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That combination is all the more concerning when viewed in conjunction with the Qi investment clock which follows industry convention with one important difference. It divides assets (here global equity indices) into quadrants with each quadrant capturing a macro regime. The regimes are industry standard and follow the typical business cycle - boom, recession, Goldilocks, stagflation.

Economic growth and inflation are the two variables that dictate which regime / quadrant any equity index lies in. But the key difference is how that is measured.

Traditional investment clocks rely on the discretionary view of the asset allocator. That is probably influenced by factors such as history (behaviour during previous cycles) or fundamentals (during an energy-led inflation shock, for example, is the country a net oil exporter or importer). Such analysis is subjective and relies on history perfectly repeating itself.

Qi's proprietary version of PCA means we capture the independent pattern of association between an equity index and economic growth (Now-Casting tracking GDP) and inflation expectations (inflation swaps). Country indices are allocated a regime on the investment clock by maths not opinion.

The first standout from the chart above is how NASDAQ is in a boom regime. But while the sensitivities are smaller, what is equally striking is the confluence of European equity indices in the Goldilocks quadrant.

The Euro Stoxx 600,DAX , CAC, IBEX, FTSE MIB are all in that top left quadrant.

Again it is worth stressing the sensitivities are modest: close to zero for economic growth, while the relationship with inflation is a small negative.

But the basic point remains - if the Bloomberg consensus above is correct, this is the worst possible combination for European equities.

Is there any respite? This view focuses on just two factors - economic growth and inflation expectations. What about the rest of the macro complex?

We've observed that growth is not a major driver currently. Inflation is a top driver for these models - European equity indices need inflation to conform to target.

And that speaks to the other key drivers in the current macro regimes. Rate volatility, credit spreads and risk aversion typically screen as the three biggest factors currently. European equities need well behaved inflation, because they need the Kool-Aid of easy money from the ECB.

The pie chart above simply shows the relative importance of all the macro factors in our DAX model. A quick way to ascertain which macro factors are driving the current regime.

And it does offer some potential relief if you believe in an ECB pivot. Put another way, investors need to have high confidence that we don't see a policy mistake from the ECB that engineers a sharp tightening in financial conditions and subsequent hit to risk appetite.

The textbook Central Bank policy response to stagflation entails higher-for-longer rates and an acceptance of weaker growth while we wait for inflation to subside. For many equity investors, that will read like the definition of a policy mistake.

And sadly it is particularly dangerous combination for the region which, if the economists are right, seems most likely to experience it.

Less well publicised is that the most popular indicator of interest rate volatility - the MOVE index - closed at its lowest level since Mar 2022 on Friday.

Qi employs swaption (instead of US Treasury) volatility but they capture the same story. Higher volatility in the rates market tends to be associated with periods of stress. Obvious culprits in recent years have been monetary policy fears - the 2013 Taper Tantrum, the 2022 inflation fight.

Traditionally, higher rate vol is a headwind for risky assets like equities. So the chart above showing the collapse in rate vol in z-score terms in the US, Europe and UK is good news.

Why should equity investors care about this relatively obscure part of capital markets? Because Qi's models show that falling rate volatility is critical right now.

More important, in fact, than the level of bond yields. The chart below shows the percentage shift in the S&P500 for a one standard deviation shock higher in both 10y US real yields and US rate vol. Remember every other macro factor is held constant each time to show the true, independent impact of each factor shift on SPX.

Real yields were the story in 2022. As the Fed abandoned transitory and embarked on an aggressive rate hike campaign, real yields became the main transmission channel by which policy tightening impacted the equity market.

At its peak, a one standard deviation rise in real yields equated to a 1% fall in the S&P500. Today sensitivity is close to zero.

Meanwhile in 2023 the story has been the rising importance of interest rate vol which Qi labels 'FED QT Expectations'. It has moved in the opposite direction. S&P500 sensitivity was effectively zero over H2 2022, but factor leadership has changed and it has become a highly prominent driver.

That can also be seen in the attribution chart above. Other bond market signals like the level of real yields or shape of the yield curve have had little effect on S&P500 model value over the last month.

Instead low rate vol, tight credit spreads and the rally in crude oil have been instrumental in moving macro-warranted model value for the S&P500 up 5.24% over the last month.

That improvement in macro conditions has not been mirrored by the market. Hence the S&P500 now screens as over one standard deviation cheap on our metrics.

The case for lagged policy effects and a recession haven't gone away. Indeed, there are mounting signs that economists are capitulating on recession forecasts just as deeper cracks open up.

It is still all about Goldilocks or Bust. But, for now, Goldilocks still has the edge.

When a blue chip commentator like Yardeni Research ponders whether the recent New York Fed survey of consumers carries an important message, it is worth taking note.

They noted that inflation expectations are subdued but fears about the availability of credit continue to move higher. The conclusion might therefore be the inflation debate is losing traction; the bigger risk for financial markets are credit conditions.

