Model : "disclaimer"
Position : "left"
1
00:00:03,872 --> 00:00:05,140
Hello, this is Keith Lerner,
2
00:00:05,140 --> 00:00:08,979
and thanks so much for joining us again
for this month's market update.
3
00:00:09,346 --> 00:00:13,152
Before we get into our key takeaways,
I just want to take a minute
4
00:00:13,152 --> 00:00:16,056
to just talk about where we are
and where we are.
5
00:00:16,056 --> 00:00:18,293
This year is actually
in a pretty good position
6
00:00:18,293 --> 00:00:19,995
from a capital markets perspective.
7
00:00:19,995 --> 00:00:25,637
We have global equities up more than 20%,
US large caps up more than 17%.
8
00:00:25,971 --> 00:00:29,609
And good old fashioned
bonds are up 5 or 6% kind of doing
9
00:00:29,609 --> 00:00:30,778
what they're supposed to do.
10
00:00:30,778 --> 00:00:34,383
So it's one of those those years
if you had the headlines ahead of time,
11
00:00:34,383 --> 00:00:37,387
it may have not helped you out
because there was so much noise
12
00:00:37,621 --> 00:00:41,159
and it was hard for investors
to kind of keep focus on what's important.
13
00:00:41,360 --> 00:00:42,194
And one of the biggest things
14
00:00:42,194 --> 00:00:45,165
our one point is corporate earnings,
which I'll talk about.
15
00:00:45,198 --> 00:00:47,902
But now going
directly into our key takeaways.
16
00:00:47,902 --> 00:00:51,775
I do think it's important to recognize
we are in a global, rally.
17
00:00:51,775 --> 00:00:53,778
So I already mentioned we have U.S.
18
00:00:53,778 --> 00:00:59,553
and international markets recently
making 52 week highs. Within the US,
19
00:00:59,619 --> 00:01:02,857
in particular,
we do have a two speed stock market,
20
00:01:02,857 --> 00:01:05,895
just like we have a two speed economy,
which I'll touch on more.
21
00:01:06,496 --> 00:01:08,766
The earnings story is still front
and center in our work.
22
00:01:08,766 --> 00:01:10,335
That continues to be the North Star.
23
00:01:10,335 --> 00:01:12,371
We're still seeing good trends there.
24
00:01:12,371 --> 00:01:15,576
And then finally, I've gotten the question
when you have big gains heading into
25
00:01:15,576 --> 00:01:18,313
the final two months of the year,
is that a positive or negative?
26
00:01:18,313 --> 00:01:21,318
And historically, before year end,
you tend to add to gains
27
00:01:21,418 --> 00:01:24,055
even if you have
some hiccups along the way.
28
00:01:25,056 --> 00:01:25,857
So what I'd like to
29
00:01:25,857 --> 00:01:28,962
do now is just walk
through our weight of the evidence
30
00:01:28,962 --> 00:01:32,400
framework to to really help us understand
where we might be headed.
31
00:01:32,601 --> 00:01:34,203
And as a reminder,
32
00:01:34,203 --> 00:01:38,175
the weight the evidence framework we use,
we start off with a historical analysis.
33
00:01:38,209 --> 00:01:42,381
We overlay that with the economic cycle
and then layer on fundamentals
34
00:01:42,582 --> 00:01:45,453
and market signals
to try to get the, the,
35
00:01:45,453 --> 00:01:49,325
the evidence on our side
to make higher probability decisions.
36
00:01:49,425 --> 00:01:51,228
So from a historical framework,
37
00:01:51,228 --> 00:01:54,666
it's important to note the bull market
just had a third year anniversary.
38
00:01:54,966 --> 00:01:58,572
When we look back historically
there's only been seven bull markets
39
00:01:58,605 --> 00:02:01,576
since 1950 that has had a third year
anniversary.
