Lofty Valuation & Low PCR! Will the Summer Dip Hit Soon?
Tech stocks were sold off yesterday. Morgan Stanley’s Chief Equity Strategist Michael Wilson believes the U.S. stock market may face short-term volatility in Q3, but any pullback could present a buying opportunity.
“While the third quarter should bring some consolidation, we view pullbacks as buying opportunities,” Wilson wrote in a report on Monday.
Historically, U.S. equities tend to peak between July and August, especially after strong gains from May to July. September has been the worst-performing month for stocks over the past 50 years.
According to nearly a century of data, seasonal weakness often occurs from late July through August. Recent market behavior is reminiscent of the mid-July pullback and early August “Black Monday” seen last year.
Tariff Deadline Looming, Overvaluation High: Beware the Black Swan!
One of the biggest current risks to the market is the fast-approaching August 1 tariff deadline set by Trump. According to strategist Franke, the potential tariff chaos at the start of August is the most likely catalyst for a coming correction in U.S. equities.
Market valuations are nearing historic highs, comparable to or even exceeding the stretched levels seen between last December and February. This means any unexpected shock could trigger a sharp decline.
The forward 12-month P/E ratio for $S&P 500(.SPX)$ now sits at 22.7, above the 5-year average of 19.9 and 10-year average of 18.4. It’s also slightly higher than the 22.1 recorded at the end of Q2 (June 30).
Put/Call Ratio Signals Possible 8%–20% Drop in S&P 500
The chart below tracks CBOE’s put/call ratio for individual stocks and indices dating back to late January 2023. There have been five similar readings in the past. In four of them, the S&P 500 peaked within days (marked by red arrows) and subsequently fell 8% to 20%.
Yet, as noted earlier, Morgan Stanley sees pullbacks as opportunities. The bank maintains a bullish 12-month outlook for the S&P 500 and favors a bull-case scenario projecting the index to hit 7,200 by mid-2026. Key drivers include strong earnings momentum, positive operating leverage, and underestimated tax savings.
With the S&P 500 returning to lofty valuations,
Will you bet on the VIX and upcoming volatility? $Cboe Volatility Index(VIX)$
Are you prepared to hedge your portfolio?
Will July–August 2025 repeat the same pattern as last year?
REWARDS
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I do not intent to hedge my portfolio yet. I prefer to employ the strategy of buying good stocks at good prices and portfolio management in terms of proportion of the various assets. I would prefer to take profit and reduce or sell off my position if I feel that the long term prospects is questionable or the risk is too high for the expected benefit. Also, hedging often requires knowledge of other tools and may cost more than the simple strategy of portfolio management.
I don’t think July-August will repeat the same pattern as last year. Trump is announcing new deals, China seems to be better managing its real estate problems and the multiple IPOs in HK would be helpful in pushing the market higher.
I do not intent to hedge my portfolio yet. I prefer to employ the strategy of buying good stocks at good prices and portfolio management in terms of proportion of the various assets. I would prefer to take profit and reduce or sell off my position if I feel that the long term prospects is questionable or the risk is too high for the expected benefit. Also, hedging often requires knowledge of other tools and may cost more than the simple strategy of portfolio management.
I don’t think July-August will repeat the same pattern as last year. Trump is announcing new deals, China seems to be better managing its real estate problems and the multiple IPOs in HK would be helpful in pushing the market higher.
@MHh @Wayneqq @HelenJanet @melson @Universe宇宙
市場估值接近歷史高位，與去年12月至2月期間的緊張水平相當甚至超過。這意味着任何意外衝擊都可能引發大幅下跌。