What’s Priced In? – MMM v6-24 – The Legend of Hanuman

Table of Contents

A Market Built on Best-Case Assumptions

🚐 On the Road Again… and So is the Market

We officially hit the road last week for our 45-day cross-country RV adventure to celebrate our twins’ high school graduation, and after swerving around construction barrels and potholes on I-90 through Illinois – smooth for a while, until suddenly it isn’t – it struck me: the current market feels eerily similar. Stock prices remain elevated, optimism is rampant, and yet under the surface, the market is barreling ahead with an awfully rosy view of what lies ahead.

So this week we’re breaking down the big question: What’s already priced in? From tariffs to earnings, from deficits to rate cuts, investors seem to be assuming a best-case scenario across the board. Let’s unpack what’s fueling the rally – and what could derail it.

🧭 Four Things the Market Is Betting On

📦 1. Trade War Resolution & Minimal Tariff Damage

The stock market appears confident that the U.S.–China trade conflict will de-escalate, with limited impact on inflation or economic growth. This belief is supported by the so-called TACO trade (Trump Always Chickens Out), where investors assume threats are all bark, no bite.

But patience is thinning: Despite another “deal” being announced last week, there were no details—again. Markets barely reacted. Investors are staring to tune out these headlines, demanding substance over spin.
Goldman Sachs’ take: They see up to 0.5 percentage point upside in Core PCE from tariffs, but expect the impact to fade in 2026.

“This market is solidly above any fundamental valuation and really only justifiable if we assume extremely positive resolution to the numerous risks facing this market and economy.” – Sevens Report, June 9, 2025

📊 Already Priced In: ✔️ Smooth resolution
🟨 Not Priced In: Failed negotiations or new reciprocal tariffs

💰 2. No Recession & Strong Earnings Growth

Expectations for earnings growth are high- with forecasts of 10% growth in 2025 and another 15% growth in 2026 earnings which are being used to justify the already high valuation levels.

📊 Already Priced In: ✔️ Perfect earnings follow-through
🟨 Not Priced In: Slowing revenue, sticky costs, margin pressure

📌 Key Data Point 1: While earnings estimates have come down from the start of the year, the market is still assuming we will have “average” growth in 2025 and return to well above average growth in 2026.

📌 Key Data Point 2: Wall Street has a wide range of forecasts for the rest of the year. Note some of them are assuming we’ve already hit the peak. My takeaway: NOBODY knows what happens next.

📌 Key Data Point 3: SEM’s Economic Model is predicting a slow down in growth (meaning well below average activity which usually leads to a slowdown in earnings growth.

Check out our full economic update here:

🧾 3. Passage of the “Big Beautiful Bill” (BBB)

The 10-year yield has become a proxy for how serious the market is taking fiscal concerns. The CBO warned that if the BBB passes in its current form, deficits could sharply increase—potentially pushing 10 year yields well past 4.60% and pressuring stocks.

This is not a political statement, but rather a statement of fact: deficits rose significantly after Trump’s 2017 Tax Cuts and Jobs Act, surged further under Biden after COVID, and would rise even more under BBB. At some point, this will matter to economic growth.

📌 Key Data Point 4: By all estimates (other than those working directly under the President), the BBB will INCREASE the budget deficit.

📌 Key Data Point 5: 54% of our federal budget is going to “retirees” (Social Security, Federal and Military Pensions, and Medicare). Another 19% is going to Interest, meaning only 27% of our budget can potentially be spent on things that actually GROW the economy (putting more people to work or making them more productive.)

📊 Already Priced In: ✔️ BBB passes with minimal market disruption
🟥 Not Priced In: Reality of deficit blowout impacting rates and equities

🪙 4. Fed Rate Cuts & “End of Inflation”

Markets are confident the Fed will thread the needle. Last week’s CPI/PPI suggests the needle might be smaller than expected. Last week’s CPI and PPI both came in hotter than expected, challenging the narrative that inflation is on a glide path back to 2%. Goldman Sachs now expects just two rate cuts in 2025 (down from three), with lingering uncertainty into 2026.

Goldman Sachs, who typically has a good pulse on the Fed, summarized the dozens of speeches over the past few months to give us this picture of the Fed’s current stance:

📌 Key Data Point 6: CPI annual rate picked up last month, which could be a problem for those wanting rate cuts.

