GPT-5 calls the US equity market: "Range bound to modestly higher"

This is how to get AI to make make bias-free strategic assessments of the market risk regime and outlook.

Sep 07, 2025

The S&P 500 is at highs with an elevated forward P/E ratio of 22x. The labor market is deteriorating, the market has priced rate cuts and inflation has risen recently. Investors can rightly claim to be conflicted as to their market outlook given deteriorating growth signals and rising inflation. So how can an investor remove their personal bias and get an objective view on the 3-month outlook?

This is where AI can excel with the right data and prompts. As the first post for The Inferential Investor, this type of analysis is what this publication will be emphasizing - synthesizing techniques on incorporating AI into process driven fundamental stock investing. I’ll present prompts designed for resolving uncertainty on current and evolving market and stock situations. Along the way, I’ll profile developments and research in AI for investing, as its rapid evolution is such that Wall St is no longer the gate keeper of reliable investment insight.

My book - “The Inferential Investor” is currently being completed and brings together the most current research techniques and investment process for melding AI into your investing activities. Stay tuned for its release.

Let someone else you know share these techniques so we can grow the Inferential Investor community!

I’ve been investing for 25+ years and its true that no matter how experienced you are, everyone can get welded on to certain viewpoints that can be counter productive, particularly when it comes to the market outlook. Getting a clean, bias-free read on the market risk regime and outlook is one of these techniques I find helpful to challenge your own views and remain objective in your investing.

There’s a lot changing in markets right now with stalling labor market conditions, anticipation of rate cuts and fears about the tariff driven inflation impetus. I run the following prompt monthly to reassess the market regime taking into account macroeconomic data and revisions, interest rate expectations changes, recent earnings trends and revisions, current valuation levels and index price trends and volatility. AI is perfectly suited for assessing this trove of data holistically, building narrative insights from each dataset, aggregating the views and using its inherent pattern matching ability with historical conditions to make an overall assessment of the potential market outlook including confidence.

In the step by step reasoned analysis below from the AI model, the TL;DR conclusions made for the next 3 months are a range bound to modestly higher equity market (1-4%) with a reasonable 60% confidence score. Upside is noted to be limited by deteriorating labor conditions and economic slowdown but the market supported by rate cuts and an expectation that while the economy is cooling - its not breaking yet in the evidence. The model has:

Assessed economic data and revisions, Fed rate cut expectations, valuation levels vs history, earnings and earnings revision trends and pricing and volatility data (weekly over last 25 years).
Made narrative insights and conclusions from each stage and data set
Noted factors that could change the view and risks
Synthesized all the insights into a reasoned overall view on direction, magnitude and confidence of the outlook for equities and volatility over a next 3 month horizon.

This represents a fairly comprehensive overview of conditions and how they can affect the outlook for the stock market. As investors, we can be biased by over-weighting in our minds one particular data set against others which can heavily impact our conclusions, risk appetite and trading behavior. This comes from our own personality traits - some investors are more conservative while others more aggressive. Sense checking our own views against a bias free model is valuable in any investment process and something I do monthly.

The following is how to replicate this using GPT-5 in Thinking mode and the output. This is not financial advice. It is a demonstration of capability and further input into your own investing assessments. I’ll be updating this market regime analysis monthly here as conditions evolve so subscribe to follow it.

ChatGPT 5 prompt:

