U.S Markets Overheating Ahead of Earnings Season?

Active fund managers are often infamous for their poor market timing—buying near peaks and selling near lows. Last week, their equity exposure... Has the market become dangerously over-optimistic?

Active fund managers are often seen as a “contrarian indicator” when it comes to market timing. They have a history of increasing stock exposure near market tops and cutting positions near lows. The chart shows that periods when active fund equity allocation exceeds 97%—marked by red bars—frequently align with short-term market highs.

Last week, active fund equity exposure surged to 99.3%, one of the highest levels on record.

Meanwhile, the U.S. second-quarter earnings season is approaching. Historically, the S&P 500 tends to rise an average of 2% in the four weeks leading up to earnings season. This year, however, the market has already gained nearly 8% during this same window—significantly above the long-term average. Has investor optimism gone too far?

Since we’re on the subject of earnings, let’s take a look at the forecasts. According to FactSet, market consensus expects S&P 500 revenue to grow by 4.2% year-over-year in Q2. Among the 11 sectors, Information Technology is projected to deliver the fastest growth, while Energy is the only sector anticipated to post a revenue decline.

On the profitability front, the S&P 500’s Q2 net profit margin is expected to reach 12.3%, slightly above last year’s 12.2%. Real Estate and Information Technology sectors are likely to be the main contributors to this margin strength.

Deutsche Bank forecasts that due to the impact of tariffs, S&P 500 earnings per share (EPS) will face mild headwinds but are still likely to come in above market expectations.

Next, let’s examine additional market charts:

This year, stock buyback volumes have hit new records. With Q2 earnings season approaching, more companies are expected to announce large buyback programs. Share repurchases remain one of the key drivers of U.S. stock market strength.

Goldman Sachs now forecasts the S&P 500 will reach 6,600 by the end of 2025 and 6,900 by mid-2026, supported by anticipated Fed rate cuts and strong fundamentals from mega-cap tech stocks.

The U.S. bull market has already lasted two years. Historically, after two consecutive years of gains, the Nasdaq has a 60% chance of another positive year with average returns of 13.3%. If this pattern holds and no major tariffs are introduced, the Nasdaq still has about 10% upside for the remainder of the year (current YTD gain: 4.6%).

Today, the top 10 companies account for 40% of the S&P 500’s market capitalization. Investing in the S&P 500 is effectively betting on the “Magnificent Seven.”

Since Warren Buffett announced his retirement, Berkshire Hathaway shares have underperformed the S&P 500 by more than 20 percentage points. Has the Oracle of Omaha’s magic faded?

More charts worth noting:

Don’t put too much faith in alternative investments. The public secondary market remains the best investment vehicle. Data shows that U.S. endowments and public pension funds heavily allocated to private equity, hedge funds, and other alternatives have consistently underperformed traditional “stock-bond portfolio” benchmarks, with the gap widening in recent years.

Is Trump’s fortune mostly from crypto?

A look at Trump’s wealth breakdown shows: $7.1 billion in cryptocurrencies and at least $620 million in crypto-related investment gains. His stocks, bonds, and cash total $2.2 billion, with another $1.3 billion in real estate and other businesses. On the liabilities side, Trump carries $100 million in real estate debt and $540 million in legal judgments.

Fresh labor market data from the Atlanta Fed shows that the share of workers who received no pay raise in June jumped to 13.3%, exceeding the long-term average—a fresh sign of weakness in the U.S. labor market.

By the measure of deaths per terawatt-hour generated (including accidents and pollution), nuclear energy remains one of the safest forms of power—far safer than coal or oil. Yet public fears surrounding disasters like Chernobyl and Fukushima continue to hinder the development of nuclear energy in regions like Europe, where it is urgently needed.

Goldman Sachs estimates that if the announced tariff hikes are fully passed on to consumers, core PCE inflation could rise by approximately 0.9 percentage points. By December 2025, core PCE could hit around 3.3% year-over-year. Without tariffs, inflation could fall to 2% by March 2026.

The U.S. Immigration and Customs Enforcement (ICE) budget has soared to $170 billion, making it one of the best-funded agencies in the U.S.—larger than Russia’s military budget. If ICE were treated as a military force, its “defense spending” would rank third globally.

Goldman Sachs’ analysis of historical data suggests that sharp real estate downturns typically require three preconditions: the economy is an emerging market, inflation is high, and home prices have risen far beyond income levels. Applying this framework to China yields mixed signals: On one hand, China’s deflationary environment suggests a milder housing correction; on the other, extremely high price-to-income ratios point to further downside risk.

Without large-scale destocking policies, Goldman Sachs projects that China’s new home sales area will decline by 8% in 2025 and 6% in 2026, with average selling prices dropping by 5% and 3%, respectively. The market is not expected to stabilize until the end of 2026.