God Only Knows

* Or maybe the Sphinx can solve the market riddle...

* If you put a gun to my head I would say we are in a broadening trading range with a negative bias over the intermediate term (measured in months)...

"What walks on four legs in the morning, two legs at noon and three legs in the evening?"

- Greek Mythology

I may not always love you
But long as there are stars above you
You never need to doubt it
I'll make you so sure about it

God only knows what I'd be without you

If you should ever leave me
Well, life would still go on, believe me
The world could show nothing to me
So what good would living do me?

God only knows what I'd be without you

- The Beach Boys, God Only Knows 

I have made the case over the last two weeks that equities (especially of a Mag 7-kind) are oversold and buyable — as they arguably represent a more favorable reward vs risk at any time in a while.

The Riddle of the Sphinx, among the most famous riddles in Greek mythology, symbolizes the stages of human life and encapsulates profound themes of humans:

* Crawling on all fours as a baby (morning)

* Walking on two legs as an adult (noon)

* Using a cane in old age (evening)

The Sphinx posed this riddle to travelers and those who could not answer were said to be devoured.

While there are many pretenders who confidently predict the stock market's future, I am often wrong and always in doubt.

Truthfully, it is likely that the Sphinx and God only know if Tuesday's rally foreshadows continued strength.

My greatest concerns are that the war in Iran (which eventually will be "resolved") will have knock-on consequences to economic growth (weaker), inflation (stronger and more persistent), tighter-than-expected (Fed) monetary policy (so interest rates will be "higher for longer") and produce something of a supply shock (for a vast array of critical materials and products).

The bottom and the middle of the K-shaped U.S. economy are bound to be even more pressured in the months ahead as general affordability is materially threatened by a weakening jobs market and stubbornly higher costs (and inflation).

Importantly, corporate profit growth expectations (of about +15% year over year) will have to be ratcheted down despite protestations from the cabal of (ostrich-like) perma-bulls:

Who in his/her right mind thinks that the prospects for 2026-7 S&P EPS gains are now higher than before the Iranian conflict (and after the rapid increase in energy and other related costs - which will impede demand and raise the costs of goods, adversely impacting margins)?…

— Dougie Kass (@DougKass)

With interest rates staying above consensus expectations and S&P profits below elevated consensus forecasts — the equity risk discount will grow ever larger — providing a backdrop for future greater-than-expected valuation contraction.

I also remain concerned about U.S. foreign policy and what it means for our alliances (trade and political).

These above factors are not valuation friendly and, at the very least will likely constrain the enthusiasm and upside that was demonstrated Tuesday.

My Strategy

I remain modestly net long in exposure but I start Wednesday much less long than I started Tuesday — given the rapidly changing reward vs. risk prospects, which are an outgrowth of a +3% advance.

That reduced reward/risk ratio is clear to me given the outsized gain in tech stocks over the last 24 hours.

Bottom Line

"God Only Knows" is among the finest ever sung by The Beach Boys and has been praised critically as among the greatest songs of all time. From their innovative 1966 album Pet Sounds, it was written by Brian Wilson. It is a baroque-style love song featuring harmonic innovation and complexity, unique instrumentation which upended typical popular music conventions both musically and lyrically.

While I may assign my own probabilities to market scenarios (based on dutiful analysis), given all the possible economic and geopolitical outcomes, many of them negative — the Sphinx and God may only know what lies ahead for the markets.

And, to be sure, I am not and will not pretend to be God.

My investment strategy will be stay vigilant and to be flexible and opportunistic.

If you put a gun to my head I would say we are in a broadening trading range with a negative bias over the intermediate term (measured in months).

I continue to see 2026 as a negative year for the broad averages— with most rally attempts failing or being constrained by persistent inflation, moderating corporate profit expectations, relatively tight Fed policy (and higher than longer interest rates), inconsistent and poorly framed U.S. leadership/policy and declining valuations.