’d get a constant grind higher in Treasury yields, which as mentioned in the rates section, has typically seen a pullback in equities as has the start of a Fed rate hiking cycle.

So we had plenty of reasons to pull back in September. And while we haven’t seen much damage in the S&P 500, which is less than a percent off its all-time closing high due to Tech sector strength, the equal-weighted S&P 500 as of Thursday was over 5% off its August 26 close.

Which brings me to the title of last week’s wrap-up “Can Tech Lead the Market Higher?” The answer was yes if we’re talking about the cap-weighted indices, not so much if we’re not.

And so the question now turns to “Can Tech Continue to Power Ahead?” as well as “Can Non-Tech Join the Rally?” Deutsche Bank FWIW says yes and no.

In late July, we called for a rotation back into Tech—the fifth such rotation in two years. That rotation is now well advanced, but we believe it still has room to run.

Mega-cap growth and Tech stocks have risen 14% since the end of July, reaching a new record high. By contrast, the rest of the S&P 500 has fallen 3% over the same period, including a 5.5% decline over the past five weeks.

The relative outperformance of mega-cap growth and Tech has moved into the upper half of its long-run trend channel, but it has not yet reached the top of that range.

As I’ve mentioned before, they’ve called the past year as good as anyone, so I’m not inclined to fade them at this point, but as I’ve also mentioned, at some point we’re going to see yields pull back sharply which will allow those other very beaten up sectors to rally.

In the upcoming week, though, we face some additional headwinds in the form of what looks to be a large pension rebalance, the increasingly rapid loss of discretionary buyback support, and, as to the non-Tech names, a weak systematic setup (all as discussed in the flows section).

But I also continue to see many reasons to be bullish, particularly as we get into October and start what, by all accounts, should be another strong earnings season (although I’m less bullish on this quarter than I was last quarter as I’ll discuss in future weeks). The economy is strong, valuations are not demanding, many breadth and sentiment figures are at levels we’ve seen bounces in the past, there is a lot of dry powder on the discretionary side, earnings, while slowing, remain robust by historical standards, etc.

These are the ingredients of a bull market. So while there are some short-term headwinds, the longer term picture remains bright, with the caveat that the political wildcard will come back in a bigger way post-midterms. But that’s something we’ll talk about a month from now.

So in the short term the answer to “Can Non-Tech Join the Rally?” looks to be dependent on a softening in the factors that have kept them out.