Day Hagan Smart Sector® with Catastrophic Stop Strategy Update August 2025
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Executive Summary
July began with the index reaching record highs, bolstered by strong earnings expectations and optimism surrounding trade negotiations. However, caution emerged as market breadth and participation indicators diverged from price gains, hinting at the potential for increased volatility.
During July’s earnings season, roughly a third of S&P 500 companies reported their Q2 results by mid-month, with approximately 80% exceeding earnings-per-share (EPS) estimates, which positively influenced investor sentiment. Notable contributions came from the technology and consumer discretionary sectors. For instance, Deckers Outdoor reported robust international demand, significantly lifting its stock price. Conversely, companies like Intel projected larger losses and announced workforce reductions, while others, such as Carrier Global, adjusted their growth forecasts downwards due to challenging market conditions.
Economic data released during the month presented a mixed scenario. Purchasing Managers’ Index (PMI) readings suggested moderate expansion but indicated a slowing momentum in some sectors, arising from inflationary pressures and shifting supply chains. Inflation remained a focal point, with market participants closely scrutinizing both core and headline inflation, as well as employment data, to gauge the Federal Reserve’s direction in monetary policy. Employment reports were stable, supporting market expectations that the Fed would maintain interest rates in July, with the market now pricing in about a 77% probability for a rate cut in September.
While inflation remained elevated, signs of moderation began to emerge, influencing speculation about Fed policy. In late July, the market adopted a cautious tone amid concerns over valuation levels and macroeconomic risks, with investors awaiting clarity on the central bank’s prospective moves. The prevailing sentiment was one of cautious optimism, tempered by worries that renewed inflationary pressures could complicate the timing of rate adjustments.
A key theme for July was the divergence between the S&P 500’s price increases and market breadth indicators. While the index achieved multiple record closings, several leadership sectors and underlying indicators failed to corroborate these gains. Indices such as small-cap stocks, semiconductor firms, and transportation stocks underperformed. The "Magnificent Seven" mega-cap technology stocks, which propelled much of the rally since 2024, exhibited mixed performance, with only a few—such as Nvidia, Microsoft, and Meta—surpassing prior highs, revealing a potentially vulnerable narrowing advance. Valuation metrics across the 11 S&P 500 sectors indicated varying investor appetites. Defensive sectors, such as Utilities and Consumer Staples, attracted interest, while economically sensitive segments, including Industrials, Materials, and Financials, showed volatility in response to economic data and trade outlooks. The Materials sector led gains, buoyed by optimism around ongoing demand. On average, expectations for earnings remained positive, reflecting a projected 7.7% year-over-year increase in Q2 profits; however, caution was introduced by revised guidance from several companies.
The Technology and Communication Services sectors particularly thrived on strong earnings and advancements in AI, though some profit-taking occurred late in the month. Financials and energy sectors closely reacted to shifts in interest rates and commodity prices. Despite strong retail demand supporting gains in consumer discretionary sectors, concerns over inflation’s impact on spending power tempered enthusiasm.
In summary, the index reached new heights, driven by growth-oriented sectors and optimistic revisions, yet underlying valuation concerns and market participation highlighted the need for careful monitoring by investors.
Holdings
Sector
Consumer Discretionary
Consumer Staples
Communication Services
Energy
Financials
Health Care
Industrials
Information Technology
Materials
Real Estate
Utilities
Outlook (relative to benchmark weighting)
Neutral
Overweight
Modest Overweight
Underweight
Neutral
Neutral
Modest Underweight
Neutral
Neutral
Neutral
Neutral
Sector Review
Consumer Discretionary: The composite model is neutral. Technical measures are mixed, with short-term trend indicators positive, while deviation from trend (indicating overbought conditions) and relative price momentum are bearish. Net new highs and still-high interest rates are headwinds while discretionary consumer spending is in neutral mode.
