Risk Appetite Holds Strong Despite Rising Macro Risks — Evening Brief – 09.18.25  

Investor sentiment has remained remarkably resilient in the face of persistent macro headwinds and troubling headlines throughout the summer. Risks tied to tariffs, labor market weakness, and slowing global growth loom large, yet the bull trend continues to show surprising durability. A review of ETF-based ratios that serve as real-time proxies for investor positioning reveals that risk appetite remains decisively skewed toward growth and cyclical exposures. 

One of the clearest indicators is the AOA/AOK ratio, which compares aggressive global asset allocation to conservative strategies. The measure recently hit new highs, underscoring a broad preference for equities and risk assets at the expense of defensive positioning. The risk-on bias looks even stronger in the U.S., where the SPY/USMV ratio continues to climb, reflecting investor preference for broad-market exposure over low-volatility strategies. This shift points to a market environment where participants are betting on momentum rather than hedging for downside. 

Cyclicals are also reclaiming leadership, with the XLY/XLP ratio extending its recovery from the April selloff triggered by tariff shocks. The measure is now approaching levels seen before the spring correction, suggesting investors are once again rewarding consumer discretionary and other growth-sensitive stocks over staples. By contrast, small caps remain a weak spot. The IJR/SPY ratio confirms that large caps continue to dominate, with smaller companies struggling under tighter financing conditions and heightened economic uncertainty. 

In fixed income, risk appetite has been more muted, but subtle shifts are worth watching. The IEF/SHY ratio shows medium-term Treasuries outperforming shorter maturities, signaling a tentative move toward extending duration. While not a wholesale embrace of bond market risk, this trend points to a modest unwinding of the ultra-defensive posture that has dominated in recent years. 

Perhaps the most intriguing development lies in clean energy. After years of underperformance, the ICLN/XLE ratio has turned higher, with renewable energy shares beginning to outperform fossil fuel peers. While the sector is still recovering from a forceful bear market, this relative strength suggests that a turning point may be at hand—an early sign of rotation that investors with a thematic or long-term growth lens will be monitoring closely. 

Taken together, these signals paint a picture of markets still leaning risk-on, despite the gathering clouds. Investors appear willing to discount bearish headlines in favor of liquidity support, structural growth themes, and momentum in cyclicals.