40
00:02:01,876 --> 00:02:05,348
The good news is, as we look forward
the next 12 months,
41
00:02:05,582 --> 00:02:08,620
all those bull markets
saw additional gains,
42
00:02:08,653 --> 00:02:12,726
even though the caveat
is it's a relatively small sample.
43
00:02:13,827 --> 00:02:16,564
The other positive is historically
when the fed has cut
44
00:02:16,564 --> 00:02:19,569
rates, when the market is close
to all time highs,
45
00:02:19,569 --> 00:02:23,575
about a year later,
the market's made up 90% of the time.
46
00:02:23,575 --> 00:02:26,445
Again, that doesn't guarantee it's
going to to replicate that.
47
00:02:26,445 --> 00:02:29,183
But from a historical context
that is a positive.
48
00:02:29,183 --> 00:02:31,920
We have gone a long time
without even a normal pullback.
49
00:02:31,920 --> 00:02:34,891
So that's still something
that investors should keep in mind.
50
00:02:34,891 --> 00:02:37,495
But the underlying trend
is still positive.
51
00:02:37,495 --> 00:02:38,964
Turning to the economy.
52
00:02:38,964 --> 00:02:40,099
You know, our main punchline
53
00:02:40,099 --> 00:02:44,805
this year has been more of a muddle
through economy as we look into 2026.
54
00:02:44,939 --> 00:02:47,910
We expect a slight uptick in the economy
55
00:02:47,910 --> 00:02:50,380
that's really predicated on three main
factors.
56
00:02:50,380 --> 00:02:53,351
One, we expect lower rates from the fed.
57
00:02:53,351 --> 00:02:58,525
So on the margin that should help. Two,
some more clarity from the tariff side.
58
00:02:58,726 --> 00:03:02,030
And then thirdly, probably the most
important side is that we expect to see,
59
00:03:02,698 --> 00:03:06,437
some improvement because of the tax policy
where you get some incentives
60
00:03:06,637 --> 00:03:10,075
from both consumers
and businesses as well.
61
00:03:10,075 --> 00:03:12,212
So we're expecting a slight uptick.
62
00:03:12,212 --> 00:03:15,550
So now let's move into the next bucket,
which is fundamentals.
63
00:03:15,583 --> 00:03:18,287
You know a lot of questions I'm
getting is around are we in a tech bubble.
64
00:03:18,287 --> 00:03:19,623
Valuations seem higher.
65
00:03:19,623 --> 00:03:23,929
And you know our valuations
for the overall market are elevated.
66
00:03:23,929 --> 00:03:25,464
We're at a cycle high.
67
00:03:25,464 --> 00:03:26,366
The offset to
68
00:03:26,366 --> 00:03:31,173
that is the earnings trends remain
very strong as markets have made fresh.
69
00:03:31,173 --> 00:03:32,241
All time highs.
70
00:03:32,241 --> 00:03:36,347
We're seeing forward earnings
estimates also at all time highs as well.
71
00:03:36,480 --> 00:03:40,620
And that's being driven by tech
and communications and the growth side.
72
00:03:40,853 --> 00:03:42,656
So we we're still overweight
73
00:03:42,656 --> 00:03:46,395
those areas even though we do recognize
there's some concentration risk.
74
00:03:46,695 --> 00:03:49,466
Moving to the technicals
or market signals.
75
00:03:49,466 --> 00:03:53,472
The underlying market trend is still
positive, both in the US and globally.
76
00:03:53,472 --> 00:03:57,377
We have over 90% of global markets
in the uptrends.
77
00:03:57,578 --> 00:04:00,482
I did mention
we had this kind of two speed,
78
00:04:00,482 --> 00:04:05,556
stock market in that the mega cap growth
and tech names are rising at a much
79
00:04:05,556 --> 00:04:09,228
faster pace than small caps in Mid-caps,
or at least they have so far.
80
00:04:09,495 --> 00:04:11,198
But the underlying trends for small caps
81
00:04:11,198 --> 00:04:14,669
and mid-caps are also still rising again,
just not at the same pace.
