August 2025 Market Strategy
Institutional investor capitulation in full swing. Could reach its climax with the next rate cut in the fall.
In my July 2025 Market Strategy, I anticipated a continuation of the current rally in the near-term on continued economic strength and US fiscal deficit spending. I also expected that Trump will get his will on rate cuts soon, which won’t necessarily be a net positive for liquidity growth, but will lift sentiment and as such can help complete the institutional investor pain trade. Let’s check how the picture has evolved since then.
TLDR Summary
The biggest story in this market is still the ongoing capitulation of institutional investors who have heavily sold the spring dip and are now being forced to cover their underweight in US stocks. They are forced to chase on a continued robust US economy, continued strong deficit spending and unproblematic inflation prints.
The next rate cut could become the pinnacle of that capitulation. It seems that we will get a politically motivated rate cut without an economic slowdown. Markets are currently anticipating that rate cut for late October. The November Treasury interest payment would be a suitable catalyst for the US stock market to mark a major top.
There is very little concern among investors about the ongoing trade war and its economic implications. Fears about it are diminishing while the level of tariffs in trade deals keeps surprising to the upside and while the full effects are far from being felt yet. That feels like complacency.