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Blue Water Risk Outlook

Conrad Gann     Richard Ling

David Santschi     Drew Tilley  

August 4, 2025


Health Care 18% of U.S. GDP but Only 9% of S&P 500 Market Cap

In This Issue:

We are thrilled to announce that Blue Water Macro Corp has been accepted into the prestigious Fintech Sandbox residency program!  This exciting opportunity will allow us to expand our reporting on new datasets more rapidly.

  • Ugly Economic Data Last Friday Interrupts Wall Street’s Summer Party.  Health Care and Consumer Discretionary Worst Performing Sectors This Year.  Advance/Decline Most Favorable in Utilities.
  • Risk Spotlight: Value Players Should Consider Health Care.  Health Insurers Worst Performing Industry since “Liberation Day.”  Betas of Major U.S. Publicly Traded Health Insurers Trend Lower in Past Five Years.
  • Blue Water Tracks U.S. Equity Implied Volatility in Partnership with SpiderRock Data & Analytics.  Earnings-Related Volatility Premiums Rise since Mid-2023 in All Sectors.
  • BetaWatch: Airlines United and Delta among 10 $2+ Billion Market Cap U.S. Stocks with Highest Betas.
  • Blue Water Macro Summer Interns Work to Expand Our Capabilities.  Feel Free to Contact Them Directly If You Are Hiring!

Last Friday’s Ugly Economic Data Interrupts Wall Street’s Summer Party.  Health Care and Consumer Discretionary Worst Performing Sectors This Year.  Advance/Decline Most Favorable in Utilities.

Financial markets have been partying hard since U.S. President Donald Trump backed off from his “Liberation Day” tariffs.  The S&P 500 and Nasdaq chugged steadily higher to record highs, and the VIX recently hit a five-month low of 14.93 on July 25.  Meanwhile, Treasury bond prices stabilized, and corporate credit conditions loosened even further as debt and leveraged loan issuance exploded.  Bloomberg reports that the yield premium on global investment-grade debt recently sank to 79 basis points, the lowest level since July 2007, when Citigroup CEO Chuck Prince assured the world he was still dancing.

Interrupting Wall Street’s summer party this past Friday were an ugly nonfarm payrolls report, a soft Institute for Supply Management manufacturing reading, and Mr. Trump’s firing of Bureau of Labor Statistics Director Erika McEntarfer for supposedly producing “phony” jobs numbers.  U.S. stocks sold off hard, with the Magnificent Seven down 3.1% on Friday and the VIX spiking to a six-week high of 20.38.  Ms. McEntarfer’s abrupt termination is one of the most extraordinary actions in a long line of extraordinary moves by Mr. Trump.  With each passing week, the U.S. operates more like an autocratic developing country than the world’s leading reserve currency issuer.

For nearly two decades, the U.S. has embraced something of a crackhead economic model, confronting even modest economic weakness with low or zero percent dictated interest rates, loads of money printing, and massive deficit spending.  If soft economic data persists, we expect the Federal Reserve to cut rates regardless of whether consumer price inflation stays elevated.  The Fed has tolerated above-target inflation for years and will act against it only if it really gets out of control.

At the sector level this year, returns generally have been tightly clustered, as we might expect with 62% of U.S. equity fund assets now indexed.  The notable exceptions have been the laggards Health Care and Consumer Discretionary.

One key measure of the stock market’s internal health is the advance/decline ratio, a breadth indicator that compares the number of advancing stocks to the number of declining stocks (it rises when advances exceed declines and falls when declines exceed advances).  We calculate it at the sector level based on data from FactSet.  The advance/decline data so far this year has had a fairly defensive tone.  The ratio has been by far the most favorable in Utilities, which is among the most defensive sectors, and least favorable in Health Care and Consumer Discretionary.

Risk Spotlight: Value Players Should Consider Health Care.  Health Insurers Worst Performing Industry since “Liberation Day.”  Betas of Major U.S. Publicly Traded Health Insurers Trend Lower in Past Five Years.

It is hard to find much value in the U.S. stock market today.  The S&P 500’s trailing 10-year inflation adjusted P/E ratio is a lofty 38.0 (the record high was 44.2 in 1999), the S&P 500’s dividend yield is a mere 1.24% (the record low was 1.11% in 2000).