Commentary: The S&P 500 Consumer Discretionary increased 1.89% during July, marking it among the stronger sectors in the S&P 500, which gained about 2.3% over the same period. Large companies such as Amazon and Tesla delivered results reflecting cautious consumer demand amid inflation and higher interest rates. Earnings revisions trended negative overall, with the sector experiencing downward pressure on growth expectations. Forward price-to-earnings (P/E) ratios for the sector hovered around 27x (based on operating earnings), indicating relatively high valuations in relation to growth prospects, but also incorporating caution due to uncertain economic data. The sector remains highly sensitive to economic releases, particularly employment data, consumer confidence, and interest rates, which influence discretionary spending capacity. Tariff concerns and supply chain uncertainties also added to the risk profile. Long-term earnings growth expectations for the sector are currently 12.8% annualized for the next five years.
Figure 1: Total Consumer Credit Owned and Securitized appears to be stabilizing. This is constructive for the Consumer Discretionary sector.
Consumer Staples: The sector’s model indicates oversold conditions are in place, short-term momentum is showing signs of reversal, net new highs are improving, and the relative short-interest ratio is high. We remain overweight, primarily due to the sector’s defensive characteristics.
Commentary: The S&P 500 Consumer Staples sector faced a modestly challenging month, ultimately finishing negative. Despite its defensive reputation and relative insulation from economic cycles, the sector encountered pressure from mixed earnings reports and margin concerns amid persistent inflationary costs. Recent earnings releases from key companies, such as Procter & Gamble and Coca-Cola, underscored this environment. Both firms reported steady but unspectacular earnings results reflecting resilience in volume but margin compression due to higher input and tariff-related expenses. Earnings revisions trended cautiously, with analysts generally maintaining neutral to slightly downward adjustments, consistent with the sector’s moderate outlook in July. The forward price-to-earnings ratio for the Consumer Staples sector is 21.5x, and long-term earnings growth forecasts are now 6.0%. The sector’s sensitivity lies mainly in input cost inflation and consumer price tolerance, where sustained inflation can compress margins unless offset by price hikes, which may face consumer resistance.
Figure 2: Consumer Staples sector potentially reversing from oversold levels.
Communication Services: The composite model remains overweight, supported by indicators calling the technical and operating environment. Trend, overbought/oversold, deviation from trend, and valuations are supportive. Relative valuations and interest rate trends are also supportive.
Commentary: The S&P 500 Communication Services sector closed the month slightly negative, but is up 26% over the past year, reflecting resilience amid a mixed economic backdrop. The sector benefited from a broadly positive earnings environment, with earnings growth expectations near 14.4%, driven by major players advancing digital services and AI innovations. Meta Platforms recently reported Q2 results, highlighting solid advertising revenue growth despite some headwinds from evolving privacy regulations and modest cost pressures. The report reflected cautious optimism, with steady user engagement and ongoing investments in AI and metaverse technologies that support longer-term growth. However, margin compression concerns prompted tempered earnings guidance. Earnings revisions for the sector remained positive overall, supporting a forward P/E of 19.8x, consistent with fair valuation levels compared to historical norms. The sector’s sensitivity is notably linked to consumer discretionary spending trends, advertising budgets, and regulatory developments impacting data usage. It also has moderate exposure to economic cycles, with discretionary ad spending fluctuating in response to broader economic confidence and inflationary effects. Additionally, ongoing legislative changes regarding digital assets and technological infrastructure developments in July helped bolster sentiment, balancing innovation-driven optimism with cautious regulatory watchfulness.
Figure 3: The Communication Services sector still has potential upside before reaching overbought levels.
Energy: The composite model remains relatively weak, with measures of relative strength, OBOS, crude spot price trends, a stronger U.S. dollar, and inventory levels negative. Oversold conditions are in place on a short-term basis, and with rig counts declining and OPEX+ potentially nearing the end of their production increases (self-reported by OPEC), we would look to increase exposure as technical measures improve.
Commentary: The Energy sector posted gains of 2.8% in July, supported by a cautiously optimistic earnings backdrop and steady commodity price conditions. Earnings revision trends remained negative but showed improvement from earlier in the year, with analysts generally lifting expectations as energy companies navigated supply constraints and demand recovery. Among the top holdings, ExxonMobil notably reported Q2 earnings within the past two weeks. The company delivered solid earnings driven by higher oil prices and improved refining margins, despite some headwinds from rising operational costs and geopolitical uncertainties. ExxonMobil’s report emphasized strong free cash flow generation and disciplined capital spending, which reinforced investor confidence. Other major players such as Chevron and ConocoPhillips also benefited from positive revisions late in July, reflecting rising energy prices and ongoing demand for hydrocarbons. Forward price-to-earnings (P/E) ratios for the sector hovered lower than the broader S&P 500 average, around 14.9x, highlighting a value-oriented profile compared to growth sectors.
