We work through a small selection of the range of systematic inputs from Prometheus Institutional that drive these conclusions.

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Our timely readings of nominal spending continue to show an economy expanding at a strong pace:

These readings are confirmed by our reconstruction of the official GDP statistics by component:

Domestic GDP conditions remain strong and stable, facilitating income and fueling consumption. The balance between income and consumption continues to flow through to corporate profits:

We see this reflected in public equity earnings momentum, which remains near its all-time highs:

These positive income, spending, and profits conditions continue to support a tight labor market:

With our daily inflation readings showing that inflationary pressures are now once again far removed from target:

The combination of these pressures continues to keep the pressure on monetary policy rates to rise, which continues to hurt US fixed income:

Alongside these pressures, the sustained lack of traffic through the Strait of Hormuz increases the potential for current oil price volatility to become a leading indication of inventory drawdowns to come globally:

The combination of these dynamics continues to suggest a positive and stable nominal demand backdrop, with supply disruptions leading to an inflation shock.

Positioning for such trends is theoretically direct— own nominal growth assets. However, reality is far from so linear. There are two challenges to expressing macro fundamental views in the current backdrop:

Equity returns are being dominantly driven by expanding risk premia:

And oil prices are dramatically exposed to a speculative unwind:

Thus, while fundamental conditions are in line with simply buying nominal growth assets, price-based risks abound. Fortunately, price-based risks can be controlled for with price-based risk management.

Combining our indicators, a Macro Cycle Allocation would be long

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We scan through the data driving these views. We begin with nominal GDP, which remains stable and elevated:

We show our CPI Nowcast, which has rebounded to show higher inflation readings:

Next, we show our Labor Market Gauge, which has offered a timely reading of labor market conditions. Labor markets look to be inflecting higher:

As a result, our monetary policy pressures gauge continues to suggest hiking cycle pressures:

Thus, while the Fed may not have tightened policy today, there remains considerable pressure on the Fed to hike policy rates over the coming months. A hiking cycle offers the worst risk-adjusted-return periods for Treasuries across all macroeconomic environments. Barring a significant growth shock from either i) an equity sell-off causing a reverse wealth effect or ii) demand destruction driven by excessively high oil prices, US fixed income likely continues to offer negative returns, or poor returns relative to the risks of owning them for most investors.

Until next time.

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For those unfamiliar, here’s an overview of what we offer at Prometheus:

To today’s note.

The Observatory is our real-time monitoring of the US economy. It offers a regular, systematic dissection of virtually every major fundamental macro data set released in the US. We scan the time-series characteristics, sectoral decompositions, macro-cycle implications, and the effects on GDP and inflation of each release, with an understanding of the nuances and specific manipulations required for each data series. The Observatory seeks to paint a moving picture of the economic cycle, print by print.

We share our latest note from The Observatory: Motor Vehicle Monitor.

Synthesis: Motor vehicle sales continue to expand, albeit with significant volatility. Domestic production and capacity utilization of the motor vehicle industry continue to look limited. However, nominal sales and employment continue to show an expanding industry. Motor vehicle activity continues to be modestly positive for GDP conditions, though volatility persists.

Read all the data driving this assessment below:

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For those unfamiliar, here’s an overview of what we offer at Prometheus:

Diving into today’s note.

We share the latest positions from the Prometheus S&P 500 Program:

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In this video, Aahan breaks down the mechanics of our Macro Regime Probabilities— and what they are telling us about the current macro dynamic.

This is an experiment in sharing video content, so if you enjoyed it— please let us know in the comments if it’s something you would like to see more of.

Until next time.

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For those unfamiliar, here’s an overview of what we offer at Prometheus:

Prometheus Research is designed to be your one-stop shop for macro research. From doing deep fundamental research on the economy to turning that research into tradable portfolio strategies, we’ve got you covered. What makes Prometheus unique is our expertise in systematizing our macro views to create rules-based quantitative strategies and frameworks for navigating macro markets. We think this is the biggest edge that we have over traditional macro research. We don’t just provide you with views and then wish you good luck—but instead, we take those views, turn them into quantitative rules, stress-test them over hundreds of years of data and across geographies, and then turn them into clear, actionable investment portfolios and frameworks. Let’s dive into everything we offer:

There are four key components of our Substack offering:

• The Observatory: The Observatory is how we at Prometheus monitor the evolution of the economy and financial markets in real time. We track and analyze virtually every piece of data on the US economy and its implications for markets. We assess the time-series characteristics, sectoral decompositions, macro-cycle implications, and the effects of each release on GDP and inflation, with an understanding of the nuances and specific manipulations required for each data series. The Observatory seeks to paint a moving picture of the economic cycle, print by print.

