by Asset Allocation Team, GMO LLC
Since bottoming on April 8, sentiment shifted swiftly, and the market staged a remarkable rebound with the S&P 500 rallying an impressive 27% through July 31.
With retail investors aggressively buying the dip, the most speculative sectors didn't just climb the “wall of worry” – they catapulted over it. Unprofitable tech, meme stocks, and bitcoin-sensitive stocks surged approximately 55-115% in just fifteen weeks.
Animal spirits are roaring, and strong momentum has pushed both valuations and signs of speculation to risky levels.
U.S. EQUITIES TURNED SPECULATIVE IN 2Q 2025
High momentum and lower quality groups rallied most following the Liberation Day market lows
Returns for period from 4/8/25 – 7/31/25 | Source: Goldman Sachs 1
What can investors do to protect themselves from this market excess?
1. Exploit it.
GMO Equity Dislocation is designed to profit from extraordinarily wide valuation spreads by taking long positions in the cheapest value stocks and short positions in the most expensive growth stocks. The recent rally leaves a rich group of candidates for short positions. The Equity Dislocation Strategy can provide diversification for a portfolio with meaningful growth exposure, yet minimal net exposure to equities.
For investors who want to retain equity market beta, GMO Quality Spectrum is a long/short equity approach that seeks to compound capital through full market cycles by going long high-quality, fundamentally strong companies and shorting a diversified basket of unstable, overvalued “junk” stocks. With a net long exposure and a structure designed to mitigate drawdowns, the strategy aims to deliver superior risk-adjusted returns while maintaining equity market participation.
2. Be Dynamic.
GMO Benchmark-Free Allocation is a valuation-sensitive, dynamic allocation strategy. The portfolio aims to tilt away from areas of excess toward dislocated and cheap market segments. Today, unsurprisingly, Benchmark-Free Allocation's biggest exposure is a 20% allocation to Equity Dislocation. We also have significant holdings in U.S. and international deep value, Japanese and emerging markets equities, as well as other liquid alternative strategies.
Disclaimer: The views expressed are the views of the Asset Allocation team through the period ending August 2025 and are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities.
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