Stocks reacted positively in the second quarter, more than making up for the first quarter’s loss, as some progress was made with the Iran peace process and the price of oil stabilized. A healthy rebound in the major Artificial Intelligence (AI) companies was a welcome contributor.

There is a lot of negative publicity about the outlook for stocks today, and some with justification. Valuations are not cheap and it would appear that real interest rates are on the rise, as higher oil prices work their way through the economy. Higher rates continue to negatively affect the U.S. housing market and consumer confidence. Consumer spending which, so far, has been bolstered by a decline in savings, has probably reached its high-water mark. There is also a more hawkish tone to what we are hearing from the Federal Reserve and, in spite of some second quarter progress, the war in Iran continues.

Offsetting the negatives are several positive factors, both fundamental and technical. First and foremost is the acceleration in corporate profits, which has not only been fueled by the spending on AI but also by favorable tax legislation and the reshoring of industry. We expect this trend to continue, which makes us think that the equity markets may not be as expensive as some people think. We are also impressed by the internals of the market’s advance. Rather than fleeing the high-flyers, it has been rotational, with healthcare and real economic stocks picking up the slack. An expanding new high list from the financial sector, a benign credit backdrop, and leadership from the transportation stocks isn’t the typical set up from which big problems develop.

July is usually a pretty good month for equity prices, while August and September can be problematic, and stocks bottom in October. We expect this pattern to again be repeated this year. The Middle East situation remains a wild card, but as long as interest rates behave reasonably well and corporate profits continue to advance as expected we would be buyers on weakness.

July 2026

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                                                                                                                                    DJIA: 50,286

Bad up days, good down days… miss the time when most days most stocks went up. We whined last time about the bad up days — those days up in the averages, but not up in the average stock. Monday we saw the opposite, a particularly bad day in the averages, but a decent day in the average stock. We’re not going to tell you Monday was fun, losing money never is but overall, it set up a healthier environment. When the average stock and the A/Ds are positive, the averages will take care of themselves. Participation is the key to healthy markets, and of late it has been in decline. New highs outnumber new lows, but the spread has significantly narrowed, suggesting fractured participation. More worrisome is the drop in stocks above their 200-day to less than 50% while the S&P dances around its highs, well above its own 200-day.  That’s quite a divergence.

If Tuesday wasn’t any fun, Wednesday was. Not only was it a good day, it was a technically good day, not one of those bad up days.  Indeed, it has been an ongoing positive characteristic of this market that bad days are not followed by technically bad days. When we have seen advance/decline numbers one sided down as we did Tuesday, we might have seen flat or minimally positive numbers in an ensuing rally. Wednesday’s numbers were almost 3–to–1 up. If that changes, that’s the time to worry. One day of course, it’s just that. Many of the best one-day rallies have come in bear markets, not that this is a bear market. If Wednesday was the start of a real positive change, the key is follow-through.   Meanwhile, surprise – Nvidia (NVDA – 220) beat. The news didn’t seem to help Thursday.  Then, too, such has been the pattern.

Home Depot (HD – 314) has had a tough time of it, down some 25% just since early February. This is one of those long-term uptrend charts which has turned into a four-year trading range. The weakness does seem surprising given strength in shares of Costco (COST – 1051). Then, too, the answer seems to lie pretty clearly in the 30-year. Note those patterns are pretty much the same, and is pretty much true for anything in the home building arena. If trying to predict the direction of the stocks, time might best be spent predicting the direction of TLT. We suppose that’s what they mean when they say rates matter.

It’s Tech’s world still, and it’s those Tech earnings that leave most in a happy place. When it comes to accounting, we defer to our professional, who, when hired, went through a rigorous process. Part of that was coming up with the sum of 2+2. The correct answer, of course, is how much do you want it to be? From last week’s Sohn conference came a few other accounting questions, more subtle, you’ll be glad to know. When the Semis sell, they book a profit. When the hyperscalers or whomever buy, it’s a five year or whatever write-off. Nothing illegal, but a bit of a distortion.  One side wins, the other side doesn’t lose much — somehow that doesn’t sound like real life. Also at the conference, someone pointed to the history of Semiconductor orders. They never slow down, they collapse. As even we have pointed out, the industry historically is famous for double- and triple-ordering.