Investors seeking value should consider the Health Care sector in general and the health insurance industry in particular.  As Blaine Rollins recently pointed out, Health Care trades at a forward P/E of 16, the second-lowest of any sector.  Moreover, it is trading at a 10-year and 30-year low P/E valuation relative to the S&P 500.  While Health Care accounts for 17.6% of U.S. GDP, it is equal to only 8.6% of the market cap of the S&P 500 (Health Care is in the small box below marked by Eli Lilly (LLY).

The recent action in health insurers has been particularly brutal.  Managed Health Care is the worst performing industry since the “Liberation Day” tariff announcement on April 2.  A range of firms have cited increased health care utilization as well as rising medical and prescription drug costs as the main culprits for earnings misses.

The largest publicly traded U.S. health insurers–UnitedHealth Group (UNH), Cigna (CI), Elevance (ELV), Humana (HUM), and Centene (CNC)–generally performed well from 2020 through 2022.  In the past 2½ years, however, the shares of all of these companies have performed poorly, and only Cigna has delivered a positive return since the start of this decade.

The betas of these health insurers relative to SPY have been trending fairly steadily lower in the past five years, and all of them have betas below 0.4.

The graph below decomposes the variance of each of the health insurers, with the width of the bars scaled based on market cap.  Note that almost all of these firms’ variance is residual, which is not surprising given their very low betas.  Blue Water can provide daily data on exactly what to hold each trading day to hedge the risk of any U.S. stock.

Blue Water Tracks U.S. Equity Implied Volatility in Partnership with SpiderRock Data & Analytics.  Earnings-Related Volatility Premiums Rise since Mid-2023 in All Sectors.

Through a new partnership with SpiderRock Data & Analytics, Blue Water tracks U.S. equity implied volatility (IV) by sector, size, style, and expiry.  SpiderRock provides detailed surface and curve-level IV measures derived from their extensive individual equity options datasets.  We focus in this section on the event-adjusted (censored) and uncensored at-the-money IV for 360-day expiries.

This event-adjusted measure removes the contribution of anticipated earnings announcements using SpiderRock’s Implied Earnings Event Model, isolating the baseline, non-event-driven volatility term structure.  The ratio we present here:

(Uncensored IV − Event-Adjusted IV) / Uncensored IV

quantifies the proportion of total IV attributable purely to scheduled earnings releases.  This ratio has two main advantages:

  • It normalizes for differences in volatility across sectors, allowing direct comparisons on a 0 to 1 scale.
  • It makes long-term patterns more pronounced, since the y-axis is standardized regardless of a sector’s absolute volatility.

The time series of sector ratios reveals several notable trends.  Following mid-2023, earnings-related volatility premiums increased in all sectors, likely reflecting a shift in market focus from macro shocks to company-specific risk.  As the Fed’s rate-hike cycle ended and baseline macro volatility subsided, options markets began pricing a larger share of uncertainty into the earnings window.

Growth sectors—Consumer Discretionary, Information Technology, and Industrials— consistently command the highest earnings-related volatility ratios, particularly in earnings seasons and periods of macro uncertainty.  Within the Defensive group, Consumer Staples and Health Care typically maintain low ratios but had spikes tied to sector-wide catalysts, such as regulatory shifts, merger activity, or commodity input price shocks.  Commodity-linked sectors, including Energy and Materials, as well as Financials display more idiosyncratic event-volatility patterns.  Utilities behave most like the Commodity group, with the lowest and most stable ratios, reflecting high regulation and predictable cash flows.

The most recent snapshot, shown in the stacked bar chart below, decomposes each sector’s total IV into its earnings-related and baseline components.  Growth sectors currently derive the largest share of total IV from earnings events, while Real Estate, Energy, Utilities, and Financials are the least affected, which is consistent with their more predictable earnings streams.  The market-wide “Total” ratio stands at roughly 9%, indicating that earnings events account for a modest share of overall option-implied volatility across the U.S. equity universe.

To test these datasets, please contact support@riskmodels.net for a free trial.

BetaWatch: Airlines United and Delta among 10 $2+ Billion Market Cap U.S. Stocks with Highest Betas.

Our BetaWatch feature highlights the 25 U.S. stocks with a market capitalization of at least $2 billion with the highest betas relative to SPY.

