Erratic Volatility, Solid Fundamentals: What the Markets Are Really Saying
The recent market tremors are intriguing: sharp pre-opening increases, sudden drops without any macroeconomic announcements, violent rotations within a few hours... However, in the background, nothing suggests a change in the economic regime. In a clear-eyed note, Christopher Dembik (Pictet AM) places this volatility within a structural context: that of a healthy market, but one mechanically amplified by investor behavior.
Fundamentals Remain Strong
Christopher Dembik points out right away: the markets have been moving in sometimes erratic directions for several weeks, without the fundamentals justifying these abrupt movements. This discrepancy is first explained by a classic mechanism.
Following the gains accumulated since the spring—buying positions opened in May-June and then reinforced in September—hedge funds have been engaging in massive sales to lock in their profits. These position unwinds weigh on stocks, but in a sporadic and rapid manner, giving the impression of shocks without cause.
The second factor is more recent and powerful: the explosion in the use of leveraged ETFs by American households.
In 2024, when professional investors were largely selling US stocks, a growing portion of domestic savings was being redeployed through these very particular instruments. They allow for exposure to an amount greater than the capital actually held, thus benefiting from amplified gains.
But the reverse effect is just as mechanical: in the event of a correction, the decline is magnified, forcing some investors to reduce their positions to avoid exceeding their loss limits. This mechanism creates market waves that do not reflect the economic trajectory but rather financial engineering.
This is precisely what is happening today: rapid, noisy movements, but structured more by technique than by economics.
Despite this turmoil, the backdrop remains particularly favorable. According to FactSet, the net profit margin of the S&P 500 reached 13.1% in the third quarter—its highest level since 2009. This result, far from anecdotal, reflects the ability of major US companies to maintain their margins in an environment marked by the normalization of prices, consistently sensitive wage costs, and strong demand.
Analysts further anticipate a continuation of this dynamic. As investors question the strength of the US economy following the tapering of inflation, the quality of earnings remains the best available indicator; it confirms that companies have solidified their post-pandemic position and have room to maneuver for 2026.
Far from signaling a reversal, the current tremors resemble more of a technical noise in an otherwise well-oriented market. Dembik states it plainly: 2026 should be a good year for the stock market.
A Remarkable Week
The upcoming period amplifies this phenomenon. With the Thanksgiving festivities, trading volumes are expected to drop dramatically. As volumes contract, even modest orders can cause disproportionate market fluctuations.
The risk is clear: more pronounced erratic movements, unrelated to new information.
In the bond market, pressure is expected to persist. Last week, Japan's 20-year sovereign rate reached its highest level since 1999, signaling monetary normalization in an economy long accustomed to strict yield curve control. This technical adjustment—anticipated for years—adds an extra layer of instability to global markets, as investors reassess Japan's role in their portfolios.
The week will also be marked by a highly anticipated event: the first estimate of the US GDP for the third quarter, expected on Wednesday. Following the strong performance in the second quarter (+3%, driven notably by tariff-related anticipations), a slowdown is likely, though the overall momentum should remain positive.
More concerning is the White House's suggestion that the October inflation and employment figures might never be released due to the government shutdown. This creates unusual institutional uncertainty in a market that abhors a lack of statistical data.
The Labor Market Is Aging Better Than Expected
Amid these fluctuations, one indicator helps calm the anxiety-inducing narrative: the employment rate for those aged 55-64 slightly increased in the third quarter, reaching 61.8%, its highest point since 1975.
This is a sign of demographic strength, which is essential in an economy where labor shortages remain one of the main risks. This increase reflects an enhanced ability for seniors to remain employed, thanks to a consistently dynamic labor market.
Dembik sees this as another reason for confidence: despite the volatility, political environment, and technical shocks, structural factors continue to positively influence the American economy.
This content has been automatically translated using artificial intelligence. While we strive for accuracy, some nuances may differ from the original French version.