The market has its divergences. Those can cause short-term problems, more often the effects come around over time. For now, the practical problem of those divergences seems the good have been too good – they’re stretched. The rest have been the rest, though the improvement in Software, including Microsoft (MSFT – 419) and in whatever IBM (253) is these days, is encouraging. While peace no longer seems at hand, the market has learned to deal with it as should the rest of us. Thursday’s turnaround was impressive, especially in the A/Ds and perhaps all the more doing so without Nvidia. It has become a market of stocks, even more than just the cliché. This suggests a trading range of sorts rather than a trend. Hey, it’s summer!

Frank D. Gretz

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Stocks stumbled in the first quarter of 2026 as the debate shifted from the effects of tariffs on the U.S. and world economies to one of war with Iran. In short order the S&P 500 declined nearly 20% and finished with a 4.3% quarterly loss. We should remember that at the start of the year the U.S. economy and global markets were looking at good economic growth and the prospect of falling interest rates while the market rally of three years was broadening. War, higher oil prices, and a Federal Reserve that has been reluctant to lower interest rates have put this outlook on hold.

While there has been a pessimistic shift in sentiment from where we were when 2026 started, both a bullish and bearish outcome deserve consideration. The bearish case primarily rests on the doubling of oil prices in less than two months and the crippling effect it can have on the world’s economy. Any sustained closure of the Strait of Hormuz—through which 20% of the world’s energy travels—will continue to elevate the price of oil, natural gas, and fertilizer, as well as global shipping costs. This in turn will affect consumer sentiment and spending, and corporate profit margins. The bears will also point to a rise in interest rates which, in part, has been caused by the deterioration in private credit with large sums of investor assets trapped in vehicles of uncertain quality and limited liquidity.

Underlying the bullish argument is that a lot of bad news is already in the market and discounted. Historically, higher oil shocks have ended the business cycle when earnings were decelerating, and that is not the case today. Data would suggest that GDP growth was running at approximately 4.5% in January while EPS growth was 14% year-over-year and accelerating. The bull case also relies heavily on the AI infrastructure buildout which shows  no evidence of softening and may also be accelerating while consumers continue to spend.

In the short term, with Hormuz constraints easing, whether through diplomacy or something else, the markets could be underpricing a fairly significant snapback.

April 2026

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2025 was the third consecutive year of double-digit gains for the S&P 500, the Dow Jones Industrial Average and the NASDAQ Composite.  Importantly, the bull market in equities was not confined to the U.S., with most major international markets participating with handsome gains. We think 2026 could be another positive year for investors, but with the possibility of one or two intermediate corrections along the way.

Our enthusiasm for 2026 primarily stems from actions taken in 2025 as the U.S. rotates from the austerity of tariffs to the stimulative effect of fiscal and monetary policy. Included are $150B in additional tax refunds in early 2026, $200B in tax cuts for factories, cap goods and R&D, additional Federal Reserve rate cuts, expansion of the Fed balance sheet, foreign investment, and the potential for significant financial deregulation.  Deregulation itself could drive down bond yields and mortgage rates, which would jumpstart the moribund housing market. Inflation continues to ebb, allowing consumers to benefit from easing prices. Our biggest concern remains employment. A tax refund does little to help someone without a job, but with the Federal Reserve pivoting, credit channels for small businesses should reopen and contribute to increasing employment.

Rarely has so much economic stimulus stood ready to influence an economic cycle, a fact that has not been lost on those who forecast economic activities and corporate profits. Consensus forecasts call for U.S. GDP growth of 3.5% in 2026 and a 15% increase in S&P 500 earnings. Both are above long term trends while inflation is falling.

The flip side of this rosy scenario is that there are many more unknowns and the world is increasingly becoming a more dangerous place with military conflicts and domestic violence spreading. Voters do not like this, and we would not be surprised to see a split Congress by the end of this year, one factor which may lead to a pullback in the market this year. In the final analysis, however, it is the direction of corporate profits and interest rates that determine the level of equity prices, which leads us to expect another positive year.

January 2026

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The third quarter of 2025 was another good period for the equity markets with the S&P 500 gaining 11.2%. Breadth also expanded with smaller companies, represented by the Russell 2000 Index, finally participating. The standouts were  the semiconductor companies, as most of the hyper-scalers announced major investment plans for AI data centers. Even healthcare, and particularly bio-techs, appear to have turned a corner.

As we go to print, it would appear that the U.S. Congress will not be able to pass a continuing resolution bill to keep the government open. Normally, government shutdowns create all sorts of gyrations in both the stock and bond markets, primarily due to the government reaching its debt limit and being unable to fund its obligations. Fortunately, the passage of the “One Big Beautiful Bill” in July of this year increased the debt ceiling by some $5 trillion, which will allow the government to pay all its mandatory obligations and continue issuing debt.

