Is Market Optimism Still Too High?

Five days ago, I posted about the housing crisis and trade deals with the US: https://www.gadeon.ca/post/canadian-trade-update-and-more-on-the-housing-crisis.

Yesterday, those negotiations got cancelled for little to no reason it seems, as I had predicted with Europe reducing their pressure on the US for the next 3 months and the US administration not really being serious anyways. In fairness, neither the S&P 500 nor TSX (Canadian market index) seemed to reflect this information, so either it was already incorporated or we're waiting on a delayed response, but I think the market generally understood this would happen.

Anyways, there is now a history of me disagreeing with major outlets (and being right) over the last 8 months or so, many of which, in hindsight, felt or should have felt incredibly obvious.

One example: JP Morgan and Deloitte published their market views going into the Trump administration early in 2025. Apparently, I can't find JP Morgan's Outlook anymore (I apologize for this), but I have Deloitte's early 2025 outlook in the references. By the way, I just want to lead with how great I think these companies are. They publish a lot of research, and I use their data and insights all the time. However, going into 2025, they published their models on the US economy placing a 25% chance of downside, contingent on any one single major negative policy being implemented[1]. At the time, it was pretty clear to me that the probability was too low (the Trump administration had been adamant about implementing these policies for months) and the impact seemed underestimated as well. Obviously, US growth is well below their predictions now.

I think this really exemplifies the naive optimism of the markets this year. Analysts should consider themselves to have a duty to deliver on insights that don't just parrot the prevailing market opinion, but reflect their own professional views.

Now, S&P Global recently published a paper on global market uncertainty[2], check it out- detailed research from them. US GDP growth is expected to slow but not halt (1.7% expected this year), Canada isn't expected to be far behind (1.5%); this paper projects China and India as the biggest movers over the next 3 years[2] (which, generally, I expect as well). Based on what they have written, it doesn't seem that these cases factor in the continued volatility of trade negotiations between the US and its major trading partners, so, adjusting these forecasts down by some 10s of bps would probably be appropriate now.

With the adjustment in the S&P 500 a few months ago, its clear the market wasn't expecting the tariffs to come through- I'm not really sure why. Interestingly, it seems like different segments of the market are telling different stories.

The S&P 500 is finally up YTD. VIX fear index is down in the US and Canada (which it probably shouldn't be YTD, given that volatility is expected to be significantly lower than a few months ago but will probably be higher than last year). The US policy uncertainty index is way up (VIX is down even though the policy uncertainty has clearly impacted the market, so its interesting that the two are diverging).

Source: Google, YFinance

Source: Google, YFinance

Source: Google, YFinance

Source: Baker et al [3].

Additionally, it appears leveraged finance is on the rise[4]. The FDIC is under pressure and will likely get worse as new retirees are created (please check out our article on that topic). The S&P 500's P/E ratio is well above its historical average, which isn't necessarily a problem if its justified by fundamentals, however, the response from analysts seems to be 'if you remove the top 10 stocks....' If you remove the top 10 stocks, you remove ~36.6% of the market cap weighted index- does that really make sense?

Now, is it justified by fundamentals? Based on the regression analysis (plus ARIMA) I conducted months ago, the only real consistent predictor from the factors I tested seemed to be the tech stock index I used (TSX; not GDP growth, not average EPS, which was all really surprising actually). Tech stock is likely driven primarily by AI growth at the moment. For the next year or two years, that will probably be fine and keep going up. Over 5 years, and I will update this prediction as time goes on, I think its going to be like another dotcom bubble; companies are itching to implement it, invest in it rapidly, and they don't understand it well. In my experience, its good (still miracle technology, its definitely changed things a lot), but its being branded as though it can actually replace experts today (we'll be here when you need us) and I think that will be really telling for how the next 5 years are actually going to play out.

As one example, just to state my case further, take a look at the report referenced on Microsoft[5]. I'm pretty sure this was created by AI because in summary it says: 'not information to buy so we recommend a hold. But over the next 3 months, its going up ~36% and will hold there. But over the next 3 years its up ~17% and hold there'- what? I just don't think an actual human would make this.

I might be wrong about the current market conditions but it seems like the market doesn't know how to orient itself and exhibits a number of inconsistencies, leading me to think it is still too optimistic over the short to intermediate term. Again, consult an investment professional before you do anything, this isn't investment advice. Our team, however, is ready to handle increased market volatility over the next while. One interesting way (because obviously you can buy hedges for assets) we've opted to do that is through diversified service offerings: demand for turnaround management should be countercyclical with the market.

If you found this helpful or enjoyable, please consider subscribing to our newsletter for more.  

You can reach out to us here for consulting services or here to discuss booking a workshop to learn useful skills and help you get more familiar with us. 

References:

[1] Deloitte Insights. (2025, March). United States economic forecast Q1 2025. Deloitte. https://www.deloitte.com/us/en/insights/topics/economy/us-economic-forecast/2025-q1.html

[2] S&P Global Ratings. (2025, June 25). Global economic outlook Q3 2025: Unpredictable U.S. policy clouds global growth prospects. S&P Global. https://www.spglobal.com/ratings/en/regulatory/article/250625-global-economic-outlook-q3-2025-unpredictable-u-s-policy-clouds-global-growth-prospects-s13508946

[3] Baker, S. R., Bloom, N., & Davis, S. J. (n.d.). Economic Policy Uncertainty Index. Retrieved June 28, 2025, from https://www.policyuncertainty.com/

[4] Morningstar Indexes. (n.d.). Morningstar LSTA US Leveraged Loan Index (Total Return, USD) [Index overview]. Retrieved June 28, 2025, from https://indexes.morningstar.com/indexes/details/morningstar-lsta-us-leveraged-loan-FS0000HS4A?currency=USD&variant=TR&tab=overview

[5] StockInvest.us. (n.d.). Microsoft Corporation (MSFT) stock – price, forecast, technical analysis (as of June 27, 2025) [Online stock analysis]. Retrieved June 28, 2025, from https://stockinvest.us/stock/MSFT?sref=Newsletter&utm_source=newsletter&utm_medium=email&utm_campaign=analysts_are_bullish_on_this_tech_giant_a_solid_long_term_play&utm_term=2025-06-26