Rush Zarrabian, CFA®
Corbett Road
Managing Partner, Portfolio Manager
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June 17, 2025

Summary

• Geopolitical tensions flared last week as Israel and Iran exchanged strikes, sparking a swift market response—stocks dipped and oil surged. While the headlines are serious, historical context and energy dynamics suggest a short-term shock, not a lasting shift.

• Markets have rallied sharply off the April lows, with momentum matching past bull market surges. While valuations are extended, history shows the forward price-to-earnings multiple (P/E) offers little predictive power for short-term returns.

• Although the score is still positive, MX strategies shifted to a neutral allocation in late May following a sharp decline in the model’s raw score, which triggered a “rate of change” sell signal. Our microcast™ signal remains at neutral, after briefly moving to a defensive stance in late April.

INSIDE THE MACROCAST™ DOWNGRADE

macrocast™ moved to a neutral stance in late May. This means our MX strategies are now roughly 75% invested in risk assets, with the remaining allocation in bonds.

The downgrade to a neutral allocation was due to a “rate of change” sell signal. While the moving average of the macrocast™ score is typically what guides the positioning in our MX strategies, we also monitor the score’s rate of change. If the model detects a sharp deterioration in market conditions over a short period of time, it can call for reducing exposure to risk assets before the moving average turns negative. Historically, these sell signals have helped the model react more quickly in volatile market environments.

The rate of change sell signal will remain in effect for six weeks. Unless the model’s moving average continues to decline, MX strategies will remain at a neutral allocation until early July.

Several key shifts across the VITALS contributed to macrocast’s™ move to neutral. As a reminder, the VITALS framework—Valuation, Inflation, Technical Analysis, Aggregate Economy, Liquidity, and Sentiment—helps capture a wide range of indicators that can influence the market. Together, these factors help us assess the health of the market and the likelihood of a sustained, recessionary bear market.

Reviewing the VITALS at the time of the downgrade:

• Inflation: Signals remained neutral. Despite concerns over tariff-driven price pressures, inflation expectations remained anchored with little pressure from commodity prices.
• Technicals: Cross-asset momentum and market breadth flashed warning signs.
• Aggregate Economy: Consumer-related indicators turned negative amid a softening labor market and weaker consumer expectations.
• Liquidity: Higher corporate bond yields reflected rising credit risk; tighter financial conditions.
• Support from Sentiment and Valuation—which helped keep the model constructive during the initial tariff-driven volatility—faded to neutral as markets rebounded.
• To reiterate, the model has shifted to a neutral stance—not a defensive one. Market conditions have seen a modest improvement over the past couple of weeks since the model downgraded, and that will hopefully continue. As always, we are actively monitoring the signals and will adjust positioning if conditions warrant.

GEOPOLITICAL RISK RESURFACES

Last Friday, tensions in the Middle East came to a head after Israel launched an offensive targeting Iran’s nuclear facilities and military personnel. In response, Iran fired ballistic missiles toward Tel Aviv over the weekend.

As is often the case with geopolitical shocks, markets responded swiftly: equities sold off, and oil spiked. On Friday, June 13, the S&P 500 dropped 1.1%, while crude oil surged 5.4%.

A major disruption in Iranian oil supplies could certainly drive prices higher. But today’s backdrop is very different from past oil shocks.

First, because of sanctions, most Iranian oil now flows to China—and Beijing has every incentive to pressure Iran to keep those barrels flowing (chart from Goldman Sachs):

Second, oil still matters, but its grip on the global economy has loosened. In 1973, a single barrel of oil powered $1,000 of GDP. Today, it’s less than half that, according to Columbia University’s Center on Global Energy Policy. 

What has changed? Efficiency and innovation. Advances in U.S. shale technology mean production can now ramp up in months, not years, and as the world’s top producer of oil and gas, the U.S. is far less vulnerable to foreign supply shocks than it has been historically.

Markets have a long track record of reacting quickly to global headlines—and then moving on. The current situation may follow that same pattern (chart from Exhibit A):

For clients, the most important question to ask when headlines hit is simple: Does this impact your plan or goals? In nearly every case, the answer is no—and that answer matters more than anything else.

Geopolitical risks can shake markets in the short term, but they rarely alter long-term outcomes. Staying disciplined—especially in moments like this—is what allows plans to succeed over time.

MARKET VALUATIONS ARE STARTING TO FEEL STRETCHED

The rebound from the April lows has been powerful—so powerful that the pace matches previous bull market surges. The study below shows that when the Nasdaq 100 rallies from bear market territory to near all-time highs in just 50 trading days, that momentum has historically continued (table from SubuTrade):

Yet this rally has unfolded without a meaningful rise in earnings expectations for S&P 500 companies. Stock prices have outpaced profit forecasts, pushing the forward price-to-earnings ratio (P/E)—price divided by projected earnings over the next 12 months—to just below the highs seen earlier this year. At a forward P/E of 21.6x, the market’s earnings multiple now sits above both the 5-year and 10-year averages (chart from Factset):

Across time, high or low P/E levels haven’t reliably led to strong or weak returns. One year out, results vary—mostly higher, sometimes down—regardless of where valuations started. In short, the chart reflects a weak relationship between the S&P 500’s P/E ratio and its 1-year forward returns. History suggests this indicator is a poor predictor of short-term performance.

Relying on the forward P/E ratio alone to forecast short-term returns is risky. While it can signal how expensive the market looks, the ratio itself tells us little about the direction of the market over the next year.

In summary, markets are navigating a complex landscape marked by geopolitical tension, uncertain trade policy, and stretched valuations. macrocast’s™ move to neutral reflects some signs of pressure across several indicators, prompting a pullback in risk exposure. Meanwhile, Middle East volatility led to a sharp spike in oil prices last week, but today’s global energy system is more resilient than in the past. Lastly, although valuations look rich, history shows that high P/E ratios alone aren’t reliable indicators of short-term market direction.

In times of noise and uncertainty, the most effective move is to stay disciplined and stay the course with your financial plan.

Important Disclosures

The chart(s)/graph(s) shown is(are) for informational purposes only and should not be considered as an offer to buy, solicitation to sell, or recommendation to engage in any transaction or strategy. Past performance may not be indicative of future results. While the sources of information, including any forward-looking statements and estimates, included in this (these) chart(s)/graph(s) was deemed reliable, Corbett Road Wealth Management (CRWM), Spire Wealth Management LLC, Spire Securities LLC and its affiliates do not guarantee its accuracy.

The views and opinions expressed in this article are those of the authors as of the date of this publication, are subject to change without notice, and do not necessarily reflect the opinions of Spire Wealth Management LLC, Spire Securities LLC or its affiliates.

All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. macrocast^TM and microcast^TM are proprietary indexes used by Corbett Road Wealth Management to help assist in the investment decision-making process. Neither the information provided by macrocast^TM or microcast^TM nor any opinion expressed herein considers any investor’s individual circumstances nor should it be treated as personalized advice.  Individual investors should consult with a financial professional before engaging in any transaction or strategy. The phrase “the market” refers to the S&P 500 Total Return Index unless otherwise stated. The phrase “risk assets” refers to equities, REITs, high yield bonds, and other high volatility securities.

Use of Indicators
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