{"id":1440654,"date":"2025-07-31T09:24:57","date_gmt":"2025-07-31T07:24:57","guid":{"rendered":"https:\/\/www.payoff.ch\/?p=1440654"},"modified":"2025-07-31T09:26:04","modified_gmt":"2025-07-31T07:26:04","slug":"investors-should-welcome-short-term-volatility","status":"publish","type":"post","link":"https:\/\/www.payoff.ch\/en\/news\/investors-should-welcome-short-term-volatility","title":{"rendered":"Investors should welcome short-term volatility"},"content":{"rendered":"\n

The average return of the S&P 500 in July is a solid 1.3%. However, this figure drops to a meagre 0.2% in August, with September performing only slightly better at 0.4%. In each of these three months, the probability of the month ending positively is just over 50% \u2013 in stark contrast to November, when the probability rises to almost 80%. From a probabilistic point of view, it might therefore be wise to come back in September, as the average return in October jumps to 2.0%, followed by a whopping 2.8% in November. In the short term, however, seasonality could become a stumbling block. The S&P has already recorded its strongest May performance in 30 years, with June 2025 also at the upper end of the historical range. Complemented by the VIX below 20, the markets could be pricing in too smooth a development \u2013 especially now that earnings, tariffs and fiscal policy turmoil are regaining importance.<\/p>\n\n\n\n

Earnings season: low bar, big differences<\/h3>\n\n\n\n

One factor that could cause volatility in the markets this summer is the second-quarter reporting season, which begins in mid-July.\u00a0Consensus forecasts for EPS growth remain subdued given the high level of macroeconomic uncertainty. In our view, this sets the stage for potential positive surprises, although dispersion will play an important role. While we expect the moderate expansion in earnings contributions to continue, mega-cap stocks are likely to continue to dominate overall performance. Consensus forecasts assume EPS growth of around 14% for the “Magnificent Seven” and just under 3% for the remaining 493 S&P 500 companies \u2013 a difference of 11 percentage points. A few large companies reporting results significantly above or below expectations could move the indices significantly in either direction, especially given the seasonally lower liquidity in the summer months.<\/p>\n\n\n\n

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In the medium term, we see few signs of a sustained expansion of market leadership. The rank correlation between the daily returns of the S&P 500 and the net winners fell to a low of 0.7 in February. Although the recent recovery was supported by somewhat broader participation, it appears to be cyclical rather than structural in nature. Even if the earnings growth gap continues to narrow and is expected to reverse by early 2026, the dominance of mega-caps in equity allocations is unlikely to unwind at the same pace. The long-term trend towards greater market concentration has been ongoing for over a decade, and we see few catalysts for a significant reversal of this dynamic in the near future.<\/p>\n\n\n\n

Political factors\u00a0<\/h3>\n\n\n\n

The recently passed OBBBA is the final item in our outlook for a potentially volatile summer. It brings a mix of tailwinds and headwinds for markets and reinforces the case for increased diversification and policy-related risks \u2013 themes that can be efficiently addressed through targeted ETF exposures. On the one hand, fiscal stimulus from tax cuts should initially boost corporate earnings, followed by better sales as consumption picks up. For the rest of 2025, the net fiscal stimulus could exceed USD 100 billion before peaking at USD 270 billion in 2026 and declining to USD 9 billion by 2029. However, these benefits are accompanied by potential monetary policy and macroeconomic headwinds. The bill’s extensive spending commitments have already raised concerns about upward pressure on inflation expectations, which could weigh on asset prices if the Fed responds with tighter monetary policy. The Budget Lab at Yale, a non-partisan policy research centre, forecasts moderate growth-positive effects \u2013 around half a percentage point in the short term \u2013 but expects GDP to be around two percentage points below the baseline by 2050 as the effects of higher deficits and higher interest rates accumulate over time.<\/p>\n\n\n\n

Although the assumption that all other factors will remain unchanged over such a long period is unrealistic, the markets have largely welcomed the passage of the bill. Solar energy and other sustainable sectors in particular saw gains, as the feared cuts to tax incentives in Biden’s Inflation Reduction Act turned out to be more moderate than expected. Additional momentum came from China’s newly announced restrictions on solar production, which boosted sentiment around Western clean energy companies. Overall, the removal of political uncertainty surrounding the bill is a strong positive for markets, but interpretation of its impact will evolve over time \u2013 particularly as the effects become visible in hard data. Volatility: friend or foe? Despite ongoing risks, markets have not only been calm, but have actually performed very well. This complacency contrasts with growing question marks on several fronts: global growth, corporate earnings, tariffs, the impact of Trump’s fiscal policy and the geopolitical situation. Combined with a difficult seasonal pattern in the summer, we would not be surprised if the markets took a breather. Consider this a brief summer lull. If this happens, it could provide attractive opportunities to re-enter the market or increase allocations. Recession risks have declined significantly, earnings expectations are low and long-term market trends are robustly upward. Long-term investors should not fear short-term volatility, but welcome it.<\/p>\n","protected":false},"excerpt":{"rendered":"

The old saying “sell in May and go away” has some basis in historical data.<\/p>\n","protected":false},"author":5,"featured_media":1435520,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"ngg_post_thumbnail":0,"footnotes":""},"categories":[220],"tags":[],"class_list":["post-1440654","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-opinion-leaders-en"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.payoff.ch\/en\/wp-json\/wp\/v2\/posts\/1440654","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.payoff.ch\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.payoff.ch\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.payoff.ch\/en\/wp-json\/wp\/v2\/users\/5"}],"replies":[{"embeddable":true,"href":"https:\/\/www.payoff.ch\/en\/wp-json\/wp\/v2\/comments?post=1440654"}],"version-history":[{"count":2,"href":"https:\/\/www.payoff.ch\/en\/wp-json\/wp\/v2\/posts\/1440654\/revisions"}],"predecessor-version":[{"id":1440656,"href":"https:\/\/www.payoff.ch\/en\/wp-json\/wp\/v2\/posts\/1440654\/revisions\/1440656"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.payoff.ch\/en\/wp-json\/wp\/v2\/media\/1435520"}],"wp:attachment":[{"href":"https:\/\/www.payoff.ch\/en\/wp-json\/wp\/v2\/media?parent=1440654"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.payoff.ch\/en\/wp-json\/wp\/v2\/categories?post=1440654"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.payoff.ch\/en\/wp-json\/wp\/v2\/tags?post=1440654"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}