You are a professional fundamental equity strategist making an assessment of the market risk regime and outlook for the equity market. Follow the steps outlined below to analyze the current risk profile of the US equity market and make an assessment of the outlook over the next 3 months for the US stock market based on a balanced assessment of data including macroeconomic data and data revisions, Federal Reserve interest rate policy and expectations, the recent trend in earnings and earnings revisions for the market, current valuation levels and the attached pricing data for the S&P 500 index. Generate narrative insights from each data set to add together to a comprehensive view on the equity market outlook based on a balance of probabilities.
Steps to follow:
1. Analyze recent trends in key macroeconomic data for the United States including data revisions.
2. Analyze the likelihood of interest rate cuts or hikes over the next 3 months
3. Analyze recent trends in market wide EPS estimates (eg for the S&P 500 index) and estimate revisions over the last three months and their implications
4. Analyze trends in the market wide P/E ratio, where it sits relative to historical ranges and the conditions that existed at those points and how it might evolve from here
5. Analyze the attached file of weekly prices for the S&P 500 index over the last 25 years for trends and patterns and correlate with conditions. Calculate rolling 3 month volatility estimates and add those to the analysis or use the VIX index as a proxy.
From these steps and narrative insights, make a conclusion of the likelihood of the S&P 500 index rising, staying flat or falling over the next 3 months, state the assessed magnitude of the move ("small", "medium" or "large") and your confidence level in the assessment on a scale of 0 to 100 with 0 being no confidence and 100 being extremely confident. Make a similar assessment of the outlook for volatility of the equity market to either rise, stay flat or fall and the magnitude of the assessed change over the same horizon.

GPT 5 (Thinking mode, Plus) Response:

Below is a concise, strategist-style assessment that integrates the latest macro prints and revisions, Fed policy expectations, earnings/revisions, valuation, and your 25-year weekly S&P 500 price file (I computed 13-week realized vol and summary stats from it). A brief probability call closes things out.

1) Macro pulse (with revisions)

Labor market is cooling—with negative revisions. August nonfarm payrolls rose +22k and the unemployment rate edged up to 4.3%. Prior months were revised net −21k (June revised down to −13k; July revised up to +79k), so the underlying trend is softer than first prints. Average hourly earnings grew +0.3% m/m, +3.7% y/y; the workweek held at 34.2 hours—both consistent with easing labor demand. Bureau of Labor Statistics
Inflation is in the mid-2s to low-3s. July headline PCE +2.6% y/y and core PCE ~2.9% y/y; July CPI +2.7% y/y and core CPI +3.1% y/y. Progress has stalled a bit but the direction vs 2023 peaks remains lower. Bureau of Economic Analysis+1 Bureau of Labor Statistics
Growth looks resilient but uneven. Q2 real GDP was revised up to 3.3% saar (after a soft Q1). Some of the strength reflects volatile trade components, but headline momentum isn’t collapsing. ISM Manufacturing = 48.7 (contraction) while Services = 52.0 (expansion), a mix that fits “late-cycle but not recession.” Bureau of Economic Analysis Yahoo Finance Monitor Daily

Macro read-through: The US is transitioning from “late-tightening” to “early-easing” conditions: cooling jobs (plus downward revisions) and inflation hovering near 2½–3% give the Fed room to cut, even as activity avoids a hard stop. Risks: stickier services inflation (tariffs, shelter) and fragile manufacturing.

2) Fed path (next 3 months)

Cut very likely in September; a second by November is plausible. Fed-funds futures imply an overwhelming probability of a 25 bp cut at the Sept 17 FOMC, with some small odds priced for 50 bp depending on CPI/PPI. Street commentary leans to a follow-up cut if labor stays soft and inflation doesn’t re-accelerate. MarketWatch CME Group
Rates backdrop for equities: 10-yr yields have been oscillating around the low-4s (recent print ~4.28%), so the equity risk premium (ERP) is tight when set against a ~4.5% forward earnings yield. That keeps multiples sensitive to rate/inflation surprises. The Wall Street Journal

Policy read-through: Base case is 25 bp in September; Nov becomes data-dependent. Easing supports multiples on dips, but any upside inflation surprise (or long-end yield pop) can quickly pressure high-P/E segments.

3) Earnings & revisions (market-wide)

Q3 2025 EPS growth est. = +7.5% y/y and—unusually—EPS estimates have risen ~0.4% since June 30 (typical quarter sees cuts). Positive EPS guidance breadth is above 5- & 10-yr averages (54 vs 47 negative). CY2025 EPS growth est. ~+10.6%. FactSet

Earnings read-through: The revisions picture is mildly positive and broad enough (Tech/Comm Services leading) to keep the earnings backdrop constructive into year-end—even as Energy drags.

