Rational Exuberance: Why the Melt-Up Still Has Room to Run (For Now)
A couple weeks ago we wrote about the macro risks building under the surface — reckless fiscal expansion, structural deficits, and a Federal Reserve that seems determined to inflate its way out of trouble. Those risks haven’t changed. But markets don’t care. At least not right now.
The recent surge in U.S. equities — with the S&P 500 up more than 15% year-to-date and the Nasdaq more than 20% — is less about fundamentals and more about positioning, liquidity, and earnings resilience. And for now, those forces remain supportive.
Earnings: Hard to Fade Strength
Q2 earnings season is off to a robust start. With ~20% of the S&P 500 reported, 78% of companies have beaten EPS estimates by an average of +6.2%. Tech continues to lead, but industrials and consumer discretionary are also surprising positively.
Margins — which many feared would compress — are showing resilience. S&P 500 net profit margins are tracking at 11.5%, down only modestly from 11.8% a year ago despite higher labor costs. For now, corporate America is navigating the macro headwinds better than expected.
Economic Data: Still No Cracks
The U.S. economy keeps humming along. June retail sales +0.5% month-over-month (vs. +0.3% expected), initial jobless claims remain near cycle lows, and industrial production rebounded +0.6% in June after two soft months.
GDP is still projected to grow but more than 2% and inflation is cooling on the headline side, even as services inflation stays sticky. So the data hasn’t broken bad at this point.
Positioning: Cautiously Constructive, Not Euphoria
The latest Commitment of Traders (CFTC) report shows non-reportable traders (retail) are net long S&P 500 futures but still well euphoric extremes that would indicate the markets are over-extended. Translation: the “fear of missing out” is growing but plenty of fuel remains for an extended squeeze higher.
Bottom Line: Melt-Up Until Further Notice
Yes — the debt remains out of control ($36.2 trillion and counting), deficits are absurd ($1.9 trillion projected in 2024), and interest costs are climbing towards $1 trillion annually. Structurally, this ends badly. But tactically? The market is signaling “party on.”
We will continue to highlight the longer-term risks while actively seeking short-term trading setups with favorable risk/reward. The current environment — with decent earnings, supportive positioning, and no recession in sight — justifies staying opportunistic.
We’re not here to predict the end of the bubble. We’re here to trade it — with discipline, data, and humility.
Because in this market, narrative doesn’t pay… execution does.
