Summer Swoon Looms for Stocks, Warns Veteran Trader
With good news from big tech already priced in and valuations stretched, The Macro Tourist's Kevin Muir believes the risk/reward now favors a market downturn.
Wall Street witnessed a confusing signal last week that has put seasoned market watchers on high alert. Despite blockbuster earnings reports from tech giants Meta and Microsoft that initially sent the S&P 500 to a new intraday high, the index reversed course to finish the day in the red. This peculiar price action, where good news fails to lift the market, is a classic warning sign for some analysts.
One such observer is Kevin Muir, a former institutional trader and the author behind the popular “Macro Tourist” blog. Citing the market’s strange reaction, he has declared he is “going back to the short side,” anticipating a significant pullback.
The Good News is Already Baked In
Just a few weeks ago, with the S&P 500 trading around 6,250, Muir expressed growing unease about the market’s trajectory. Now, with the index surging past 6,400, he believes the rally has reached a tipping point. The stellar earnings from Meta and Microsoft, he argues, provided the perfect opportunity “to pull the trigger on a sell call.”
“There are a bunch of reasons for my shift in tone,” Muir explains. “With the good news from MAG 7 earnings, and the tariff deal ‘wins’ being announced by Trump, we’ve hit a point where much of the good news is baked into the price.”
His bearish outlook is reinforced by several longer-term concerns, including investors’ heavy over-allocation to the U.S. market, extreme concentration in a handful of big tech stocks, ongoing economic policy volatility, and the advanced age of the current economic expansion.
Valuations Flashing a Warning Sign
A key pillar of Muir’s argument lies in market valuations. He points to April, when tariff worries caused analysts to slash their 12-month forward earnings-per-share estimates. During that period of uncertainty, the price-to-earnings (P/E) multiple applied to those forecasts dropped from a lofty 22.5 down to 18. This effectively lowered the bar for the market, making it easier to rally.
Today, the situation has completely flipped. According to Muir, earnings estimates are now back at all-time highs, and the P/E multiple has returned to its peak of 22.5. From this elevated level, the path of least resistance may be down.
“Of course, maybe this time 22.5 times doesn’t prove to be the top in multiples, or maybe earnings estimates find a way to accelerate even more from here,” Muir concedes, “but the risk/reward is now skewed to the downside.”
History Points to a Summer Correction
This confluence of factors leads Muir to predict one of the market’s regular “summer swoons.” So far this year, the market has defied the old adage to “sell in May and go away.” A brief 3.4% correction in mid-May lasted less than a week before the rally resumed. This prompted Muir to question how often the market rallies through an entire summer without a significant dip.
After analyzing the last 30 years of summer drawdowns, he discovered a telling pattern. The majority of small corrections (less than 5%) began in mid-June or later—not a single one started in May. This historical data suggests that the minor dip in May was likely not the main event.
“I suspect that the current mid-May correction will not prove to be the maximum summer drawdown,” Muir concludes. “Although there is nothing stopping the rally from continuing, the longer it continues, the more overbought it becomes, and the larger the inevitable correction.” For investors enjoying the recent gains, his analysis serves as a timely reminder that summer markets are often anything but calm.
