Stretched markets could be due for a reset

Do not ignore warning signals!

Like a giant black hole from a summer blockbuster movie that pulls in everything around it, equity markets continue to drag cash off the sidelines. Global risk assets moved higher for the month of July as reasons to be bearish were overlooked and laughed off. But like all good things, they do come to an end, and that time appears to be nearing.

The rally has been impressive. From the April lows, the S&P 500 has increased by over 30% and once again sits at all-time highs. A year many expected to yield muted returns is now higher by double digits.

This is making many investors feel empowered to add risk. After all, with markets at record levels, every dip has been a buying opportunity. There aren’t many better indicators of exuberance than the MEME stocks, and they joined the party near the end of July, setting off a short squeeze that saw several fly over 25% in a day on no news.

These are “Red Flags,” and it’s worth thinking back to previous similar times of excess and noting that this is not a time for complacency. Added to that unease, the calendar is now flipping over to the seasonally worst period for markets, and being a little more defensive makes some sense.

Warning signs

Markets have had to deal with many concerns this year. Tariffs have added a degree of uncertainty to what was already a challenging earnings environment. After several strong years of performance in which valuations have increased to elevated levels, we believe that earnings growth is now needed for markets to move higher.

Early results from second-quarter earnings reports have been mixed. The spending around AI by the hyperscalers continues to power related businesses higher, and it has been encouraging to see the big banks report strong numbers, albeit led by capital market’s activity. While concern continues in the consumer segment, economic uncertainty is beginning to take effect, and pockets of weakness are appearing.

The bond market continues to signal caution. Japanese bond yields have moved to multi-year highs, pulling rates higher in other nations, while Switzerland has returned to the world of negative yields as the safety trade reappears. Back in the U.S., Federal Reserve Board Chair Powell continues to come under political pressure to cut rates, while inflation remains elevated and uncertainty high.

In the background remains the tariff issue. Ahead of President Trump’s self-imposed deadline, several countries and regions were able to reach deals with the Americans, but the damage has been done. Long established trading partnerships have been shredded, and even when deals are reached, who would be shocked to hear that they have to be renegotiated? Not a great environment for long-term planning.

With these concerns, and markets hitting records, we believe this isn’t a time to be a hero. Markets are stretched and may be due for a reset. Warning signals are appearing and, in our view, should not be ignored. While there are always going to be single-name opportunities, the broader market is now looking risky and needs to be regarded with caution.

Greg Taylor, CFA, is the Chief Investment Officer and a Portfolio Manager at PenderFund Capital Management.

Visit the PenderFund website for more commentaries, analysis, and insights from Pender’s investment professionals.

Notes and disclaimer

Content © Copyright 2025 by PenderFund Capital Management Ltd. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

Securities mentioned in this article are for illustrative purposes only and do not constitute an investment recommendation. Always consult your financial advisor before investing in any security.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in net asset value and assume reinvestment of all distributions and are net of all management and administrative fees, but do not take into account sales, redemption or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. This communication is intended for information purposes only and does not constitute an offer to buy or sell our products or services nor is it intended as investment and/or financial advice on any subject matter and is provided for your information only. Every effort has been made to ensure the accuracy of its contents. Certain of the statements made may contain forward-looking statements, which involve known and unknown risk, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.

Image: iStock.com/FooTToo