📈 The Compound CHART PACK

HAPPY CHART PACK THURSDAY, folks!

Today is volume 3 of 📈 THE CHART PACK 📈, a weekly collection of charts every week tag-teamed by Chart Kid Matt and myself (who work on the same research team IRL!). Like a conversation we have on the desk, but for the whole world to see.

If you like this collaboration (or have constructive feedback), shoot me an email at [email protected]. And if you want more where this came from, subscribe to Matt’s newsletter here.

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Fixed income expertise

Chart #1: Rate cut hopium

Chart Kid Matt: Analysts often cite the S&P 500’s average 12-month return after Federal Reserve cutting cycles, but I hadn’t seen the returns broken out by multiple expansion versus earnings growth. That’s what this chart shows. Of the 9.6% 12-month average gain after the start of all Fed cutting cycles since 1957, 6.1% has come from multiple expansion and only 3.5% from earnings. In other words, multiple expansion tends to be the driver of equities in Fed cutting cycles, not earnings growth. 

OptimistiCallie: I have a good explanation for this. A majority of Fed rate cut cycles are desperation cuts, meaning that Fed nerds have to cut because the economy desperately needs it. And when stocks rebound from the ashes, they often rise on hopes for stronger earnings ahead (even though profits are still depressed). That’s multiple expansion/valuation.

Another reason why you can’t get mad at rising price-earnings ratios. Sometimes, the market’s sniffers pick up the right scent.

What you should remember, though, is that rate cuts can happen under different circumstances. Some are good for stocks, while others lead to an economic purging that ultimately resets the market cycle. Ultimately, patient investors get the glory, but you have to trudge through months — sometimes years — of falling prices to enjoy the gains on the other side.

Chart #2: Where’s the Mag Seven?

Chart Kid Matt: Full disclosure: I was just the artist for the next two charts. The analysis comes straight from the mind of Michael Batnick. On last week’s WAYT, he was scrolling through the S&P 500 members' year-to-date returns and couldn’t find a Magnificent Seven company in the top 50. He wanted to see how that stat compared to other years. So I charted the number of Magnificent Seven companies in the S&P 500 top 50 through 9/4 from 2021 to 2025.

2022 was the only other year where not a single Magnificent Seven company was in the S&P 500’s top 50 performers through early September. And that was a bear market. In 2025, we’re in a bull market and these behemoths are outside the returns of the S&P top 50. The shift tells me the bull market we’re currently in is being driven by a wider set of stocks than the usual winners.

OptimistiCallie: OK, if you would’ve asked me how many Magnificent Seven leaders were among the top 50 S&P 500 performers year-to-date, I probably wouldn’t have said zero. Surely Nvidia is at least up there, right?! Nope.

Tech stocks were crushed in the April market malaise, but a swift recovery clearly has a way of wiping our memories clean of transgressions. Other sectors and strategies have led since the beginning of August, too (thank you, Jay Powell and the rate cut gods). If you’re a technician who’s looking for rallies among a wider range of stocks, then you’re pretty pleased with what you’re seeing.

By the way, this year is a lesson for everybody who leaned too far into tech in the name of ~beating the market~ (I’m sorry, the premise of beating the S&P 500 is ridiculous if you’re not a Wall Street manager pulling a bonus for stock-picking acumen). Ducking and dodging to chase performance isn’t an investment strategy. And if you’ve done this in 2025, you’ve probably pulled your hair out from frustration.

Diversify and chill, babe. Run your own race.

Chart #3: Don’t worry about $1 trillion in margin debt

Chart Kid Matt: FINRA margin debt just crossed $1 trillion in July. Whoa. Big numbers like that often spark talk of speculation and “froth” - which is fair at first glance, but less so when you dig into the data. And that’s exactly what Michael had me do. The chart above normalizes the level of margin debt as a percentage of the S&P 500’s market cap (or total value). On that basis, the story flips. Investors have been de-leveraging since 2008, and we’re still a long way from levels that could be viewed as concerning.

OptimistiCallie: Ah, margin debt — or the total amount of money investors borrow from brokers to make trades. A classic indicator of froth because people tend to make riskier decisions (like investing with money that technically isn’t theirs) when they feel overly confident about the future.

But is this ratio valuable if it hasn’t told us much since the financial crisis?

I don’t think so. First of all, this is a ratio, and therefore a representation of two trends. We know the S&P 500’s market cap has been soaring for much of the past 15 years, and clearly faster than margin debt levels. This may be more of a story of market success than investing trends, and if you don’t believe me, maybe you should talk to your doctor about denominator blindness. It’s an epidemic.

Also, investors don’t really borrow money from brokerages any more. That’s very early 2000s, like low-rise jeans and tracksuits (although both are coming back in style, so…). They employ the same trades, but through more sophisticated products like options or leveraged exchange-traded funds (you know, those wild 3x short Tesla funds you hear about). Everyday investors haven’t had access to these tools for very long, and they’ve really leaned into non-margin leveraged trades since the early COVID days. A lot of speculation is happening outside of what margin debt is showing.

Huge thanks to Chart Kid Matt (aka Matt Cerminaro) for the charts and thoughts this week. Subscribe to his newsletter, and check out Exhibit A, the Compound’s visual storytelling platform that you need for your clients.

Thanks for reading!

Callie

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