• Prometheus Macro Cycle Program: Our Macro Cycle Program seeks to offer a simple, long-only investment solution for investors looking to adjust their asset allocation in sync with the macroeconomic cycle.

• Prometheus S&P 500 Program: The Prometheus S&P 500 Program aims to outperform the S&P 500 over a full investment cycle. The program will aim to achieve this objective by leveraging our proprietary combination of Sector Selection, Beta Timing, Active Overlays, and Dynamic Risk Control. This is an ideal fit for active equity market investors. We have an extensive primer on our process, which you can read by clicking the link here.

• Prometheus Crisis Protection Program: The Prometheus Crisis Protection Program seeks to offer a portfolio diversifier during periods of economic and financial instability by blending active, long-only exposure to Gold, TIPS, and VIX. The program is designed to have minimal turnover, except during crisis periods, and is intended to be a portable solution for both active and passive equity market investors. You can read the primer on the strategy by clicking the link here. This program is quite flexible in terms of its implementation. Check out the links to various implementations below:

  • Keep All Your S&P 500 Returns, But Protect The Downside

  • A Defense-First Approach To S&P 500 Investing

  • Integrated S&P 500 & Crisis Protection

Whether you’re a discretionary investor seeking to find genuinely tradeable macroeconomic insights, looking to apply macro market timing to your approach, or simply looking for a more diversified approach to equity investing— Prometheus has you covered. Everything you need to navigate macro:

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We hope to see you on the other side.

We show how nominal growth remains stable below:

This stability of nominal GDP continues to be largely driven by strong domestic spending conditions in the form of strong consumer spending:

Consistent with an economic expansion, equities continue to exhibit the strong trend in the cross-section of US macro assets.

The S&P 500 remains within range of its recent highs as the economy continues to expand, corporate profits remain strong, and recession risk remains limited. This continues to fuel corporate earnings:

However, there remain price-based risks to forward equity market returns. Below, we visualize the macro factor decomposition of equity market returns into returns from growth, inflation, policy, and the equity risk premium:

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The conversation was truly wide-ranging, covering topics from our macro regime outlook to structural changes in the US business cycle.

Find the whole conversation below:

Until next time.

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For those interested in understanding our Basic Trend Program, you can read the overview below. For those just looking for updates to positions or signals, you can scroll to the section labeled as such.

Basic Trend Program: An Overview

We think a basic trend program stacked on beta is one of the most defensible things an investor can do. It is intuitive, empirically supported, and consistent with how most people actually behave when markets move against them.

That is not how it is usually sold. A large number of participants — in both mid-tier institutional and retail strategist settings — are trend following and then shrouding that trend following in marketing and elaborate analysis. “Long-term fundamental views, with technical execution” is often the tell. What is being sold is two return streams: a view component and a trend component. The trend component dominates the positions, the execution, and the performance. The view component rarely carries an edge. We are releasing the trend component in full so it can be judged on its own.

We also think the barriers to entry in trend following are close to zero. The cost of replicating it should be too. This gives you a benchmark against which to evaluate any market strategist and a portfolio you can run yourself with a brokerage account. We dive into our process below.

Benchmark Selection

We begin with a benchmark of 60% stocks, 15% bonds, 15% gold, and 10% bitcoin. The stocks, Gold, and bitcoin portfolio advocated by Paul Tudor Jones has become popular recently. We add bonds back because dropping the primary defensive asset is a mistake. The weights are simply a reorganization of the classic 60/40, dividing the bond allocation across bonds, Gold, and bitcoin. This reflects the popular zeitgeist without going overboard. Are these weights optimal? No. But they span the assets most investors actually hold and roughly account for their volatility, which is enough for a benchmark.

