AXIOMA ROOF™ SCORE HIGHLIGHTS

• US: FOMC meeting, Q2 GDP (1st estimate), the Jobs report, PCE, and Manufacturing PMI data. Big Tech earnings from Microsoft, Apple, Amazon, and Meta. Also reporting are Boeing, PayPal, Visa, and Mastercard.
• Europe: Preliminary GDP and inflation figures from the Eurozone, Germany, France, Italy, and Spain. Earnings from AstraZeneca, L’Oreal, Barclays, Hermes, HSBC, Airbus, GalxoSmithKline, Mercedes-Benz, Siemens, Danone, Adidas, Shell, Unilever, Sanofi, LSE, Credit-Agricole, BMW, Soc-Gen, and Stan-Chart.
• APAC: Japan: BoJ interest rate decision, industrial production, retail sales, consumer confidence, and unemployment data. China: Manufacturing and non-manufacturing PMI, and industrial profit data. Australian inflation data. Trade data from HK, South Korea, Indonesia, and the Philippines will offer insights into impact of tariffs on regional trade.
• Global: Trade negotiations between the US and its key partners, particularly the EU, ahead of the August 1st deadline.

Investor sentiment remained strong last week, buoyed by news of the US-Japan trade deal. Seven of ten markets ended bullish, though sentiment in Japan stayed neutral due to political uncertainty after the LDP's election loss put Ishida’s leadership in question. European sentiment also remained neutral ahead of the US deal deadline, but Sunday's framework agreement may encourage more risk-taking among those investors this week. As of Friday’s close, there is a strong positive sentiment risk premium in five markets: Asia ex-Japan, China, Global Developed markets, Global Emerging markets, and the US. The other five markets all showed a more balanced supply-and-demand for risk (i.e. more demand than supply but not enough to trigger a positive sentiment risk premium).

Investors have been implementing risk-tolerant strategies in most markets since the April 9 pause in the reciprocal tariffs, and since the early May truce between the US and China in all others. This despite rising uncertainty, a lack of trade deals, ongoing wars in Ukraine and Gaza, and a short 12-day war with Iran. Given the absence of new information, what has helped markets climb that wall of worry since April 9?

Markets love acronyms. What started as a TACO rally in April and May, turned into a FOMO rally in June and July. FOMO is that creeping anxiety you feel watching from the sidelines as markets keep rising and everyone else seems to be crossing the finish line before you even make it out of the gate.

Insight, it has been said, is almost always a rearrangement of facts. Fact One: Markets kept rising. Facto Two: Investors have a fear of missing out. Conventional wisdom held that markets rose because investors have a fear of missing out. But what if we shifted the equation, rearranged the words? Maybe, just maybe, investors have a fear of missing out because markets kept rising. Maybe if investors stopped acting on their fear, or if that fear suddenly vanished, markets would fall (a.k.a., “buy the rumor and sell the facts”)?

The new facts for investors to digest are that it was Japan and the EU who chickened out, not Trump – JEACO not TACO. Additionally, China now seems more isolated than it had hoped and may have lost some leverage. The Trump team, having seemingly negotiated with Mexico, Canada, the UK, Japan, and now the EU, will focus all its attention on China, putting Xi in an uncomfortable position. He might have missed an opportunity to grab the EUs olive branch during last week’s China-EU trade meeting. Xi will now have to choose between doubling down alone, or folding as a group. That decision must be made before August 9.

So, if the fear of missing out on the hope for a trade win is removed by the actual win, what will investors chose to focus on next? It will take some time to find out if the 15% tariff rates are inflationary, and meanwhile the Q2 earnings season is in full swing.

According to FactSet, the S&P 500’s blended earnings growth for Q2 2025 is 5.6%. But dig deeper: the “Magnificent 7” are expected to post 14.1% year-over-year growth, while the other 493 companies limp in at 3.4%. This isn’t just about earnings dominance—it’s about concentration risk. The effective number of stocks in the U.S. core market has dropped below 53, less than 10% of the Axioma Core Market portfolio (AXUS-LM). That compares with 27-30% in all other markets.

Now that the uncertainty from the trade war and geopolitics has peaked, fundamentals should matter more than hopes or fears. The question now is, has FOMO made us overshoot the fundamentals?

Note: green background = bullish, red background = bearish
 
Changes to investor sentiment over the past 180 days for the markets we follow: 

How to Interpret These Charts:

Top Charts:
The top charts illustrate the ROOF ratio, which represents investor sentiment. This ratio is depicted in green on the left axis, while the cumulative returns of the underlying market are shown in black on the right axis. Key reference lines include:

• A horizontal red line at -0.5 (left axis), marking the threshold between negative sentiment (-0.2 to -0.5) and bearish sentiment (< -0.5).
• A horizontal blue line at +0.5 (left axis), indicating the boundary between positive sentiment (+0.2 to +0.5) and bullish sentiment (> +0.5).
• A horizontal grey line at 0.0 (left axis), around which sentiment is considered neutral (-0.2 to +0.2).

Bottom Charts:
The bottom charts display the levels of risk tolerance (green line) and risk aversion (red line) within the market, representing investors' demand and supply for risk, respectively. Key insights include:

• When risk tolerance (green line) exceeds risk aversion (red line), more investors are willing to buy risk assets than there are investors willing to sell them at the current price. This scenario forces risk-tolerant investors to offer a premium to entice more risk-averse investors to trade, thereby driving markets upward.
• Conversely, when risk aversion (red line) surpasses risk tolerance (green line), the market dynamics reverse.

The net balance between risk tolerance and risk aversion levels is used to compute the ROOF ratio shown in the top charts, reflecting the sentiment of the average investor in the market.

Blue Shaded Zone:
The blue shaded zone between levels 3 and 4 for both indicators signifies a reasonable balance between the supply and demand for risk in the market. When both lines remain within this blue zone, the market is considered ‘emotionally’ stable. However, when both lines move outside this zone, the significant imbalance in demand and supply for risk can lead to overreactions to unexpected news or risk events.