It may come as a surprise that among the 10 stocks with the highest betas are two major airlines: United Airlines (#1) and Delta Airlines (#7).  The betas of day trading favorites Nvidia, Palantir, and Tesla have drifted lower in the rankings in recent months, and Nvidia’s beta is now only the eighteenth highest.

Blue Water Macro Summer Interns Work to Expand Our Capabilities.  Feel Free to Contact Them Directly If You Are Hiring!

This summer at Blue Water, our talented cohort of NYU Tandon School of Engineering interns has been deeply immersed in projects critical to enhancing our analytical and outreach capabilities:

  • Giga Nozadze (LinkedIn Profile) is leading product development for the BW-SpiderRock Sector Implied Volatility product.
  • Manush Shah (LinkedIn Profile) is focusing on beta enhancement by adding a third factor to our risk models.
  • Rashil Shah (LinkedIn Profile) is developing momentum, reversion, risk-on, and risk-off factors.
  • Sally Xintong Zhao (LinkedIn Profile) is focusing on our mutual fund rankings.
  • Ziyi Li (LinkedIn Profile) is working on Capstone Simulator evaluation of OLS, Random Forest, and XGB learners for SPY timing using sector returns as features.

​From Washington University, Sydney Tao (LinkedIn Profile) is spearheading a social media campaign for the Blue Water Risk Outlook.

Feel free to reach out directly to any of our interns if you are seeking to hire up and coming financial engineers!

Regards,

David Santschi

Blue Water Macro

Blue Water Risk Outlook Summary

Purpose:  Provide concise, insightful analysis of macro equity risks, specifically macro risks to the U.S. stock market.

Team:  The team–Conrad Gann, Richard Ling, David Santschi, and Drew Tilley–is a blend of experience and new talent.  Conrad and David worked together at TrimTabs Investment Research, where David was the managing editor and lead content architect.  Richard has been with Blue Water Macro for three years and leads the ETFBeta.com product, while Drew is rolling out the portfolio optimizer for RiskModels.net.

Data Sources:  FactSet, ETFBeta.com, RiskModels.net, and SpiderRock Data & Analytics.

Key Topics:

  • Beta Weighted Heatmap: Visually represents risk levels across stocks and sectors, showing market capitalization weighted by beta.
  • Impact of Tariff Volatility on Equities: Examines how policy changes, including tariffs, and their associated volatility affect specific sectors and industries.
  • Sector and Industry Beta and Implied Volatility: Analyzes of how risk levels, past and expected, are changing within specific sectors and industries.  
  • MAG-7 Risk: Focuses on the outsized market risk of the "Magnificent Seven" stocks and their impact on mutual fund performance.

Initial Distribution:  We are launching the report as a PDF file attached to an email message.  We plan to transition to an email message containing highlights and links to our Blue Water Macro blog.

Pricing:  Complimentary for launch and by subscription in the future.

Legal Disclaimer

The data and analysis in this document are provided “as is” and without warranty of any kind, either expressed or implied. All investment strategies have the potential for profit or loss. There can be no assurance that any strategy will match or outperform any particular benchmark.  Blue Water Macro (BWM), any of its employees and affiliates, and any third party data providers shall not have any liability for any loss sustained by anyone who has relied on the information contained in this document or any other BWM publication.

All of the data contained in this document was obtained from sources believed to be reliable, but no guarantee is given to its accuracy and completeness. BWM is under no obligation to update, modify or amend the information. All of the opinions expressed in this document are subject to change without notice.

BWM uses various methods to evaluate investments, which may, at times, produce contradictory recommendations with respect to the same securities. When evaluating the results of previous BWM recommendations, BWM may modify the methods it uses to evaluate investment opportunities from time to time. For this reason and for many other reasons, the performance of BWM’s past recommendations is not a guarantee of future results.

The securities mentioned in this document may not be eligible for sale in some states or countries or be suitable for all types of investors, and their value and the income they produce may fluctuate and be adversely affected by exchange rates, interest rates, and other factors.

Nothing in this document should be construed as investment, tax, financial, or other advice and should not be relied upon. Investors should always obtain current information and perform due diligence before investing. Reliance on this information for the purpose of engaging in any investment activity may expose an individual to a significant risk of losing all of the assets invested. If you are in any doubt about the action you should take regarding to this document and the information in it, you should contact an independent professional advisor.

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Risk analysis powered by RiskModels.net using market data from FactSet                      research@bluewatermacro.com