Model : "disclaimer"
Position : "left"
Hello. This is Keith Lerner coming to you with our most recent market update. So let's get right into it. Three points upfront. The first is the US economy continues to muddle along.
The second point is for the stock market, we are entering a choppy period, but we still think the uptrend deserves the benefit of the doubt. And lastly, from a portfolio perspective, we are still preaching balance, but we're also finding some, some new opportunities.
So let's turn, to the weight of the evidence and firstly, the economy. We still continue to see this muddle through economy. In fact, we just got the most recent employment report. It was soft.
And if we look at the last four months, we're averaging job gains of just twenty five thousand per month. So what that means is the the Federal Reserve is likely to cut rates in September. That's been our call for several months, and we expect at least two rate cuts by year end. We still have more inflation data to go through as well.
Our head of economics is calling the the labor market kind of this no hire, no fire. We do, though, expect a little bit of improvement by the end of the year. Keep in mind, we've had so much macro uncertainty the last couple of months, but we have now the the passage of the one big beautiful bill. We likely will have that bad rate cut in September, so a little bit more clarity, as we move deeper into, into into this year.
As we turn to the stock market, I mentioned we're moving into this kinda choppier period, but the uptrend deserves the the benefit of the doubt. I think we all have to keep in mind too the stock market from the lows have been up four months in a row. We've had big gains. The S and P is up thirty percent.
Technology stocks have rallied more than fifty percent. So a bit of a digestion period would be, you know, perfectly normal in our view. But I think even though we have this muddled through economy, the key foundation for this bull market still remains in place, and that's earnings. We just came through a very strong earning season, and we're not what what what what's important is we're seeing strength not only in technology, but we're seeing those earning trends of growing out to the other four hundred ninety three stocks.
And, also, as we look down to, like, small caps, we're seeing improvement there as well. So, I would keep that in mind. Moving into position, you know, we still have a focus on, you know, US large caps and growth even though we expect a little digestion. You know, over the last month, we've become more positive on small caps because of what I just mentioned.
The earning trends are still are starting to move up. They also should benefit from the Federal Reserve rate cuts.
Looking more globally, we we we we also have become incrementally more positive on international markets as we're seeing better price trends, and it's also a hedge against the US dollar. But, again, big picture, we have still maintained that US bias. Turning to fixed income, you know, we are focused on high quality, especially during this kind of what we expect to be a bit more of a volatile period. And what we're seeing over the last, you know, few weeks is even though there's all these concerns about deficits and inflation, the ten year treasury yield is coming down providing that balance for portfolios.
And then lastly, we've been positive all year on gold. We still see the benefits from a portfolio diversification, perspective, you know, especially in more modest positions. The good news is after moving sideways for about three or four months, we've just saw gold break to the upside of a of a multi month range. So that's it for for this month. I will say as we look ahead, we have a lot of data, in September, and that Fed meeting in mid September will come front and center. So we'll keep you informed as our, views evolve. And with that, we'll continue to follow the weight of the evidence and, speak to you next month.
Key takeaways
Investors are asking: Is this just a breather, or the start of something more? Our view: While the path forward is likely to be less smooth than recent months, the bull market still earns the benefit of the doubt.
- Following a summer of strong returns, market sentiment is shifting. Over the past month, we’ve seen a sharp rotation into previously lagging segments such as small caps, value stocks, and international markets.
- We continue to favor U.S. large caps, though in late August we upgraded our view on small caps to neutral, reflecting an improving backdrop.
- Artificial intelligence (AI) and technology (tech) remain dominant themes of this bull market. However, after the sharpest four-month rally since 2000, the tech sector has entered a digestion phase. We view pullbacks as buying opportunities, supported by strong earnings momentum and returns that remain far from bubble extremes.
- Gold recently broke out to the upside of a four-month trading range—a positive technical development—and continues to look attractive as a portfolio diversifier.
Even with September pullback risks, the bull market deserves the benefit of the doubt. Earnings strength is broadening, technicals remain firm, and small caps are improving.
Weight of the evidence
We rely on our weight-of-the-evidence framework—an approach that blends historical context, macro/business cycle analysis, fundamentals, and market signals.
