BTIG strategist warns of historical pullback risk as S&P 500 nears record highs
Despite robust second-quarter earnings and the S&P 500 trading at record levels, BTIG’s Jonathan Krinsky advises investors to hedge exposure or reduce risk ahead of a seasonal period of market weakness.
BTIG strategist Jonathan Krinsky has issued a cautionary note to investors, advising a reduction in risk or the implementation of hedges for broad-based equity exposure as the market approaches a historically difficult period. The warning centres on the window between August and October during mid-term election years, a timeframe that has consistently delivered negative returns for equities.
According to Krinsky’s analysis of historical data, markets in 1990, 1998, 2002, 2010, 2014, 2018, and 2022 all experienced pullbacks of at least 7% during this specific three-month window. While 2006 was the only year to avoid a decline in this period, the market subsequently fell 9% from May to July, suggesting that seasonal averages may be front-run rather than avoided.
The caution comes despite the S&P 500 currently trading at record highs, a feat driven largely by exceptional corporate performance. Second-quarter earnings for S&P 500 companies are on pace to rise by at least 50% year-on-year, marking the highest growth rate since the second quarter of 2021, according to data from FactSet.
Earnings surprise rates are also at multi-year peaks. Approximately 86% of S&P 500 companies that have reported earnings have exceeded Wall Street estimates, surpassing both the five-year average of 78% and the ten-year average of 76%. If this figure holds, it will represent the highest percentage of positive earnings surprises since the second quarter of 2021, when it stood at 87%.
Krinsky acknowledged the strength of the current data but urged investors not to become complacent. He noted that while corporate America is performing well financially, the historical difficulty of the upcoming calendar period presents a compelling case for defensive positioning. The strategist described the current environment as having "immaculate vibes" but warned that history suggests investors should not get too comfortable.
The analysis also highlighted the outlier of 1994, which saw a 5% drawdown in the August-October window but ultimately fell 8% by December, further illustrating that historical patterns are not absolute predictors of future performance. Nevertheless, the convergence of seasonal headwinds and record valuations has prompted BTIG to recommend a more cautious approach for the remainder of the year.
Brian Sozzi, Yahoo Finance’s Executive Editor, reported on the strategic shift, noting the tension between cut-and-dried earnings data and seasonal market tendencies. The report underscores the challenge investors face in balancing strong fundamental performance against historical calendar risks.
