This weekend brought a whole host of news & headlines to the forefront of the global stage. Of course, any time there are major issues in the middle east energy focused areas can be affected one way or the other… and while many of us have been underweight these names recent action leaves us with plenty to talk about. Intraday action on Monday, 6/23 saw crude oil (CL/) trade significantly lower after spiking over the weekend. Falling roughly 6% intraday, crude futures dipped after attacks on US military bases in the area, suggesting that further military escalation could focus on US military presence in the areas rather than critical energy infrastructure or the Straight of Hormuz (source Wall Street Journal.) Regardless, the weekend's upside movement demonstrates just how sensitive price movement can be to an evolving situation, price movement that continues to print quite an interesting picture from a technical perspective. Furthering this idea is the rapid accent of energy-based commodities within the commodity DALI rankings- energy moved from 4th to 2nd over the last 10 calendar days.

Before our overnight chart update, which would take into account possible intraday action on 6/23/25, the chart for CL/ sits at $75… one box away from posting a bullish triangle on its default chart. This chart action may get a tad cloudy with 6/23’s action, however, which leaves CL/ in jeopardy of reversing lower and violating some localized support. We have discussed the importance of holding above these levels throughout recent research if the commodity has meaningful hope of establishing long-term strength, so a break of this point would certainly be discouraging for energy bulls in the near term.

Perhaps more likely in more of your portfolios will be energy based exposure, which we use proxy XLE as a gauge. While the fund has posted a string of buy signals off 2025 lows and broken back into a positive trend with recent action, it maintains a poor overall fund score, bringing into question the longer term strength of the recent move. Reversing back down into a column of O’s, bulls will look to defend various levels of support nearby baked into the upper $70’s & low $80’s but expectations for further action should be tempered.

When the broader sector’s outlook remains cloudy at best, using the technical attribute scoring system to isolate specific points of strength is typically the best course of action when picking up exposure. Using the security screener to isolate highly rated, liquid, non-MLP energy names, we screened for a total of 19 strong options. One of which is Expand Energy Corp (EXE), which posted new all-time highs over the last week. While it is a tad overbought around current levels, the 5/5’er sits on a string of consecutive buy signals and has a nice base of support to work off of just above the middle of the trading band. Keep in mind- the upcoming weeks will undoubtedly bring plenty of news and further headlines about the US and its involvement in the middle east. Remember- using price action to find points of strength/weakness is most important in a quick moving market.

Key points

• While geopolitical and trade policy uncertainties remain, equities are pricing in a stabilization in business confidence
• Markets attempting to broaden out while major U.S. indexes approached all-time highs
• U.S. equity risk premium is negative, but that doesn’t necessarily portend equity weakness 

Summary

As markets closely follow the latest escalation in the Middle East, Bloomberg’s Global Trade Policy Uncertainty Index hit its lowest since the end of January. The U.S. and key trade partners continue trade tariff discussions ahead of the end of the U.S.’s 90-day tariff pause on July 8th. The more negative impact on the U.S. employment landscape and economic hard data from trade policies will likely come on a lag. While policy uncertainties will persist and macro data has softened, the backdrop remains relatively steady and continues to underpin the U.S. consumer and economy. Equities—specifically the more economically-geared cyclical areas—have priced in a stabilization in business confidence. Investors are also looking for signs of a sustainable broadening out of equity returns. The equity risk premium remains negative given higher equity valuations and Treasury 10-year yields. Yet historical equity returns going forward are still solid from these levels.

Chart in focus: Equities pricing in a stabilization in business sentiment   

Source: Bloomberg. Notes: ISM manufacturing based on monthly data. Cyclicals vs. defensives equity proxy represented by a pair trade of going long Goldman Sachs U.S. cyclicals and short Goldman Sachs U.S. defensives, ex-commodities. As of June 13, 2025.

“It’s the economy, stupid!”

Political strategist James Carville famously coined this phrase during the 1992 U.S. Presidential race. Headline noise can and does drive daily market moves. Over the decades, though, this has become a catchphrase that the longer-term trajectory for risk assets is ultimately driven by the outlook for economic and corporate fundamentals.