Business cycle indicators – Muddling along
Like the little engine that could, the economy continues to chug along despite several headwinds.
- Negative employment revisions, tariff uncertainty, deficit issues, and inflation concerns are being offset by a resilient consumer, significant capital spending on artificial intelligence, and expected business incentives from the passage of the One Big Beautiful Bill, deregulation, and the likelihood of Federal Reserve (Fed) rate cuts.
- Our base case remains two Fed rate cuts by year-end, though upcoming employment and inflation data will be critical to that outlook.
Fundamentals – Rich valuations offset by broadening earnings
The S&P 500’s valuation remains elevated, driven by mega-cap stocks. However, earnings continue to provide a solid market foundation.
In the second quarter (Q2), the S&P 500 earnings growth rate reached near 12%, up from 5% expected at the start of June.
Notably, earnings strength is broadening.
- The Magnificent 7 posted Q2 earnings growth of 26.6%, well above the 13.9% expected at June’s end, according to FactSet.
- The remaining 493 stocks saw earnings growth of 8.1%, significantly exceeding the 2.5% forecast.
- Small caps have also experienced notable upward earnings revisions.
Market Signals – Uptrend intact, but entering a choppier period
The S&P 500 remains in a well-defined uptrend and roughly 90% of global markets are also in uptrends. Encouragingly, the rally is broadening beyond mega-cap tech stocks, with the S&P 500 Equal Weight Index breaking out to new highs and improved performance by small and mid-caps.
September is historically a more challenging month, though seasonals should not be looked at in isolation. We enter the month with stock and bond volatility near the lower end of typical ranges, suggesting vulnerability to macroeconomic surprises in the coming weeks.
Strong market support for the S&P 500 exists in the 6100–6150 range, with additional support at the rising 200-day moving average (currently at 5960).
Market signals – Trends positive, with mixed participation
- After a seven-month trading range—aside from brief downside overshoots—the S&P 500 recently broke out to the upside, marking a constructive technical shift. Over 80% of global markets now trade above their 50-day moving averages, signaling broad-based resilience.
- Only four sectors—technology, communication services, industrials, and financials—have returned to all-time highs. Meanwhile, small caps, mid caps, and the equal-weighted S&P 500 remain below their peaks. That’s less encouraging in terms of participation.
- The key question for the second half is whether we see broadening. To do so, we’ll likely need a pickup in the economy and earnings. We are open to that possibility, but we’ll wait for confirmation of improved trends before adjusting our stance. In the meantime, we continue to favor large-cap equities with a growth tilt.
- Sentiment: Investor optimism has rebounded sharply. Equity exposure among newsletter writers is near multi-year highs, suggesting a higher bar for upside surprises.
Tactical positioning amid crosscurrents
We maintain a bias toward U.S. large caps and the growth style, though we have become more constructive on small caps. Small cap valuations are attractive, earnings trends are improving, and technical indicators are turning positive.
While we are still team USA, we have become incrementally more positive on international markets over recent months. The MSCI EAFE Index, a proxy for international developed markets (IDM), broke to the upside of a multi-decade trading range earlier this year and provides a partial hedge should the U.S. dollar weaken further.
In terms of fixed income, we continue to favor high-quality bonds, awaiting better opportunities as credit spreads remain at historically tight levels.
Notably, despite persistent inflation and deficit concerns, the 10-year U.S. Treasury yield has declined this year.
Gold remains a valuable portfolio diversifier amid ongoing geopolitical risks and central bank buying. It continues to show strong technical performance following a multi-month breakout.
Bottom line – Resilient bull faces choppy waters ahead
Overall, the bull market continues to deserve the benefit of the doubt, even as we brace for a potential jolt in September given the heavy slate of macroeconomic activity.
We maintain a constructive view on U.S. large caps while recognizing emerging opportunities in small caps. And while headlines will continue to ebb and flow, the key driver for the continuation of this bull market remains earnings. Encouragingly, we are seeing earnings strength broaden.
As always, we will continue to follow the weight of the evidence.
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