Two-Speed, Binary Trend

Trend following is a well-established way of investing. Economies move in trends, and asset markets move to reflect those trends. When you trend-follow large, liquid markets that carry opposing economic biases, you get a portfolio that adapts to the macroeconomic environment. There is far more information in the trend of stocks, bonds, and commodities than there is in the top ten stocks. The benchmark above is a good base to follow. We use two look-back windows, one month and six months, and take a binary reading of each:

• Both trends positive: full position.

• Trends opposed: half position.

• Both negative: flat.

We do not apply shorts here. Shorting is more expensive and introduces more management. More importantly, these assets carry an upward drift over time, and shorting them successfully requires a more tactical approach than this program is designed for. Why those look-backs? They are not optimal in any formal sense. They conform to the behavioral tendencies we observe in most investors. When markets are crashing, the one-month trend sizes you down. When markets are rallying from the lows, the six-month trend keeps you participating. Pick your own look-backs if you prefer; this is not a religion.

Risk Parity

We now have a portfolio that sizes a 60/15/15/10 allocation up and down on two trend speeds. That is already a reasonable place to stop, but there are easy gains available through risk parity. Risk parity is the idea that every asset should contribute equally to portfolio risk. We measure risk through volatility. So instead of the somewhat arbitrary 60/15/15/10 weighting, we weight each asset inversely to its volatility. Asset weight is expected return divided by volatility, relative to the rest of the universe. The implicit assumption is that all assets carry the same expected return. We adopt that assumption here; if you disagree, substitute your own. This ensures every asset is equally represented. The binary trend signal then scales the risk-parity weights: all clear gives the full allocation, mixed gives half, and both negative gives zero.

Dynamic Leverage and the Volatility Targeting

We now hold a package of assets with an expected volatility conditional on its holdings. We would prefer that the risk profile be deliberate rather than incidental. The goal is to take risks when it is warranted. When is it warranted? When the portfolio is diversified and when there is conviction. Both conditions are already encoded in the trend signals, since signals translate directly into positions, and positions into breadth. So we scale target volatility by the number of positive trend signals. We set the maximum volatility to 15% — roughly the midpoint of long-term volatility for this asset set, though any number will do. With four assets and two signals each, there are eight signals and therefore eight discrete levels of risk:

• Eight positive signals: 15% volatility.

• Four positive signals: 7.5% volatility.

• Zero positive signals: no exposure.

And everything in between. This gives a profile that takes the most risk when the portfolio is most diversified and steps down as breadth deteriorates. Set the maximum wherever you like, but the principle holds: more diversification, more Sharpe, more room for risk.

Stacking these layers produces the Prometheus Basic Trend Program. It outpaces beta and cuts drawdowns considerably, all from relatively simple components. We show the simulated path of the program below:

If you like this approach, you can follow it for free on Prometheus. If you would rather not, use it as a template and build your own. For those interested in following along here, find the latest positions and trend signals below.

Basic Trend Program: Positions & Extended Universe

Below, we show the latest positions from the Basic Trend Program:

This program currently has a 100% max long position in Stocks, a 0% max long position in Bonds, a 50% max long position in Gold, and a 50% max long position in Bitcoin.

In risk-parity terms, this translates to Stocks: 51%, Bonds: 0%, Gold: 11%, Bitcoin: 8%, and Cash: 30%. This reflects an expected volatility target of 8%.

For those interested in applying this approach to a broader set of ETFs, we show the latest two-speed binary trends across a wide variety of assets below. The color key below reflects whether trend signals are bullish (both trends positive), bearish (both trends negative), or neutral (trends mixed):

Asset market trends are broadly mixed across the extended universe.

Until next time.

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We begin with the most recent data: permits, starts, and completions:

The latest data continue to show a housing sector that is meandering within a contraction. Historically, this type of weakness has largely been consistent with recessionary pressure:

However, the recomposition of the economy towards a greater contribution of technology and services consumption to growth has continued to mute the effect of housing weakness on the broader economy. Below, we show the estimated impact of the latest data on residential investment:

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As we can see above, growth continues to support equity prices in a manner consistent with the economic expansion. Our inflation factor has shown much more mixed readings, with inflation hurting equities at the onset of the war, only to turn highly supportive in recent months. (Recall, equities are disinflationary assets, i.e., lower inflation is more supportive in the visual). Policy continues to be a drag on equities as monetary policy expectations of a hiking cycle continue to weigh on markets. Finally, the equity risk premium is the dominant driver of returns today. While the equity risk premium should indeed be a positive contributor to price returns over time, it is rarely a driver that can persistently rise at an accelerating pace as it is today. This opens the window for chop and potential downside in equities. In this note, we detail how our S&P 500 Program is approaching this dynamic.