Consumer and business sentiment indicators weakened materially given the uncertain outlook due to trade policies. As noted in our prior piece, it can take time for confidence to reset amongst consumers and companies which can dictate business activity.

The markets typically react to the reported absolute levels of business and consumer sentiment measures. However, the rate of change is also an important trend to monitor. Our biweekly chart in focus above shows that the ISM Manufacturing Index (as a proxy for business confidence) has stabilized on a year-over-year basis after a decline amidst peak trade policy concerns. This recent stabilization is reflected in the Nasdaq-100 Index® (NDX) and, more so, in a gauge of U.S. cyclical versus defensive equities. The notable relative performance reversal of cyclicals versus defensives indicates that markets have continued to price out recession concerns which spiked in early April.

Markets attempting to broaden out amidst ongoing cautiousness

Whether managing index-based or active equity strategies, diversification across geographies, sectors, factors, and market caps becomes paramount for total portfolios amidst a likely continuation of increased macro volatility, policy uncertainties, and market dislocations.

Over the past two months the iShares Russell 2000 ETF (IWM) is marginally outperforming the Vanguard S&P 500 ETF (VOO) by 0.7% (through June 16th). This spread had reached 2.7% prior to the Israel-Iran conflict escalating. Despite the recent outperformance of U.S. small versus large cap equities, small caps are still underperforming by over 7% YTD. Also, U.S. small caps are -13% from their most recent highs at the end of November 2024 (post the U.S. elections and expectations of a more favorable business environment) while the Nasdaq-100 and S&P 500 are within 2% of their all-time highs. And as for forward 12-month EPS estimate growth rates, they are -2.3% for the Russell 2000 Index versus 10.3% for Nasdaq-100 and 7.2% for the S&P 500.

For a broadening out to sustain in the more economically sensitive small cap and value (which has continued to lag) cohorts, investors will need to be convinced of a reacceleration in economic and business activity and confidence amidst the evolving global construct.

Also per our prior piece, international equities have outperformed U.S. equities by over 13% the past six months—equivalent to +3.2 standard deviations vs. the 10-year average. Though relatively stretched in the near-term, this is also illustrative of a broadening in the markets. The Nasdaq U.S. Benchmark™ Index (NQUSB) has outperformed the Nasdaq Global ex-United States™ Index (NQGXUS) by over 136% the past 10 years and U.S. corporates maintain their best-in-class stature. Yet investors have increasingly been searching for opportunities in other geographies given fiscal and monetary policy divergences, growth dynamics, and relative valuations (amongst other drivers). See Nasdaq Dorsey Wright’s recent report which ranks international equities as first in its asset class ranking framework for the first time since 2023.

Coupled with trade and fiscal policy concerns, and U.S. dollar weakness, U.S.-domiciled equity mutual funds and ETFs saw outflows of $24.7 billion in May 2025, the largest in a year. Contrarily, European equity funds saw inflows of $21 billion in May taking YTD inflows to $82.5 billion—highest in four years (per LSEG Lipper).  

Equity risk premium remains negative, yet forward equity returns have still been positive at these levels

The U.S. equity risk premium (ERP)—the additional compensation to invest in more volatile equities versus a risk-free asset, measured by the spread between the S&P 500 earnings yield (earnings-to-price; E/P) and the Treasury 10-year yield—has been in negative territory for more than two years per Bloomberg data. As E/P is the inverse of price-to-earnings (P/E), a byproduct of elevated equity valuations is a lower earnings yield. Coupled with higher Treasury yields, taken onto itself, today’s ERP of -44bps indicates that investors are not being compensated for taking the additional risk associated with equities.