82
00:04:15,137 --> 00:04:17,874
Moving then to.
83
00:04:17,874 --> 00:04:20,878
So what does this all mean
from a tactical position standpoint?
84
00:04:21,245 --> 00:04:24,383
Globally, we're still team USA.
85
00:04:24,383 --> 00:04:26,753
We still have a bias for US equities.
86
00:04:26,753 --> 00:04:30,793
But we are also seeing opportunities
globally in international markets.
87
00:04:30,793 --> 00:04:34,198
For instance, we just saw Japan,
with a new prime minister
88
00:04:34,198 --> 00:04:37,202
make a fresh multi-decade highs.
89
00:04:37,569 --> 00:04:41,141
Europe's been a bit more mixed recently,
but, you know, some of these markets
90
00:04:41,208 --> 00:04:44,446
are still benefiting from,
you know, some stimulus there as well.
91
00:04:44,813 --> 00:04:48,685
On the fixed income side, at this point,
we're still sticking with high quality,
92
00:04:48,852 --> 00:04:51,790
looking for a better opportunity
in the credit markets.
93
00:04:51,790 --> 00:04:54,527
But, credit spreads remain very tight.
94
00:04:54,527 --> 00:04:57,765
And then lastly on gold,
we've been positive on gold all year long.
95
00:04:57,765 --> 00:05:02,305
That said, in of the over recent weeks,
we discussed in some of our notes
96
00:05:02,305 --> 00:05:06,678
that we thought the risk reward on a short
term basis was somewhat less positive
97
00:05:06,678 --> 00:05:09,682
because gold became
the most stretched to the upside,
98
00:05:09,950 --> 00:05:13,488
a relative to a trend
that we've seen since 2006.
99
00:05:13,488 --> 00:05:17,527
So we think we think we, gold
likely kind of cools or continues
100
00:05:17,527 --> 00:05:20,598
to cool off a bit structurally,
we still think there's some positives
101
00:05:20,865 --> 00:05:23,536
and we want to do from a portfolio
diversification
102
00:05:23,536 --> 00:05:26,040
standpoint
that we still want to have an allocation.
103
00:05:26,040 --> 00:05:29,144
But, patience
is likely going to be a virtue there.
104
00:05:29,478 --> 00:05:32,182
So bottom line,
summing this all up is that,
105
00:05:32,182 --> 00:05:35,186
you know, we do have these positive
and negative forces still intact,
106
00:05:35,386 --> 00:05:38,357
but we still think this bull market
deserves the benefit of the doubt.
107
00:05:38,558 --> 00:05:41,762
And we would stick with that trend
to look at pullbacks as opportunities.
108
00:05:42,196 --> 00:05:43,732
You know, as always, we'll continue
109
00:05:43,732 --> 00:05:48,072
to follow the weight of the evidence
and keep you informed as our views evolve.
Key takeaways
- Global rally: U.S., international developed, and emerging markets hit 52-week highs in October.
- Two-speed U.S. stock market: Mega-caps lead, but small caps and equal-weighted indices are still in well-defined uptrends.
- Earnings supportive: Results are beating expectations and broadening—important given high valuations.
- History suggests more upside, though not in a linear fashion: Bull markets that turn three tend to see further gains, though stocks are in an unusually long period without a 5% pullback.
- Year-end tailwind: When up >15% year to date (YTD) through October, the S&P 500 has finished higher 20 of 21 times; with many managers lagging, dips may be quickly bought.
Just as the U.S. economy is moving forward at two speeds—with the high end, aided by strong market and housing gains, outpacing the lower end—so too is the stock market.
A two-speed market and economy
Despite a steady drumbeat of challenging headlines—an ongoing government shutdown, the Federal Reserve’s (Fed’s) resistance to automatic rate cuts, shifting tariff policies, and persistent technology bubble concerns—global equity markets pressed higher. The U.S., international developed, and emerging markets all reached fresh 52-week highs, underscoring that a global rally is underway.