Figure 4: The decline in rig counts can support prices over the longer term.
Financials: The composite model remains neutral, supported by short-term price trends, relative oversold conditions, lower volatility, improving bank loan growth, and a widening yield curve. Negative indicators include slowing upside momentum and modestly wider credit spreads. Business credit conditions have turned negative. We are neutral.
Commentary: The S&P 500 Financials sector was flat in July, though net 3-month earnings revisions turned positive toward the end of the month. Several of the top financial holdings reported earnings in the past three weeks, reflecting strength in core banking operations, trading, and investment banking activities. For instance, JPMorgan Chase’s recent Q2 earnings highlighted resilience amid a mixed macroeconomic backdrop, driven by higher net interest margins and strong fee income despite some headwinds linked to loan growth. This reinforced investor confidence in the sector’s ability to navigate the current environment. Earnings revisions across the sector were generally positive, with analysts upgrading forecasts reflecting better-than-expected profits and strong financial fundamentals. The forward P/E ratio for the Financials sector is 16.3x, signaling a value-oriented profile relative to more growth-sensitive sectors. The sector remains highly sensitive to economic releases, including employment data, interest rate expectations, and inflation trends, given their impact on lending margins and credit quality.
Figure 5: The Financials sector’s investment-grade OAS has moved lower, indicating that investors perceive a lower risk for the sector’s bonds.
Health Care: The composite model is neutral. Negative inputs include relatively short-term trends, momentum, longer-term breadth, and a decline in healthcare personal expenditures. Positive supports include lower volatility (indicating defensive characteristics), the CPI for medical care increasing (showing healthcare pricing power remains in effect), and valuations being relatively cheaper.
Commentary: The S&P 500 Health Care sector faced a challenging month, acting as one of the biggest drags on the broader market despite some pockets of resilience. The sector closed with a 3.23% decline amid uncertainty driven by regulatory pressures and pricing concerns, notably following the White House’s recent letters urging major pharmaceutical firms to reduce drug prices within 60 days. This regulatory backdrop weighed heavily on investor sentiment for leading companies, including Eli Lilly, UnitedHealth Group, and Bristol-Myers Squibb, which saw share price declines. Among the holdings, UnitedHealth Group’s earnings report reflected ongoing challenges due to policy headwinds and cost pressures but showed stability in core business areas. Earnings revision trends broadly tilted negative, reflecting cautious analyst sentiment in light of margin compression and potential pricing reforms. The forward price-to-earnings (P/E) ratio for the Health Care sector hovered around 16.1x, indicating a fair valuation relative to its five-year historical range. The sector remains sensitive to economic releases impacting health care spending, regulatory developments, inflationary cost pressures, and changes in government health policies. Overall, July underscored Health Care’s defensive yet vulnerable positioning: steady demand met with growing regulatory scrutiny and evolving earnings outlooks, leading to cautious investor outlooks for the sector going into the second half of 2025.
Figure 6: The Health Care sector is oversold. A reversal from these levels would be encouraging.
Industrials: The composite model’s level remained neutral, with short-term momentum, oversold conditions, breadth, CRB trends, industrial production, and a weaker U.S. dollar all positive. Increased volatility relative to history, decelerating cash flows, higher valuations (based on sales trends), and lower oil prices are negative. We remain neutral.
