Market Update Fall 2025

Stocks reaching all-time highs amid Federal Reserve rate cuts and newly signed trade agreements are no coincidence. With AI driving real productivity gains and corporate profit growth, this bull market appears to have more room to run. Expect market volatility to increase as valuations have become extended.

Market Performance & Bull Market Context

- The S&P 500 Index, representing the 500 largest U.S. stocks, is up 17% year-to-date (YTD), while the S&P 500 Equal Weight Index has gained 11% YTD.
- While pockets of froth exist, the broader market is not in a bubble.
- This month marks the third anniversary of the current bull market. Historically, of the eight prior bull markets that reached their third year, seven continued higher over the next 12 months, averaging a 13% gain (CFRA Research).
- Since World War II, bull markets have lasted an average of five years and delivered cumulative gains of 156%. This one is up 88%, suggesting further upside potential.
Technology & Valuation Insights
- The “MAG 7” stocks—Nvidia, Microsoft, Apple, Alphabet, Amazon, and Meta—are driving index valuations higher, raising bubble concerns.
- However, their valuations remain modest compared to the dotcom era. The tech sector’s trailing P/E ratio of 49 is well below the dotcom peak of 77.
- According to Ned Davis Research, three- and ten-year returns in tech are only about half of those seen in past bubbles.
- Elevated valuations imply that earnings growth must continue to justify prices.
Earnings & Economic Indicators
- Earnings revisions for the remainder of 2025 and into 2026 have been upward.
- Profits are a leading indicator—historically preceding employment gains and broader economic fundamentals.
- Strong profit growth has historically led to rising stock prices and a wealth effect that supports consumer spending.
- The Fed is now in easing mode. Rate cuts typically produce a positively sloped yield curve, which supports economic growth and bull markets.
- Economically sensitive sectors tend to accelerate in such environments, and recent data has been encouraging.

Earnings Picture

- This earnings season is tracking the third-strongest EPS beat rate since at least 2001.
- EPS is projected to rise 13% in 2026 (FactSet).
- No recession is expected in 2026.
- The S&P 500 is reporting a net profit margin of 12.1%, above the five-year average for the sixth consecutive quarter.
- Analysts expect margins to expand further in 2026.
- Tariffs have not yet impacted corporate profits.
- The U.S. dollar has declined 10% YTD and is projected to fall further in 2026, boosting multinational earnings.
- Oil is trading at $60 per barrel, and rate cuts are creating a supportive backdrop for equities and consumers.

Valuation Snapshot

- The forward 12-month P/E ratio for the S&P 500 is 22.7—above the 5-year average (19.9) and 10-year average (18.6), but slightly below the 22.8 recorded at Q3’s end based on FACTSET research.
- MAG 7 stocks trade at 31x forward earnings vs. 20x for the other 493 companies.
- Outside of speculative areas like Quantum Computing, most of the market is trading at valuations consistent with economic expansion.
- Valuation metrics are better suited for long-term return expectations. However, overpaying for stocks tends to reduce future returns. The relative strength of the stock market and earnings guidance is more important in the short term.

Looking Ahead

- We are in the early innings of the AI revolution, with capital expenditures (CPEX) expected to continue for years.
- Historically high profit margins and economic growth are key to reducing federal debt and containing interest rates.
- Trade tensions are easing, with new agreements placing the U.S. on a more competitive footing—even China is expected to agree to revised terms.
- Increased domestic manufacturing and employment are likely outcomes.
- Money growth is slowing, reducing inflationary pressure.
- Shelter inflation is easing, commodity prices are subdued, and the labor market is cooling.
-- Monetary and geopolitical risks are expected to be lower in 2026.
- According to Capital Group, in the three non-recessionary rate-cutting cycles since 1984, the S&P 500 returned nearly 28%, U.S. bonds saw 17% annualized returns, while cash lagged.
Seasonal Strength & Market Momentum
- Many sectors are overbought but could continue higher into year-end.
- High Relative Strength in a bull market often signals continued price appreciation.
- November through April is historically the market’s most favorable period.
- Fundamentals support the rally: Q3 GDP could grow 3.8%, and corporate earnings remain strong.
- Profits continue to lead employment and broader economic indicators.

Targets & Strategy

- The S&P 500 just celebrated its third anniversary in this bull cycle. Historically, bull markets that reach this milestone tend to continue higher.
- Analysts project a 12.2% increase over the next 12 months, with a bottom-up target price of 7,559.54 vs. the current 6,738.44 - FACTSET.
- While pullbacks are possible, investors have consistently bought the dips.
- My strategy focuses on buying quality stocks at reasonable prices. Meme stocks and speculative bubbles are avoided. The MAG 7 is not in a bubble.

Risks to Watch

- Key risks include:
- Headwinds include stretched valuations and political uncertainty ahead of midterm elections. Extended valuations in the stock market could cause market volatility and a correction. A shift toward socialist economic policies could hinder growth and market performance.
- Possible slower economic growth
- Potentially rising unemployment
- Potentially declining consumer spending
- Earnings shortfalls
- Possible higher bond yields

Final Thoughts
Past patterns don’t always repeat. Future fundamentals may shift due to fiscal, monetary, geopolitical, regulatory, and capital cost factors. Expect periodic 5–7% pullbacks and occasional 10–15% corrections as part of normal market behavior. Past performance is no guarantee of future results.