The Prometheus S&P 500 Program aims to outperform the S&P 500 over a full investment cycle. The program will strive to achieve this objective by leveraging a combination of Sector Selection, Beta Timing, Active Overlays, and Dynamic Risk Control. Our S&P 500 Program can be integrated with our Crisis Protection Program, which seeks to offer a portfolio diversifier during periods of economic and financial instability by blending active, long-only exposure to Gold, TIPS, and VIX.

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For context, we visualize the live returns for our Integrated Program below:

Our programs are operating in line with their long-term expectations. Today, the S&P 500 Program is positioned as follows:

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We dive into what our process is telling us. With the official retail sales numbers released, we now have enough data in hand to form our initial estimates for monthly GDP in the form of our GDP Nowcast:

The latest data shows moderating real GDP readings. However, it is essential to recognize that this data is largely being weighed down by volatility in trade data rather than consistent domestic weakness. Isolating the domestic drivers of economic activity, we continue to see the domestic real GDP growth of 2.5%. This is largely consistent with our high-frequency estimates of GDP growth:

Furthermore, our daily business cycle gauges continue to show an expansionary business cycle:

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We share our latest note from The Observatory: Retail Sales Monitor.

Synthesis: The latest retail sales data continue to suggest

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The latest CPI data came in materially colder than expected. Markets have taken this as confirmation that the disinflationary trend will continue, reducing the pressure on the Fed to hike policy rates. This may be premature. We scan through the data and offer our assessment.

The softness in the headline data was largely in line with our CPI Nowcast, with oil prices materially weighing on the headline CPI. We show our estimates headed into today’s release below:

Headline inflation came in even more negative than our estimates, however. This was driven, in large part, by a slowdown in shelter inflation, coupled with price declines in transportation services:

This weak data implies weaker PCE inflation. We estimate the next PCE reading using the latest CPI data:

The latest CPI data suggests a -0.14% headline PCE print in June, bringing the 6-month trend in headline PCE to 4.4%. This is a much more timid disinflationary effect than CPI itself suggests.

Furthermore, reconciling the components of this CPI print that drive their respective PCE counterparts, we continue to see inflation breadth as pervasively elevated:

Accounting for the latest CPI data, our estimate of PCE breadth (% of areas with 6M annualized inflation >2%) remains unchanged, with 80% of sectors showing inflation above the target.

Thus, while this print is indeed a step in the right direction for the Federal Reserve, we think it’s important to recognize that one print is not indicative of the underlying pressures. Even if we extrapolate the current trend forward, we are still unlikely to see annual inflation rates consistent with the Fed’s 2% target. At the current trend, we would still be looking at an annual trailing inflation around 3% this year:

Therefore, as we review the data, we continue to see significant challenges ahead for the Fed, which we expect to be reflected in fixed income markets. Treasury markets remain secularly rich relative to nominal GDP conditions and, without a material repricing, will continue to whipsaw.

Read all the data driving our CPI assessment below:

The Observatory, CPI Monitor

615KB ∙ PDF file

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Until next time.

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For context, we visualize the live returns for our Integrated Program below:

Our programs are operating in line with their long-term expectations. Today, the S&P 500 Program is positioned as follows:

There are four major takeaways from these positions:

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We begin with major macro trends across stocks, bonds, and commodities (US-focused). Scanning across those markets, we continue to see US equities as the only markets with persistently positive trend strength:

We see these trend signals reflected in the distribution of global market returns as well, with US equities leading the pack amongst global assets:

These macro market trends are largely supported by our fundamental gauges. Our timely reads on nominal GDP growth continue to show a steady expansion:

Meanwhile, our inflation readings continue to suggest near-term disinflationary pressures:

Additionally, our business cycle gauges continue to show an expanding business cycle:

And our monetary policy pressure gauges are now neutral:

The combination of these dynamics continues to suggest an economy in steady-state expansion, with significant inflation volatility driven by oil price dynamics.