📊 Already Priced In: ✔️ Soft landing + cuts
🟥 Not Priced In: Sticky inflation or hawkish pause

🔭 The Week Ahead

Date	Event
Tues, June 18	Retail Sales, Industrial Production, S&P Global PMIs
Wed, June 19	Fed Decision – Watch for updated Dot Plot, Powell Presser
Thurs, June 20	📛 Markets Closed (Juneteenth Holiday)
All Week	Fallout from Israel’s Friday strike on Iran may elevate oil and volatility

⚠️ Sentiment Check:

NASDAQ leadership showing cracks
Small caps remain a red flag
Credit spreads still holding firm—for now

💬 Final Thoughts

We’re seeing a market that’s priced for perfection across nearly every variable. That doesn’t mean a correction is imminent, but it does mean we should temper investor expectations, diversify risk exposure, and keep dry powder ready in case the next detour isn’t so smooth.

Market Charts

The sell-off on Friday took stocks back to the “break-out” levels. If those are able to hold, we could see a resumption of the rally, but as noted above, the market is pretty much expecting the best case scenario for stocks, so anything to disrupt it (like an escalating conflict between Iran and Israel) could lead to sharp losses.

This chart better illustrates the nearly straight-up move since the trade war “ended” in the eyes of the market (the start of the “TACO” trade).

This week for bonds I thought I’d add lines around what the experts keep saying are “critically important” for the 10-year (4.5% and 4.0%). Moves above or below that are supposedly indications of inflation fears (above) or recession fears (below). As you can see, for the past 2 years we’ve both been above and below these levels in a very wide range.

More importantly, in my opinion, is the spread between corporate bonds and Treasuries. If spreads increase rapidly, it is a clear sign of strain in the financial system. We are not seeing anything to raise those alarms.

One thing to continue to watch is the uptick in initial unemployment claims as well as new highs in continuing claims. These numbers are both timely (we get them every week) and more accurate (because they are a consolidated look at each state’s actual claims from the prior week.)

Remember, our economic model picked up on some underlying weakness. With the market expecting no slowdown, this is something those with too much equity exposure should be monitoring closely every Thursday.

SEM Model Positioning

-Tactical High Yield sold high yield bonds on 4/3/25 after 9 weeks in these funds. These models bought back in on 4/24. All proceeds were moved to money market or short-term bonds, with a yield around 4.1% in money markets.

–NEW – Dynamic Models are ‘bearish’ as of 6/6/25, reversing the 11 month ‘neutral’ signal. The interest rate model remains ‘neutral’ (low duration exposure)

-Strategic Trend Models received 1/2 of the trend sell signal on 4/5/25

SEM deploys 3 distinct approaches – Tactical, Dynamic, and Strategic. These systems have been described as ‘daily, monthly, quarterly’ given how often they may make adjustments. Here is where they each stand.

Tactical (daily): On 4/3/2025 our tactical high yield model sold out of high yield bond into money market.

Dynamic (monthly): The economic model went ‘bearish’ in June 2025 after being ‘neutral’ for 11 months. This means eliminating risky assets – sell the 20% dividend stocks in Dynamic Income and the 20% small cap stocks in Dynamic Aggressive Growth. The interest rate model is ‘neutral’ meaning low duration/money market investments for the bulk of the bonds.

Strategic (quarterly)*: One Trend System sold on 4/4/2025

The core rotation is adjusted quarterly. On August 17 it rotated out of mid-cap growth and into small cap value. It also sold some large cap value to buy some large cap blend and growth. The large cap purchases were in actively managed funds with more diversification than the S&P 500 (banking on the market broadening out beyond the top 5-10 stocks.) On January 8 it rotated completely out of small cap value and mid-cap growth to purchase another broad (more diversified) large cap blend fund along with a Dividend Growth fund.

The * in quarterly is for the trend models. These models are watched daily but they trade infrequently based on readings of where each believe we are in the cycle. The trend systems can be susceptible to “whipsaws” as we saw with the recent sell and buy signals at the end of October and November. The goal of the systems is to miss major downturns in the market. Risks are high when the market has been stampeding higher as it has for most of 2023. This means sometimes selling too soon. As we saw with the recent trade, the systems can quickly reverse if they are wrong.