Corporate Earnings and Monetary Policy

The bank highlights strong corporate earnings and the potential for easier monetary policy as key support for the market. Historically, when corporate earnings are strong and the Federal Reserve is more accommodating, stocks tend to perform well, even if their valuations are high. With interest rate cuts expected to start later this month, UBS believes the current environment is good for stocks. Even though the S&P 500 has a high forward P/E ratio of 22, we still see the market as a positive space for equities. History tells us that high valuations don’t always mean a downturn in the next year, especially when other factors are favorable. We should focus on strong corporate performance and changes in monetary policy. Data supports this positive outlook. S&P 500 companies had an average earnings beat of 7.8% for the second quarter of 2025, indicating that businesses remain strong despite a slower economy. Additionally, the August 2025 Consumer Price Index (CPI) report showed core inflation dropping to 2.9%, making it more likely for the Federal Reserve to cut rates later this month.

Option Strategies and Market Outlook

In this context, we should look at selling put options or put credit spreads on key indices like the SPX. This strategy allows us to earn premium while expressing confidence that the market has solid support and is not likely to drop significantly. The current VIX is low at around 15, indicating some market calm, but it’s still wise to capture downside protection premiums. For a more directly bullish approach, consider buying bull call spreads on sector ETFs like XLK for technology. This low-risk strategy lets us benefit from the expected gains due to a supportive Fed while limiting losses if valuations take a short-term hit. This is a safer method than buying outright calls, which can be pricey in today’s market. We should closely watch implied volatility leading up to the next FOMC meeting on September 16-17, 2025. Selling premium before this event could be a smart move, as a widely expected rate cut would likely reduce market uncertainty and volatility afterward. This “volatility crush” creates a clear opportunity for short-option strategies. Looking back, we saw something similar in late 2023, where worries about high valuations were forgotten due to the Fed’s dovish stance, sparking a strong rally into 2024. While the current P/E is higher now, the combination of strong earnings and anticipated rate cuts indicates a similar path in the next few weeks. Thus, gearing up for potential gains while managing risk through spreads seems like the best strategy. Create your live VT Markets account and start trading now.

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