Downside risks to the market
The Sandbox Daily (6.3.2025)
Welcome, Sandbox friends.
Today’s Daily discusses:
key risks to market narrative
Let’s dig in.
Blake
Markets in review
EQUITIES: Russell 2000 +1.59% | Nasdaq 100 +0.79% | S&P 500 +0.58% | Dow +0.51%
FIXED INCOME: Barclays Agg Bond -0.07% | High Yield +0.19% | 2yr UST 3.955% | 10yr UST 4.458%
COMMODITIES: Brent Crude +1.47% to $65.58/barrel. Gold -0.54% to $3,379.1/oz.
BITCOIN: +1.12% to $105,951
US DOLLAR INDEX: +0.56% to 99.261
CBOE TOTAL PUT/CALL RATIO: 0.85
VIX: -3.65% to 17.69
Quote of the day
“Quality means doing it right when no one is looking.”
- Henry Ford
Assessing key downside risks to market narrative
As a capital allocator, one of my principal responsibilities is to assess downside risks.
Even during bull markets, these are valid conversations to have.
From my early days in private wealth management, my former boss at UBS would often ponder: “where are we most exposed?”
“If X happens, what Y action is our response?” he’d ask.
Challenging your base case brings incredible depth to your process. A simple thought exercise that prepares you for the negative outcomes. That way there are no surprises or emotions, just execution.
The equity market’s rebound off the April lows has displayed notable absolute strength and improving breadth, signals often interpreted as constructive within technical frameworks.
From a fundamental perspective, we simply don’t know the fallout quite yet. That information will reveal itself as early as the May and June data collection periods, or the Q2 corporate earnings period that begins in early July.
Listed below, I’ve highlighted several key risks that could undermine markets in the back half of 2025.
Labor market softness: At 4.2%, U.S. unemployment is at a three-year high, however we’re only a few ticks higher having normalized after multi-decade lows in the unemployment rate (cycle low was 3.4% in April 2023). A further rise could accelerate Fed rate cuts and reintroduce inflationary concerns, creating a policy dilemma. Keep a close eye on the weekly continuing claims number.
Higher yields: The U.S. 10-year Treasury yield has advanced toward critical resistance near 4.6-4.7%. A sustained breakout above 5% would tighten financial conditions, weigh on equity valuations, and pose headwinds for economic recovery. As for a housing market recovery, a decisive move lower is needed.
Earnings deceleration: Earnings estimates for 2025 and 2026 remain too rosy. A growing number of companies are guiding lower for 2H25, citing macro uncertainty. Slower revenue and EPS growth would push the broader earnings recovery into 2026 and beyond.
Headline-driven volatility: Market sensitivity to tariff-related headlines has contributed to pronounced intraday and multi-day volatility, complicating momentum strategies and increasing risk premiums.
Overbought conditions at overhead resistance: The S&P 500’s +20% v-shaped recovery off the April lows now faces technical resistance around 6,000, coinciding with the (broken) October 2022 uptrend channel. Overbought conditions are present across many sectors and indices.
Geopolitics: President Trump's "America First" agenda is reshaping the global economic landscape, and the U.S. dollar and U.S. Treasury have been collateral damage. Can Treasury Secretary Scott Bessent deliver on reworked bilateral trade agreements in a reasonable timeframe?
U.S. credit downgrade: While a non-event itself, Moody’s recent downgrade underscores the growing chorus of concerns regarding the U.S. government’s $36 trillion debt burden. Rising interest costs (and potential future tax hikes to address fiscal imbalances) could hamper growth expectations.
Index concentration risk: The top 10 stocks comprise ~35% of the S&P 500 market capitalization, exacerbating the risk of single-stock or sector-driven swings across markets.
Housing market weakness: Higher interest rates have crushed the demand for homes. Weakness in homebuilder and construction stocks could be flashing warning signals that conditions will get worse before they get better. Releasing the pressure valve from lower interest rates could unlock a major growth driver in 2026.
While the rally from the April lows has been impressive, supported by breadth improvement and short-term momentum, the market remains susceptible to a broad array of technical, macroeconomic, and geopolitical risks.
Investors must always recognize risks, stated or otherwise.
That’s all for today.
Blake
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Welcome to The Sandbox Daily, a daily curation of relevant research at the intersection of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. The information and opinions provided within should not be taken as specific advice on the merits of any investment decision by the reader. Investors should conduct their own due diligence regarding the prospects of any security discussed herein based on such investors’ own review of publicly available information. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily. Any projections, market outlooks, or estimates stated here are forward looking statements and are inherently unreliable; they are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur.
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