(Half) Year In Review

We’re all in the process of tallying up all the numbers from the first half of 2025.  In terms of many major stock market indices, if you’ve just woken up from a 7-month nap, you’re forgiven for thinking little at all has happened so far this year.

Of course, that’s very much not the case.  The first half of 2025 has delivered something for everyone. 

I need to acknowledge that I’m a bit lost for words at the moment.  A bit drained.  Volatile markets are thrilling and engaging, but they can also drain the energy out of you.  I had some big plans and rough drafts for this month’s commentary but alas they haven’t materialised.  Instead, as the second half of the year begins, allow me to offer up some rather un-insightful commentary on what’s happened in the first half together with a few anecdotes from other investors and our thinking as the second half begins.

Just… wow…

5 years of weekly data on the S&P 500 tells the story.  The speed of the recent recovery has been the biggest surprise to most people – including us.  There’s a good theory to help explain it – we’ll get to in a moment.

The market isn’t trading on fundamentals.  I know that sounds like a petty excuse, but I’m in very good company.

Jim Chanos has described conditions as a “feels market”.

Cliff Asness has described the “epic valuations”.

Australia’s John Hempton has mentioned over the past year that he hears the “ringing of bells” (the old metaphor for a possible top in the market) and has recently expressed confidence that his fund is well place for “when the selloff resumes”.

Market conditions are prompting some rather amusing comments from market pros such as this one below:

In their first quarter commentary, David Einhorn and his Greenlight team had the following comments:

“A couple of quarters ago we wrote;  We will avoid calling this market a bubble, and simply observe that the dividend yield is low and the P/E ratio is elevated despite corporate earnings being cyclically high, if not top of the cycle…”

“Sensing the market was turning, in late February we pivoted from conservative, but not bearish, to bearish…  The fact that the market has declined from its record highs does not make it inexpensive of attractive.”

Passive flows and retail FOMO

Again, the speed of the recent market recovery is what caught most investors by surprise. 

Industry data reports that retail traders “bought the dip” aggressively whilst institutions were reducing equity exposure during that recovery phase.

Ahh yes…  It continues…  For 16 years now retail investors have been conditioned that stocks only go up.  All you need to do is buy every dip and you will soon be rewarded with new highs. 

Beyond this, it’s been well-documented that “passive investing” strategies have taken over from traditional “active” management.

In the simplest sense, “active management” is about investing capital based on fundamental research and analysis.  Warren Buffet – known as the greatest ever “value investor” – is an example of an active manager.

Instead, more and more people are allocating funds passively.  They buy shares – perhaps an individual share like Nvidia or more commonly a basket of shares via an index ETF. 

This activity shows up in industry analytics tracking the money flowing into ETF’s.  Here’s one example, being weekly flows during one of the final weeks of June:

$17.2 billion going into ETF’s tracking U.S. large cap stocks.  In a week. 

Here’s another graphic of how this year is currently tracking:

In addition to this, what’s also been documented is the proliferation of retail trading activity such as the use of Zero-day-to-expiry options – “call” and “put” options that expire the next day. 

These are lottery tickets.  A bet on whether the market will go up or down in the next day.  The volumes being traded are enough to have a real impact on the markets – the buying of Calls (bets the market will rise) requires the market-makers that sell them to retail punters to hedge their exposure by buying “the market” – often in the form of index futures. 

The kicker to all of this is as follows:

Day-to-day, the markets are being driven by people only concerned about “price” with no concern about “value”. 

People believe him when President Trump asserts that the market is going to go a lot higher.  People believe his economic team when they say there is “zero chance of a recession”.

People are buying stocks because they believe the price will rise.  That might seem like a perfectly logical thing to do… and in a way it is.  But the key point is that no consideration to “value” is being given. 

Add to this all the trend-following, algorithms and the highly speculative derivatives trading activity.

Never before have we seen so much capital being controlled and deployed by people with such little regard to “value”.

The trend is your friend

With the above in mind, when you gaze around the financial blogosphere at the moment, what you find is that (almost) everyone that is bullish has a “technical analysis” focus whilst (almost) everyone that cares about valuations is cautious.

Momentum.  That’s the bullish argument here. 

To be sure, it’s a very valid argument.  Momentum is a powerful force and, in a sense, it has no limit. 

But of course, there is a limit.  There comes a point where everyone that wants “in” has bought… there’s nobody left to pay the higher price in order for that higher price to be achieved.  And if that conviction in “price going up” wanes, the risk of a major selloff emerges.

You are here

So here’s where we stand as we enter the second half of 2025. 

Valuations are historically extreme. 

Corporate profit margins at cyclical highs.

The key U.S. economy continuing to display strong signs of weakness.

A… how should we put this… “very erratic” U.S. government administration comprised of “go fast and break things” people.

Inflation down but a real possibility of an uptick as tariffs take effect.

Investor confidence in higher prices is high.

Share markets running on momentum.

What’s a rational investor do to? 

I’ll leave that for you to decide…

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