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Hello Fundstrat family and community!
Market Recap
Equities began the month of July with seasonality acting as a tailwind. Historically, in the first year of a presidential term, July has tended to be the best month of the year. While this did not fully play out this time, the S&P 500 still rose 2.2% in July.
Investors spent much of the month awaiting trade-deal announcements, mindful of the impending August 1 tariff deadline. During the month, deals were announced with many trading partners, including Japan and the EU. On balance, the deals announced have been better than what had been in place on April 2, resulting in what we view as wins for both the White House and the market.
With the August 1 deadline having arrived, higher tariffs will apply to most nations that had yet to reach an agreement beforehand, with China being the most notable possible exception. We do not view this as a macro negative. Equities and companies have already absorbed a lot of these tariffs and for the most part, these trade deals have been favorable to the U.S. Multiple signs to support this are beginning to emerge.
Solid Earnings season
As of this writing, we are still in the midst of the 2Q 2025 earnings season, with over 75% of companies having reported. The results have been robust, with 83% of companies beating expectations by a median of 6.7%. Both the beat rate and the magnitude of surprises are above historical averages, underscoring not only a solid earnings season but also a resilient economy.
In fact, one of the biggest reasons for the U.S. outperforming the rest of the world over the past few years is its earnings growth. Since 2019, the U.S. has outpaced the rest of the world by a sizable margin in terms of cumulative earnings growth.
A logical question to ask as we look forward is this: If tariffs are coming globally, will U.S. earnings still outperform? In our opinion, the answer is yes. We see U.S. companies as the best-positioned relative to their peers around the world.
Looking forward
During the first year of a presidential cycle, the months of August and September have tended to be challenging for investors. This is something to keep in mind.
Yet, fundamentally, the overall economy remains resilient. An examination of the Federal Reserve’s Beige Book for the month suggests that in the U.S., most regions reported better economic activity, better economic outlook, lower prices, and better employment.
Despite the July jobs report coming in soft on Aug. 1, it heightens the likelihood of rate cuts to come. Fed funds futures suggests that many investors agree, with the perceived odds of rate cuts spiking. As a result, the Fed could pivot dovish soon. Thus, despite August seasonality, we see dips as buyable.
Strategic Sector Rating
In this month’s sector allocation update, Mark upgraded his rating on Consumer Staples from Underweight to Neutral. Consumer Staples has been one of the underweighted sectors by both Tom and Mark for years. However, technically, the sector has started to act better over the past few weeks, with the monthly MACD turning positive. Of course, Consumer Staples isn’t among the best-performing sectors, but relatively speaking, it has become “less bad.”
In addition, the relative trend of equal-weighted Consumer Staples vs. equal-weighted S&P has held well versus previous lows, reinforcing the overall technical improvement. Even the DeMark TD Sequential now signals a relative monthly buy against the equal-weighted S&P for the first time since 2022—although it hasn’t been confirmed yet.
Lastly, as both Tom and Mark pointed out in their regular notes, August during the first year of a presidency tends to be a choppy month for equities. From a short-term perspective, although Tom thinks the choppiness could already be front-loaded, Mark’s technical and cycle study suggests the market might reach a local peak around 8/15–8/20. If that’s the case, Consumer Staples could work well during the pullback phase.
All in all, it’s worth watching the recent technical improvements in the Consumer Staples sector. From a long-term perspective, Mark still sees the sector as underweight, but a temporary upgrade to Neutral seems appropriate given recent developments.
Tactical Sector Ranking
Compared to last month, the major changes are the upgrade of Utilities and the demotion of Materials:
- Utilities: Benefiting from increasing power and infrastructure demand due to AI adoption, Utilities—typically a defensive sector—has rallied along with Technology over the past month. Interestingly, it has become more versatile—on one hand, it captures the AI trend, and on the other, it plays defense during market downturns.
- Materials: The sector has come under pressure recently, especially as DXY rallied from ~96.8 to nearly 100. As a result, it dropped from #8 to the bottom of the 11 sectors. Yields remain the key factor to watch here. Mark believes lower yields (and DXY) could help the sector find a bottom, with precious metals likely benefiting the most. However, for now, Materials ranks poorly across all three of our proprietary models.
- Industrials: Dropped out of the top 3 in tactical momentum metrics—not due to weakness, but rather because Utilities now shows stronger relative strength. Fundamentally and technically, Industrials still look solid.
- Real Estate: Successfully climbed out of the bottom 3. Both the DQM and trend model show improvement, so incrementally, it looks better than last month.
Compared to last month, we added 2.0% and 1.7% to Utilities and Real Estate, respectively, due to their improving tactical strength as noted above.
Technology and Communication Services also saw increased weights thanks to strong relative performance.
All other sectors were reduced, with Industrials and Materials seeing the biggest reductions as we reallocated those weights toward Utilities and Real Estate.
Compared to the benchmark index, our overweight sectors continue to be non-commodity cyclical areas. The two largest overweight sectors are:
- Information Technology: +2.5% vs. benchmark
- Communication Services: +2.0% vs. benchmark
With increased allocation due to momentum, Utilities is now our 3rd largest overweight, with an additional 1.8% recommended.
Other modest overweight recommendations include +0.4% in Financials, Discretionary, and Industrials.
Despite Mark’s upgrade of Consumer Staples to Neutral, we still recommend a reduced 2.1% allocation to the sector.
*The above-mentioned weights are based on an 85% Sector ETF + 15% Tactical ETF allocation. If you are 100% allocated to Sector ETFs, you can refer to slide 43 in the attached Deck.
ETF Picks
Over the past month, 4 out of our 5 ETF picks outperformed the S&P 500. On average, the 5 ETFs were up +3.7%, beating the benchmark by +2.6%.
PBW -1.30% was the top performer, up +9.2%, outperforming the S&P 500 by +8.0%.
SOXX -3.10% was the only underperformer. While it had done well for most of the month, it came under pressure more recently due to market de-grossing after the “hawkish FOMC” and a weaker jobs report.
ARKW -1.55% and BITB 0.80% were added to our ETF Picks back in June. Both have performed well so far, and we’ve decided to keep them for August.
This month, we’re replacing PBW -1.30% , IAI -0.12% , and SOXX -3.10% with ITA -0.89% , IBLC -0.29% , and SOCL -1.79% .
Updated Five ETF Picks
- ARK Next Generation Internet ETF (ARKW -1.55% )
- iShares U.S. Aerospace & Defense ETF (ITA -0.89% )
- iShares Blockchain and Tech ETF (IBLC -0.29% )
- Bitwise Bitcoin ETF (BITB 0.80% )
- Global X Social Media ETF (SOCL -1.79% )