Commentary: The Industrials sector delivered strong performance through July. The sector’s resilience was underpinned by robust earnings and positive revision trends, particularly driven by aerospace, defense, and heavy machinery subsectors. Key players, such as GE Vernova, reported strong Q2 earnings, prompting upward revisions in profit forecasts due to improved demand in the power and electrification segments. The sector’s forward price-to-earnings (P/E) ratio of 24.6x remains elevated, indicating market optimism around earnings growth amid economic recovery themes such as reshoring, infrastructure spending, and AI-driven automation trends. Analysts have noted that the aerospace and defense subsector, which accounts for about a quarter of the Industrials sector, substantially contributed to returns due to heightened geopolitical spending and technological investments. However, the sector exhibits sensitivity to economic releases, including manufacturing data, trade policies, and interest rates. Some segments, such as airlines and trucking, faced headwinds due to slowing consumer spending and recession fears, while industrial products and distribution saw gains from supply chain improvements. Investors also monitored the potential impact of tariffs due to anticipated trade disruptions in early August.
Figure 7: Valuation based on cash flow yield is becoming more expensive (lower yield = more expensive).
Information Technology: The composite model is neutral. Measures of short-term relative price momentum and overbought conditions are negative, along with a lower short interest ratio and earnings breadth. Longer-term measures of overbought/oversold, sales growth, and inflation expectations remain supportive. We are near the benchmark weight.
Commentary: In July, the S&P 500 Information Technology sector showed solid performance amid a mixed macroeconomic backdrop, supported by strong earnings reports and positive revision trends. Among the top holdings, Microsoft reported robust Q2 earnings, highlighting continued strength in cloud services and AI-driven solutions despite some margin pressure. The company’s cautious yet optimistic guidance reflected sustained enterprise demand and innovative investments fueling growth. Earnings revisions across the sector were generally positive, benefiting from resilient demand for semiconductors, software, and digital infrastructure. However, some cost inflation and supply chain challenges remained risks. Forward price-to-earnings (P/E) ratios for the sector increased to 29.6x, above the five-year average and signaling somewhat elevated valuations consistent with growth expectations and market leadership. The sector is sensitive to economic releases, such as employment data and interest rate policy, given their impact on corporate IT spending and the discount rates used in valuations. Innovation trends in artificial intelligence, cloud computing, and semiconductor supply cycles also play pivotal roles in shaping investor sentiment.
Figure 8: Signs are emerging that the IT sector is reversing from short-term overbought conditions.
Materials: The composite model declined in August. Indicators evaluating relative trends, momentum, OBOS, deviation from the trend, gold futures momentum, and the relative earnings yield are negative. Emerging Market equity momentum and industrial production of the Materials segment are bullish. We are reducing exposure to neutral.
Commentary: The S&P 500 Materials sector faced a challenging month, closing roughly flat as commodity pricing pressures and global economic uncertainties weighed on investor sentiment. Despite the modest decline, the sector’s fundamentals showed some resilience amid mixed earnings results and cautious earnings revision trends. Companies like Newmont Corporation and Linde plc reported earnings: Newmont’s Q2 earnings reflected stable gold production but faced margin pressures from rising input costs and logistical challenges. Linde’s report highlighted solid industrial gas demand but tempered capital expenditure plans due to macroeconomic uncertainties. Earnings revisions for the Materials sector trended modestly downward, reflecting lingering concerns about global growth prospects and trade tensions impacting raw material demand. Forward price-to-earnings (P/E) ratio is 19.3x with expected long-term earnings growth of 13.0%, reflecting a relatively moderate valuation compared to more growth-oriented sectors. The Materials sector remains highly sensitive to economic releases such as manufacturing PMI, global GDP growth dynamics, and commodity price fluctuations. Inflation and trade policies impacting raw material costs and supply chains also affect sector profitability. Additionally, fluctuations in the U.S. dollar can influence export competitiveness and earnings in the sector.
Figure 9: Historically, better equity performance in Emerging Markets has been bullish for the Materials sector. However, there are signs that DM is gaining ground.
Real Estate: The composite model is neutral. Technical indicators are mixed with breadth and RSI bullish, but indicators calling the relative price trend, deviation from trend, and the weakness in the homebuilding sub-industry are negative. Operating condition indicators are also mixed, with good employment and lower interest rates supportive, offset by emerging weakness in the NFIB Small Business Credit Conditions index. We remain neutral.
