From Vol Exhaustion to Price Fatigue
Thoughts on the Market
We kicked off October on a high note and closed it out even stronger — finishing higher with an improved setup for the months ahead. Thanks to the mid-month shakeout that reset sentiment and positioning, the odds of a solid year-end rally look even better now.
The savior in need? Could be Trump — though he also triggered the wobble — or maybe just corporate America, showing up right on cue to defy market caution.
With over 60% of the S&P 500 having reported, this earnings season is shaping up to be another one of solid performance and upside surprises. Earnings strength continues to defy market caution, so let’s look at the numbers:
So far, 318 companies have reported, with 83% topping earnings estimates, delivering an aggregate 5% upside surprise and driving year-over-year earnings growth of 11.1%.
Not bad for an economy everyone said was “slowing.”
Heading into the season, the Street was looking for 7.9% earnings growth, or about $67.7 per share for the S&P 500. But with revisions trending higher, we now look on track to finish closer to $73.
Once again, the snake charmer is doing its thing — just like in Q1 and Q2, when analysts came in too bearish and ended up playing catch-up.
But apparently none of that matters. Everywhere you look, people are losing sleep over valuations — which, ironically, usually means we’re not at the top yet.
We don’t put much weight on valuations to begin with. They’ve never been great for timing, and let’s be honest — no one ever gained an edge by simply dividing price by earnings.
Still, anyone comparing today’s valuations to the Dotcom era on a basic P/E basis is missing the point. You see, even the act of comparing today’s multiples to their 10-year averages implicitly assumes the index’s earnings structure and risk profile haven’t changed over the years — but they clearly have, especially with how much the sector mix in the S&P 500 has shifted.
For us, it all comes down to profitability. So, if you’re comparing today’s 22.8x multiple to the 10-year average, you’re also comparing it to a period when margins averaged about 12.34%. Right now, they’re closer to 14.5%. That context matters.
Here’s the thing: higher profitability demands a higher valuation premium.
Using our profitability-adjusted model, today’s P/E comes out to 17.75x — less than one standard deviation above its 20-year average of 16.2x, and even lower than back in July when the index was about 5% cheaper.
So yeah… if this is a bubble, it’s probably the cheapest bubble in history.
Moving on — last week’s FOMC meeting delivered what everyone expected — a 25bps cut and the announcement that QT will end on December 1. But Powell surprised everyone by saying a December cut isn’t a sure thing, sending the odds for another rate cut this year from about 90% down to 66%.
Interestingly, though, rate-cut expectations for 2026 didn’t budge — probably because Trump is still expected to name Powell’s successor by year-end, and that person is likely to stick with a dovish, growth-friendly agenda.
From our view, Powell’s slightly hawkish tone is actually doing some good, cooling off a market that hasn’t stopped climbing since the big VIX crash on October 17.
As our next chart shows, the past 2-week rally has been running well above the already bullish average path following a volatility collapse.
That said, a bit of moderation at this stage is probably a good thing.
We went from vol exhaustion to price exhaustion in just a few days, and most people are pointing at the Mag 7 stocks as the reason why.
Sure, they finally broke out after a month of sideways trading — but really, it’s Tech as a whole driving the move. In fact, all 65 other names in the sector did even better than the Mag 7.
Take a look at our next chart: the left side shows what the media usually focuses on — just seven stocks carrying the market. But the right side tells the real story: it’s not just seven. Tech overall is outperforming, even more than the Mag 7.
Looking at last week’s price action, it’s clear that everything except Tech rolled over. That makes Technology’s breakout to new all-time highs basically the only reason the S&P 500 kept climbing to exhaustion levels — which also explains all the talk about weak intraday internals.
The point is: Technology now makes up 36% of the S&P 500. So whenever large-cap Tech gets its turn, it’s just almost inevitable that the index will rise – even if fewer stocks are driving the move. And when everything else is pulling back, like we’re seeing now, it can really mask how the broader market is actually performing.
The takeaway is: This unprecedented concentration is going to keep producing these weird mismatches between returns and internals. And as interesting as they may appear, these short-term divergences don’t really signal much anymore — they mostly just reflect today’s index composition. In other words, they’re coincident indicators, not bearish signals.
To give you a sense of the breadth picture, we’ve highlighted every unusual return vs breadth day so far this year in the chart below.
That said, we don’t want a couple of “weird” days to throw us off the bigger picture. After all, breadth isn’t something you judge with point-in-time analysis.
Still, market participation — as measured by how many stocks are trading above their 200-day moving average — has pulled back.
But perhaps the fact that the average S&P 500 stock, the average Nasdaq 100 stock, and even the average Russell 2000 stock are all within 3% of their all-time highs tells us a lot more about the trend, and certainly confirms that breadth is holding up.
So, where does that leave us?
Like we said before, Tech got its turn and pushed the index to exhausted levels. But looking at everything else, the other sectors are still far from stretched.
Of course, that doesn’t exactly leave the S&P 500 from being extended at the moment. But as we like to say, stretched markets can correct in two ways: through price or through time.
Given the nature of this bull market, we’d still bet on the latter — after all, the strongest trends usually correct through time, not through price.
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