Today as equities melt up I wrote down for DS Members the bull case for equities. Open minded exploration of bull and bear cases at all times is my process. Markets are almost always right so a bull case must exist. Here is mine 🧵

Let's give this a try. Reasons to be bullish stocks. Stock prices change for a combination of fundamental and flow reasons. Why should they go up. Fundamentals 1. Accreting realized net income is almost always a positive and currently is running at 1% a month positive influence. As long as earnings growth is running at 12% this influence simply makes stocks more valuable as they retain earnings, buyback stock, and pay dividends. All other fundamentals are expectations based. But without a change in expectations 1 dominates However a change in expectations if it occurs is much more powerful than this monthly drift. Expectations. Consensus earnings growth expectations are for at least two years of ongoing 12% earnings growth. The realized is extrapolated out two years. While determining consensus earnings past then is prone to high errors in prediction in both directions. It's likely that a continued high rate of longer term earnings growth expectations is consensus Corporate earnings are heavily driven by two major factors NGDP and deficits. NGDP drives top line sales because it is literally top line sales and deficits drive margin (Kalecki-Levy). Breaking those two factors down currently NGDP expectations are roughly 4.5% which is a combination of 1.5% rGDP and 3% inflation. Upside to NGDP expectation is not my view but if wrong real gdp could rise based on population growth higher than expected likely driven by immigration cuz citizen demographics is highly predictable and slow moving Productivity growth higher than expected which could be deregulation and/or AI delivering more than expected. (Expectations are likely pretty high but they could be too low) Inhalation expectations are pretty stable and lowish while productivity gains which real growth depends on is most likely disinflationary lowering inflation expectations easy monetary conditions and leveraging up by private and public sector can offset that and keep inflation expectations high or even rising. (Thats good for stocks and bad for bonds). So there is a case for rising NGDP expectations and rising top line expectations for Stocks. What about margins. The big thing for margins is deficits. Currently and most frequently the biggest fastest moving variable for deficits are policy. In particular the most volatile component is tariff revenue. What I suppose is absolutely certain is announced tariffs have only downside from here. While around the margin I could imagine further tariffs assessment that seems less likely and small. Tariffs are pretty big. I suspect tariff expectations are much lower than current tariffs as they stand. Two reasons make me believe tariff expectations are lower than current assessment. 1. They may be declared illegal by the "radical left" circuit courts and that decision is upheld by Roberts /Barrett swing votes 2. The current assessed level is likely to be partly and meaningfully paid by US consumers and corporations which will reduce demand and raise prices and in aggregate be a net NGDP hit that will be pretty meaningful and destructive to the economy and stock prices. For those reasons future tariff assessment expectations MUST be below current. However that expectation is FAR above tariffs being completely struck down or Trump voluntarily deciding to reduce tariffs a lot. So there is clear upside for tariff reduction which is pro NGDP and also increases the deficit which flows to margin. (Good for stocks and very bad for bonds unless intervention in bond supply follows). In terms of timing of the courts the circuit got the case last week and it should take a month for it to get punted to Supreme Court. I'm not a legal scholar but I read that the circuit court is highly unlikely to rule in trumps favor. It would be a huge negative surprise to markets if they rule in favor of Trump and a modest positive if they rule against based on Expectations. I have no idea how the Supreme Court rules and if 1/n

The Trump administration can or will try another tack for tariffs if ruled against including other forms or simply ignoring the ruling however if tariffs disappear the market and the economy is not priced for the outcome. NGDP will surge and margins will surge. The dollar and bonds will crater and stocks and hard money will moon. The Fed will be on permanent pause or hike. Flow The current flow is like the current earnings accrual an up and to the right influence. Daily savings growth is positive and is almost always positive except in rare cases of negative employment. That daily savings growth is typically offset by net supply of stocks. But for the last 5 years public sector share count is falling as share repurchases heavily offset insider employee liquidations from various compensation schemes and issuance of IPOs and secondaries Stock sales. Except during the spac bonanza the daily net flow is bullish and probably at 25-50bp per month of appreciation I measure this with my daily passive flow indicators and it is clearly bullish and has been for 5 years at least. The next topic is expectations of net supply and demand for equities. My measurements are consistent with high expectations that this net negative supply dynamic will continue at the current strong pace. In other words passive flow expectations are quite bullish. The dominant fast moving aspects for these expectations are pace of share repurchase, pace of savings growth, issuance expectations. Share repurchase pace Expectations remain high but this one seems a downside risk that's not yet priced as Capex expectations are very high and to fund CAPEX a choice may need to be made going forward by the hyperscalers who dominate the share retirement landscape. There is practically zero issuance and those expectations have no downside but a burst of issuance would be a negative surprise. That's not priced. How the world is going to finance its spend on hyper scaler and AI services is unclear and issuance by the rest of the equity market seems likely to me but is not expected. Lastly as mentioned the passive flow is up and to the right and may wiggle up (bullish) or down but only a sustained negative jobs outcome will turn this flow negative. Lastly in my overall assessment of equities is positioning. Having already addressed gross supply and demand above the next step is investor cohort supply and demand. What I would say First and foremost is that this doesn't matter much over a Quarter or year but matters a lot over any monthly or shorter time Frames. It takes days weeks or at most months to correct position underweights and overweights of cohorts. Positioning data and sentiment data supports rapid rebalancing across cohorts. When breaking down the cohorts some things are clear. Over the last quarter AUM of cohorts has shifted pretty meaningfully. Leverage of cohorts has shifted as well. I'll also cover performance vs benchmark of cohorts and vol targeting more broadly across Cohorts. The biggest recent change is a shift from institutional AUM to self directed AUM That shift isn't a firing of imstitutional managers. That isn't seen in data as any "firing" is heavily masked by mechanical 401k and IRA Contributions that still occur. But the self directed cohort is increasing its self directed allocation while keeping its institutional allocation flatish. Yes retail is buying. Hedge funds which are the other cohort are pretty stable both in an AUM flow sense and a net exposure sense and are neither massively overweight or underweight shares. Perhaps the most bullish aspect Across cohorts regarding flow is vol targeting. Positioning changes from vol targeting has been bullish since April. Because of the rapid but choppy decline in vol and rise in portfolio diversification measures sustained levels will result in aggregate demand for assets as Heavy filtering of vol changed leaves cohorts under desired leverage targets at 2/n

the moment. Sustained levels is clearly bullish. On going success by "retail" will also likely result in ongoing or increasing overweight the riskier assets and outperformance of risk vs benchmark. Of course the inter cohort thing can change in either direction on a dime While I add all this up as fully priced across fundamentals, flow, and positioning the bull case remains totally reasonable. It also would be a huge bullish outcome even at current pricing if Roberts/Barrett reverse trumps tariffs. Perhaps the best hedge for such an outcome is January OTM calls on equities and OTM puts on ZB