To a degree this is backed up by FactSet's observation that inflation is becoming less frequently mentioned in earnings calls. They note that 296 companies cited "inflation" during Q2 earnings calls - the fourth consecutive quarterly decline and the lowest number of mentions since Q2 2021.

This is where Qi's factor sensitivities come into their own. We capture the independent relationships between asset prices and a host of macro factors. By tracking these historical patterns we can observe how key macro drivers ebb and flow in terms of importance. In effect, how macro regimes shift.

Below we take the eleven S&P500 GICS Level 1 sectors and their relationship with US inflation expectations.

The clear standout is US Technology. All three tech sectors (Tech itself XLK, Communication Services XLC and Consumer Discretionary XLY) have seen strong increases in their sensitivity to inflation, and sensitivity now sits near recent highs. Sectors with a more value and cyclical bias are comparatively insensitive.

So, while respecting the commentary from CFOs during the most recent earnings season, on our metrics it is too early for investors to think inflation no longer matters. Tech, the clear of US equity markets, is reliant on reflation.

Yes, strong inflation that induces policy tightening is a negative for risky assets; but it's the policy reaction equities fear, not reflation itself. Put another way, deflation is a bigger evil.

We then repeat the exercise looking at sensitivity to corporate credit spreads and the same pattern is repeated. It is tech (XLK, XLC, XLY) that screens as the most reliant on credit spreads remaining tight. The other sectors also want a well behaved credit market; it is just that sensitivities are notably less.

The clear pattern therefore is that Technology is beholden to Goldilocks. It is most reliant on rising inflation expectations (sensitivity is at it's highest levels since the pandemic) and tight credit spreads (sensitivity is at the wide end of the ranges).

Goldilocks or bust.

There is a clear geographical split with the Americas the clear beneficiary of higher oil prices. NASDAQ, S&P500 and Brazil's IBOV have all seen sensitivity to crude rise sharply. To a lesser extent TOPIX also benefits.

Some may query those results, especially Japan as a net oil importer. For now, we think this reflects oil's role as a proxy for risk appetite. Some of the gains in crude come from tight supply conditions; but, from the demand side, there are growing hopes global growth will achieve a soft landing.

But if current patterns show US equities enjoying a Goldilocks relationship with energy markets, the same cannot be said for Europe or China. Neither the DAX or CAC enjoy the same positive sensitivity.

The Shanghai Composite, where macro explains 75% of price action, has recently seen sensitivity flip into negative territory - higher oil is threatening to become a drag.

Moving away from indices to single names, stock pickers can use Qi's Optimise Trade Selection function to screen their holdings for sensitivity to crude oil.

Below we show the results from screening across the S&P500 to find the winners and losers from this energy move.

The beneficiaries include a bias to consumer cyclical names - Tesla, Amazon, Carnival, Live Nation.

Carnival stands out. It enjoys a 3.1% gain when crude rallies by one standard deviation. And it screens as cheap to aggregate macro conditions.

Once again, the current pattern is Goldilocks - higher oil is not (yet) a tax on consumption, rather a sign of healthy risk appetite.

The five most vulnerable US stocks are a more eclectic mix. Unlike the retailers cited above, ETSY and Estee Lauder don't enjoy the same positive relationship with energy markets.

Economic orthodoxy states rising crude oil acts as a tax on consumers and businesses. But US exceptionalism means that, for some at least, bad news can be seen as good news. Put another way, crude has yet to rise to that trigger point where it becomes a drag and, for now, Goldilocks trumps Bust.

The equivalent search across Euro Stoxx 600 stocks flips the script back to more conventional results and again highlights how, in Europe, bad news is bad news.

German power generator Uniper screens as the biggest beneficiary from rising crude oil; and it is slightly cheap to macro conditions.

Meanwhile fashion retailer Zalando stands out as amongst the companies that suffers from higher oil and is slightly rich to Qi model fair value.

Measure your own holdings to get visibility on whether your portfolio see's bad news as a headwind or a tailwind.

The soft landing narrative has had good news this week - signs of a softening in the robust US labour market; no fiscal bazooka but incremental policy easing in China; bond yields reverse lower pulling the Dollar down.

But the dilemma facing investors remains sharply unchanged - Goldilocks or Bust is alive and well. And it's at times like these that all market participants, not just contrarians, should consider their tail risks. While Goldilocks prevails today, what are markets are pricing in terms of recession risk?

The Watchlist below is not exhaustive but includes a number of securities across asset classes that would typically be viewed as cyclical in nature. So which markets are pricing the Goldilocks scenario, and which are pricing elevated fears of a hard landing?

Again, this is not a definitive list of cyclical assets. Our Recession Watch Watchlist is available off-the-shelf, or create your own customised list in the Qi portal and, with one easy eyeball, you have the ability to quickly monitor where markets are pricing Goldilocks and where a potential Bust is gaining traction.

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