4) Valuation (P/E in context)

Forward 12-month P/E ≈ 22.1, above the 5-yr (19.9) and 10-yr (18.5) averages. Several reputable outlets peg forward P/E in the ~22–22.5 range, among the richest points of the cycle and elevated relative to trailing bond yields. FactSet The Wall Street Journal

Valuation read-through: ERP is compressed, so the market’s cushion against rate/inflation upside is thin. Upside in the index likely needs either falling yields or another leg of EPS upgrades.

5) Your S&P 500 weekly file: trend, volatility, context

From your 25-year weekly series (2000-→, ending 2025-08-31):

Level & trend: Last close 6,481.5; 13-week total return ~+8.0%; 52-week ~+19.8%—firm uptrend and at/near ATH (drawdown 0.0%).
Realized volatility: 13-week realized vol (annualized) ≈ 10.1%, which sits at the ~29th percentile of the 2000-present distribution—i.e., low-vol regime by historical standards.
Trend filter: Price is above a 40-week (~200-day) average, consistent with risk-on regimes.
Interpretation: Low realized vol + new highs typically aligns with benign macro/policy backdrops; however, such regimes are susceptible to rate shocks because positioning and valuation are full.

I’ve saved the enriched dataset (adds returns, drawdowns, rolling vol, 40-week MA): Download the enriched CSV.
(You can also see the two charts and a summary table rendered above.)

Putting it together — 3-month equity outlook (balance of probabilities)

Base narrative:

Macro is slowing but not breaking; inflation is in the 2½–3% channel; a September cut is highly likely with a decent chance of a second by November if data cooperate. Bureau of Labor Statistics Bureau of Economic Analysis+1 MarketWatch
Earnings trend/revisions are slightly better than seasonal; margins stable-to-up in key sectors; this argues against an earnings-led selloff. FactSet
Valuation is rich vs history and ERP thin vs the 10-yr; that caps multiple expansion and raises sensitivity to upside inflation/yield spikes. FactSet The Wall Street Journal
Your file confirms a low-vol, trend-up regime (13-week vol ~10%), which historically tilts odds modestly positive unless a rate/inflation shock interrupts.

Direction (S&P 500), next 3 months

Rise: 45% probability — magnitude: small (≈ +1% to +4% total return).
Catalysts: one (possibly two) rate cuts, benign CPI/PPI, revision breadth holds up.
Flat: 30% probability — magnitude: small (−1% to +1%).
Catalysts: mixed prints; yields range-trade; earnings season broadly in line.
Fall: 25% probability — magnitude: medium (≈ −5% to −10%).
Catalysts: sticky services CPI (tariff pass-through), long-end yield pop, guidance resets in a few mega-caps. Yahoo Finance Monitor Daily The Wall Street Journal

Overall call: “Range-bound to modestly higher.” Confidence ≈ 60/100 (supportive policy & earnings vs valuation/rates risk).

Implied volatility (VIX / realized vol), next 3 months

Rise: 50% probability — magnitude: small-to-medium (VIX up a few pts; realized vol trending toward long-run median).
Flat: 30% probability — magnitude: small.
Fall: 20% probability — magnitude: small (would likely require steady disinflation and gentle yields).
Rationale: We’re starting from a low realized-vol base (~10% annualized) in your series and mid-teens VIX recently. Seasonality (Sep/Oct), policy/event risk, and tight ERP bias vol somewhat higher even if price action nets out sideways-to-up. FRED

What would change my view quickest

Upside inflation surprise (services/shelter) that pushes 10-yr yields higher and delays/downsized November easing. Bureau of Economic Analysis The Wall Street Journal
Guidance rollover reversing the rare mid-quarter upward EPS revision trend. FactSet
Policy/geo headlines that widen credit spreads and steepen the vol term-structure. Reuters

Disclaimer: The Inferential Investor does not provide financial advice. Any discussions on stock and market views are made from an educational standpoint and to demonstrate techniques and capabilities of AI, are indicative and subject to change. Given this, the author does not warrant to update readers if a previously stated view changes. It is recommended to always do your own research but I welcome you to follow this substack as another input into a well rounded investment process.