Leveraging our timely proprietary estimates of the current stages of the macro cycle continues to look attractive. This process has navigated this year quite well thus far:

Combining our indicators, a Macro Cycle Allocation would be long

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Every day at midday, we share updates to our US Macro Regime Probabilities with Prometheus Institutional, along with our synthesis of what the current regime probabilities suggest.

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Our Macro Regime Probabilities use our bottom-up signals across asset markets to construct forward-looking estimates for the cross-asset macro market regime. These signals incorporate both fundamental and price-based information to produce high-frequency, forward-looking estimates for the US cross-asset environment. These signals are best used as a forward-looking guide for the cross-sectional returns across macroeconomic assets. We define the regimes as follows:

• (+) G (-) I: Rising Growth & Falling Inflation, Equities Outperform

• (+) G (+) I: Rising Growth & Rising Inflation, Commodities Outperform

• (-) G (-) I: Falling Growth & Falling Inflation, Treasuries Outperform

• (-) G (+) I: Falling Growth & Rising Inflation, TIPs Outperform

Synthesis: Our Macro Regime Probabilities show a flattening of the distribution of potential economic outcomes. This dynamic is flattening the distribution of regime-expected returns.

A relatively flat distribution of regime-expected returns supports holding a diversified mix of global assets. We find a diversified mix of global assets to be attractive, with our expected return program showing all asset classes offering reasonable expected returns:

Furthermore, the diversification benefits of owning a portfolio of assets remain significant versus history. The mean return of holding any given asset class today offers a Sharpe Ratio of 0.51. However, combining assets into a portfolio aligned with the Prometheus Expected Return Program yields a portfolio-level expected Sharpe Ratio of 1.13:

This elevated return-on-risk level comes with increasing de-correlation across assets. We visualize this using the effective number of bets in a portfolio of global assets:

With the distribution of regime expected returns flattening, we think it best to consider the adage: When in doubt, diversify.

Until next time.

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As US equities continue to push higher on the back of earnings expectations for technology firms, we think it will become increasingly important to monitor financial stability measures that underpin these expectations. Put differently, financial system liquidity conditions will be an important input in determining whether the equity market rally can continue or will stall out. We share our tracking of US liquidity conditions:

We begin tracking liquidity conditions by presenting the weighted growth rate of the major sources of liquidity: reserves, commercial paper, & repurchase agreements. In the modern era, the primary sources of financial system liquidity have collapsed to two sources: private sector repo and banks’ reserve balances. We zoom in on these sources below:

As the Federal Reserve has rolled off its quantitative easing programs, reserve balances have become a much less meaningful driver of financial system conditions. We show how the factors contributing to reserves have been flat/modestly negative since 2024:

Given these dynamics, rep activity has been the dominant source of new liquidity for the financial system. We show the evolution of private repo growth by type below:

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For context, we visualize the live returns for our Integrated Program below:

Our programs are operating in line with their long-term expectations. Today, the S&P 500 Program is positioned as follows:

There are four major takeaways from these positions:

• Beta Timing: With equity momentum slowing and equity indexes beginning to look stretched, our signals are once again pointing to modest reversal pressures at the index level.

• Sector Selection: Across the equity sectors, our signals favor technology and industrials.

• Risk Control: Our risk control continues to guide us effectively in managing drawdowns. In a multi-standard-deviation event across all our positions, our expected drawdown is 7%.

• Bond Overlay: With oil markets now selling off materially, pressure on fixed-income markets has eased. While still not in their optimal zone for expected returns, fixed-income carry is now a reasonable risk for investors to consider in their portfolios, prompting our bond overlay to re-enter fixed-income exposures.

To this allocation, we add our Crisis Protection Program. The Prometheus Crisis Protection Program is allocated as follows:

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Our research offering at Prometheus offers an expansive toolkit for navigating macro markets, covering every major data release in the US and a global universe of 47 markets across equities, fixed income, and commodities. We use our Week Ahead notes as a thematic overlay to surface the parts of our process that are generating the most important signals in the current context.

Find the complete note attached below:

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