Commentary: The Real Estate sector was flat in July due to mixed economic signals and cautious investor sentiment. Despite lagging the broader S&P 500’s return, the sector showed signs of stabilization after a challenging start to the year. Several notable REITs have recently reported earnings, with mixed outcomes reflecting property-type-specific trends. For instance, office and single-family housing REITs outperformed other categories, driven by improving fundamentals, including rising occupancy rates and steady rent growth. Conversely, hotel- and retail-focused REITs struggled with headwinds such as lingering pandemic-related demand softness and margin pressure from elevated operating costs. Earnings revisions were largely positive for many property types, with approximately 71% of REITs raising their 2025 FFO (Funds From Operations) guidance during Q2, signaling confidence despite macroeconomic uncertainties. The sector’s forward P/FFO multiples remained moderate, averaging around 13.7x, reflecting a cautious valuation relative to historical norms. The Real Estate sector remains sensitive to economic releases affecting interest rates, inflation, and employment, as these influence financing costs and property demand. Overall, July underscored a sector balancing gradual recovery with persistent external risks, positioning the Real Estate sector as cautiously optimistic yet vulnerable.
Figure 10: Relative breadth over the past 50 days has been bullish for the Real Estate sector. A positive divergence.
Utilities: The composite model has improved. Indicators calling short-term trend, relative price momentum, deviation from trend reversals, capacity utilization, and relative dividend yield are positive. Breadth and weaker manufacturing PMIs (globally and in the U.S.) are still an issue. We have increased exposure to neutral.
Commentary: Utilities was the strongest sector in July, up 4.91%. Among the top holdings, Duke Energy reported its Q2 earnings, highlighting robust earnings growth, driven by stable operational performance and strategic investments in grid modernization. Duke’s report reinforced confidence in the sector’s steady cash flow generation despite macro uncertainties. Earnings revision trends for Utilities remained positive overall, with analysts maintaining or slightly upgrading forecasts, supported by solid earnings growth expectations near 6.9% for the next 12 months. Forward price-to-earnings (P/E) ratios for the sector is 18.5x, reflecting a typical valuation premium due to the sector’s defensive characteristics and reliable dividend yields averaging around 3%. The Utilities sector remains sensitive to interest rate movements and inflationary pressures, given its capital-intensive nature and reliance on debt financing. Economic releases concerning inflation, employment, and Federal Reserve policy have a significant impact on investor sentiment and valuation levels. Additionally, regulatory developments in clean energy transitions and infrastructure spending remain key factors influencing sector outlook.
Figure 11: The Utilities sector shows signs of reversing from short-term oversold levels.
Catastrophic Stop Update
The Catastrophic Stop model combines time-tested, objective indicators designed to identify high-risk periods for the equity market. The model entered August recommending a fully invested equity allocation relative to the benchmark.
The Day Hagan Catastrophic Stop Model currently stands at 72.7%, indicating investors should maintain their benchmark equity exposure. Technical indicators are mixed, with longer-term trend signals still bullish but short-term indicators showing overbought conditions. Sentiment is extremely optimistic, yet institutional positioning remains neutral. The model suggests a likely short-term consolidation phase before the market potentially resumes its upward trend. Should conditions continue to deteriorate, the model is poised to objectively signal a reduction in equity exposure.
Figure 12: The Catastrophic Stop model recommends a fully invested equity position (relative to the benchmark). Due to the use of indices to extend model history, the model is considered hypothetical.
The Day Hagan Daily Market Sentiment Composite remains in the excessive optimism zone. With sentiment indicators, we go with the flow until it reaches an extreme and reverses. In other words, we will rate this indicator as neutral until it reverses back below 70.
Figure 13: S&P 500 Index vs. Day Hagan Daily Market Sentiment Composite.
Our goal is to stay on the right side of the prevailing trend, introducing risk management when conditions deteriorate. Currently, the uptrend remains intact. The broader-based composite models calling U.S. economic growth, international economic growth, inflation trends, liquidity, and equity demand remain constructive. The Catastrophic Stop model is positive, and we are aligned with the message. If our models shift to bearish levels, we will raise cash.
This strategy utilizes measures of price, valuation, economic trends, monetary liquidity, and market sentiment to make objective, rational, and unemotional decisions about how much capital to allocate and where to invest that capital.
For more information, please contact us at:
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With Catastrophic Stop ETF
Symbol: SSUS
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