The current negative ERP reading is juxtaposed by the ERP being in the fourth quartile of history (going back to 1962) for most of 2010 to 2020 (chart below)—a period of extreme monetary stimulus by central banks globally which drove bond yields lower, with some in negative territory. Appreciating that the ERP cannot be viewed in a vacuum as context for each cycle is important (e.g., inflation dynamics and monetary policies, equity leadership in a particular cycle), the current reading of -44bps is at the same levels as in 2002 and ranks in the second quartile relative to history. This suggests more muted equity returns going forward. However, the chart below shows that the median equity returns over the next six and twelve months for this quartile are still relatively healthy.     

Disclaimer:

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The correlation between international equities and crude oil is back at multi-year lows. We examined the correlation in monthly returns between the iShares ACWI ex-US ETF ACWX and Crude Oil Continuous CL/ using data from 12/31/1987 through 6/20/2025. Based on the data at this point through June, that correlation is set to drop to -0.0196, the lowest reading since March 2006. That could change before the end of the month given the increased volatility in oil prices over the past week. We got very close to negative territory at the end of last year, as the correlation dropped to 0.0009, not quite enough. Even if we tick back above 0 over the next week, the directional trend of the correlation would remain the same. Crude oil prices are the least entangled with foreign stock prices as we have seen in almost two decades.

It is rare to see this correlation move into negative territory, but not unprecedented. The calculation began below 0 back in 1990 and remained below that breaking point until the beginning of 1994. There was then a four month stint from 1998 to 1999 that saw a sub-0 reading, a couple months in 2003, then mid-2004 to early 2006. Those all add up to 67 months out of the past 35 years that the trailing 36-month correlation between ACWX and CL/ has been below 0. On the other hand, we have gotten used to notably higher correlations over the past 15 years. The highest correlation came in March 2020 at 0.7595. We also saw a prolonged stretch at or above 0.6 from 2008 to 2014.

Major spikes in the correlation do seem to coincide with weakness in global equity markets. This occurred in 2001, 2008, and early 2020. The correlation calculation is inherently a trailing “indicator,” if you can even call it that, since it looks at the last three years of monthly price action. So, it is tough to use these reading as a predictor of what to expect moving forward. With that said, it can help offer perspective on how global prices were interacting in different market regimes.

The last time we saw a sustained decline in this correlation that resulted in it moving below 0 came during a particularly bullish market for international equities from 2002 to 2005. From March 2002 to September 2005, ACWX gained 46% while the S&P 500 Index SPX gained just 7%. Meanwhile, crude oil jumped more than 150% as the US went to war in the Middle East.

Things could work out differently this time. The constant flow of information influencing price action in real time makes this time different. The geopolitical landscape is different. The oil production landscape is drastically different, as the US is now a net exporter of the commodity. I still think this graph is helpful as it shows the shifting relationship between foreign stocks and the most important global commodity.

The past few weeks have seen inconsistent appreciation for crude oil, as CL/ has advanced from a May low of $56 to a current level in the upper 60s at the time of this writing Monday afternoon. International equities have pulled back from multi-year or all-time highs, but they were also generally overextended from a strong start to the year. This could offer some buying opportunities as we head into the second half of 2025.

Even though the broader international equity space shows essentially no correlation to crude oil, there is more variation among the individual country and regional representatives. The table below shows the rankings of our World ETF Matrix alongside the trailing 36-month correlation of each fund against Crude Oil (CL/) (through 6/20). This matrix includes 46 global equity representatives, including broad funds, some US funds, and most individual countries with active equity markets. As can be seen in the table, there is not a clear delineation of correlation groupings in the top or bottom ranks of the matrix. The Global X MSCI Colombia ETF COLO is the most positively correlated with crude, though just at 0.2009. That fund has shown notable improvement and sits at multi-year highs. Switzerland (EWL), Chile (ECH), New Zealand (ENZL) and Japan (JPXN & EWJ) are all among the most negatively correlated.

The most recognizable point is that there are not many funds with strong correlations to crude oil, either positive or negative. The names toward the top of the rankings do generally show more muted readings than those toward the bottom. So, those looking for international equity ideas can feel comfortable focusing on areas with high relative strength without as much concern over the direction of oil prices.

Daily Option Ideas for June 23, 2025