Just as the U.S. economy is moving forward at two speeds—with the high end, aided by strong market and housing gains, outpacing the lower end—so too is the stock market.
Mega-cap stocks continue to drive the largest portion of gains, while the average and smaller companies lag behind. The speeds may differ, but in both cases, the aggregate direction remains forward: both the economy and the market are advancing, even if not all participants are moving at the same pace.
Corporate earnings season has once again exceeded expectations, and earnings gains have broadened. Importantly, earnings momentum, despite concerns about the large pickup in artificial intelligence (AI) capital spending, continues to be strongest in technology and growth names, where we remain overweight.
Notably, the S&P 500 bull market just marked its third anniversary and delivered the sixth-strongest six-month rebound in history. This has typically led to further gains over the next year, albeit not in a straight line.
As we enter the final two months of the year, history is on the bulls’ side: when the S&P 500 is up more than 15% YTD through October, it has finished higher 20 out of 21 times, with an average additional gain of 4.7%.
Weight of the evidence
Historical lens
Momentum is powerful. From the April low into mid-October, the S&P 500 surged 35.5%—the sixth-strongest six-month rally since 1950. While such bursts rarely lead to a straight line higher, history shows that after similar rallies (>30%), the market was higher a year later in 9 out of 10 cases.
Moreover, when the Fed has cut rates with stocks near all-time highs, as occurred recently, the S&P 500 has been higher a year later 93% of the time.
Notably, out of the seven prior bull markets that extended beyond year three, all saw further gains in the following year, albeit with some setbacks along the way.
Indeed, the market has gone an unusually long stretch without even a 5% pullback, which means it could be more sensitive to negative surprises.
Business cycle – Muddle continues, with an uptick
The U.S. economy continues to “muddle along,” but we expect slightly better growth over the next year.
Our head of U.S. economics raised our GDP growth forecast to 1.8% for 2025 and 2.2% for 2026. Recent tax changes and modestly lower interest rates provide upside, though uncertainty from on-again/ off-again tariffs remains a drag and we continue to see a cooling in the labor market.
Fundamentals – Valuations rich, profits rising
Valuations are elevated, with the S&P 500 forward price-to-earnings (P/E) near 23x. However, forward earnings-per-share (EPS) estimates are at record highs, led by technology, and more than 80% of companies have exceeded quarterly earnings estimates. The breadth of earnings strength is expanding, reinforcing profits as the market’s north star.
Market signals – Uptrend, but bifurcation
On a technical basis, more than 90% of global markets are in uptrends (above their 200-day moving average). Small caps and equal-weighted indices are also in well-defined uptrends, but their relative performance is at multi-year lows—evidence of the “two-speed” market.
Sentiment is running a bit hot, which means a higher bar for positive surprises.
Tactical positioning
- U.S. large cap equities bias: We continue to favor large caps and the growth style, supported by strong balance sheets, earnings momentum, technology exposure, and AI tailwinds.
- U.S. small cap equities: Neutral. Profits are improving, and they could benefit from rate cuts, but large cap fundamentals remain superior.
- International developed market equities: Neutral. These markets have broken out of a multi-decade range but still lag the U.S. in earnings growth. Japan is showing relative strength post-election, while Europe continues to trail.
- Fixed income: Maintain a high-quality focus. Investment grade credit spreads are tight; we’re waiting for a better entry point.
- Gold: Long-term trends remain positive, but gold is stretched—prefer to add on pullbacks. Gold continues to validate its safe haven role as others falter.
Bottom line
Positive and negative forces remain in play. Despite headline risks and the potential for short-term pullbacks, the bull market continues to earn the benefit of the doubt.
As always, we will continue to follow the weight of the evidence and keep an open mind.
Our full report is reserved for clients only. Let’s work together.
A caring advisor can help you uncover opportunities and take on challenges—and provide greater confidence, clarity, simplicity, and direction.