Are market and flow trends made of steel?

It’s a bird! It’s a plane! No, it’s not Superman, but a stock market rally that continues to zoom through a flurry of macro headlines—pushing year-to-date gains to double digits at the end of July. A rally seemingly made of steel, just like the Last Son of Krypton himself.

Driven by supportive earnings reports, US equities propelled global equity markets last month—notching a 2.2% return while non-US markets were flat.¹ And amid the rally, US-listed ETFs had $121 billion of inflows in July, pushing their year-to-date total to $677 billion and putting 2025 on pace for a record-setting $1.3 trillion.

But the big question is whether the rally and flow trends will have the same made-of-steel profile after August.

Sentiment improving in sectors, but not small caps

Beyond the record-setting pace of ETF inflows fueled by secular trends in low-cost (+$321 billion, 47% of flows in 2025) and active (+$263 billion, 39% of flows in 2025), positioning shifts beneath the surface illustrate some improvements in sentiment.

Sector flows reveal a healing of sentiment following a kryptonite-like sapping of sentiment in April post Liberation Day. Sector ETFs took in $5 billion in July and now have had three consecutive months of inflows—their longest stretch of positive flows in over a year.

More precisely, their rolling daily 60-day flow figure has been positive for a few weeks now (Figure 1) and moving above the historical median.

July’s sector inflows would have been greater if not for defensives’ $700 million of outflows. More specifically, Health Care’s $1.8 billion of outflows as the other two defensive sectors (Utilities and Consumer Staples) had inflows.

Financials (+$3 billion) and Industrials (+$1.6 billion) led on inflows in July, and the industrial sector had the most inflows over the past three months—taking in $3.3 billion. Yet, there is more beneath the surface as $2.4 billion of that figure is from sub-industry exposures focused on Aerospace & Defense stocks—a market with macro tailwinds from the One Big Beautiful Bill Act (OBBBA) and increased defense spending around the world.

Contrary to sectors’ positive sentiment, $6.6 billion of outflows from small caps in July illustrates that we are not out of the woods just yet and the full risk-on market isn’t everywhere.

On a rolling three- and six-month basis, small-cap flows have never been worse (Figure 2). These outflows have coincided with small caps lagging large caps by almost 9% this year and 17% over the past one year.

Given the elevated rate regime, uncertain macro backdrop with tariffs likely ending up as growth negative and inflation positive, and weak profitability trends (34% of small caps are unprofitable),² the headwinds for small caps may continue—prompting investors to place their tactical capital elsewhere.

Overseas equity overweight still exists

Regional equity positioning is also part of the beneath-the-headline read on sentiment. While US equity flows are larger than non-US equity, recently investors have looked overseas more than in prior periods. This reflects a preference for greater geographical diversification amid the redrawing of our global macroeconomic paradigm that has the potential to upend the prior era of global cooperation that uniquely benefited US assets.

The rolling three-month differential between the two regions (US and non-US) helps illustrate how the prior trend of concentrating capital in just the US has mean reverted (Figure 3). And over the most recent three months, the share of non-US equity flows is almost 40%, well above the year-to-date figure and representative of the more recent, post-Liberation Day shifts.

Within those non-US flows, emerging market equity ETFs have now had inflows for six consecutive months, taking in $16 billion over the stretch. While not a record, it is more than they took in all of 2024—another signpost of a tactical shift toward non-US exposures. And that trade has been rewarded as emerging markets have outperformed the US so far this year by almost 8%.³

No love for the long bond

Government bond exposures had the second-most inflows in July, entirely led by short- and intermediate-strategies as the long-term bond flows were flat. In fact, that has been the trend all year as long-term government bond flows were negative, while the rest of the government space had sizable inflows.

The weak investment in long-term US Treasury ETFs coincides with increased volatility on the long end of the curve, amid uncertain central bank policies and worsening deficits. Combined with other macro risks (shift toward mercantilist policies), the yield out on the long end of the curve is not fairly compensating for the volatility to earn that yield.

Given these dynamics, investors’ lack of love for the long bond is unlikely to change—particularly since its typically reliable diversification profile has been impacted by the shift in our macroeconomic paradigm and the rise in risk/term premiums.

Will a macro heavy August be the kryptonite?

Despite the unresolved trade debates, strong fundamentals were the Krypto the Superdog support mechanism for equity returns in July. But the risk is that these fundamental reporting safety nets are likely to weaken as we get into August. Sixty-five percent of S&P 500 firms have already reported earnings. That means macro trends will once again be the main driver of sentiment. And, unfortunately, macro news has acted as green kryptonite (the mineral that saps Superman’s powers) to the market’s mood in recent macro-heavy August months.

Over the past 30 years, S&P 500 Index returns have averaged -0.42% during August,⁴ the second-weakest average return of any month in that time period. Also, August, on average, is the worst month for ETF inflows.

The Federal Reserve Jackson Hole Symposium is likely to be a market-moving macro event once again this year, given the rhetoric around Fed policy and the first double governor dissent at the July meeting since 1993.

This August, remember that even though Superman is the Man of Steel, he is not invincible. Gold kryptonite can completely remove his powers and Doomsday did beat him. And like Superman, rallies made of steel can be slowed or stopped.

If August and its rogue’s gallery of macro risks are the next test, this calls for balance within equity-heavy concentrated portfolios. Like Superman teaming up with the rest of the Justice League to help defend on multiple fronts. Mixing in non-traditional assets can help improve resiliency in case August’s macro forces act as any color of kryptonite to the equity markets’ rally.

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