At their September meeting the Federal Reserve Board lowered its federal funds rate by 25 basis points, continuing a pattern of lower rates, which had been suspended for twelve months. The primary reason noted was a deterioration in the labor markets. We expect at least one further cut this year and further cuts in 2026.

While there are still many unknowns, one of the hallmarks of 2025 has been the steady increase in corporate profits. Current estimates are for S&P 500 earnings to increase about 8% in 2025 and 9% in 2026, and even these estimates may be low. We like the fact that corporate earnings are going up while interest rates are going down, and credit conditions are mostly benign. Provisions in the 2025 tax bill should help spending broaden in 2026 with tax refunds starting in February and full depreciation of corporate investments a major plus for corporate cash flow. Deregulation will also help. Some have referred to the recent advance in the equity markets as a bubble, but bubbles of the past are usually “popped” by a Fed tightening cycle and investor preference for staples. This is not the case today.

                                                                                                                                    October 2025

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Stocks continued their roller coaster ride in the second quarter of 2025. Having reached a high on February 19^th, they declined to a low on April 8^th. This was a 19% decline and slightly exceeded 20% on an intra-day basis. The primary reason for the April decline was the introduction of President Trump’s tariff policy, which at its onset seemed punitive and recessionary. As visibility on U. S. policy improved, however, stocks recovered with the S&P 500 closing at a new high, in part anticipating the passage of the One Big Beautiful Bill, which was signed into law on July 4^th.

Provisions in the bill allowing for full expensing of capital investments in the U.S. coupled with tariffs are a powerful incentive for CEOs to invest in plants and equipment. Mega cap tech companies had already been investing hundreds of billions of dollars in an Artificial Intelligence  arms race. This spending means strong sales for companies across diverse industries from semiconductors to data centers to utilities, their equipment suppliers and beyond. Further clarity on the final level of tariffs should increase capital investment intentions from here.

Stagflation concerns morphed into soft landing optimism. Inflation has not accelerated as feared, as companies have chosen to absorb some tariff impact in their margins rather than increasing prices.

While there is evidence of some softening in the labor market, the unemployment rate remains low at 4.1% and is not signaling recession. Jobs continue to support spending. Some durable goods purchases were likely pulled forward ahead of tariffs. Though that may have altered the basket of goods consumers buy, aggregate retail sales continue to increase, growing 2.8% from year-ago levels in May.

Risks for the second half of the year start with current market valuation. The aforementioned  positive developments are not lost on the market with the S&P 500 trading at a historically expensive 24 times earnings, making the market vulnerable to a corrective pullback. The sluggish housing market is a risk to employment and household balance sheets. High mortgage rates are dampening activity and moderating home sale prices. Potential policy changes reducing the independence of the Federal Reserve could frighten the bond market, sending long-term rates higher if investors fear a future Fed Chair would trade short term monetary largesse for long term discipline on the inflation front.

As we enter the third quarter, generally considered the weakest part of the year, both the corporate and consumer sectors have proven resilient in the challenging evolution of U.S. policies. Corporate earnings are still growing, and this earnings growth supports a continuation of the current bull market, even if the robust recovery from April lows requires a digestive period.

July 2025

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After an initial burst of optimism at the turn of the year, stocks and bonds started to weaken as Inauguration Day took place. Right after the election, the Small Business Index surged as business owners thought tax cuts and deregulation were coming their way, but this quickly reversed as the quarter ended and “Liberation Day” revealed the largest tariff increases the country has ever seen.

By their very nature, tariffs are inflationary and must be offset to maintain economic stability. Adding to the problem is the way the current administration is applying them with an on-again, off-again approach which leaves little confidence for business planners who must think years into the future. As of this writing, excluding those levied on China, all tariffs have been suspended or are under negotiation except for a 10% universal tariff, still a massive increase. 

In 2017 the first Trump administration signed into law The Tax Cuts and Jobs Act (TCJA) which lowered marginal tax rates, capped the Alternative Minimum Tax (AMT), doubled the standard deductions and child tax credit, created a new deduction for small businesses, and raised the estate tax exemption. At the same time, the bill capped the state and local tax deduction, the mortgage deduction, and personal exemptions. All these provisions revert to pre-TCJA levels should Congress not act to extend or make them permanent by the end of this year. The cost to consumers alone would be about $400 billion over a ten-year period.

With so much uncertainty, equity markets have sold off sharply. From a technical perspective we have seen negative sentiment extremes, indiscriminate selling, and capitulating price action. It is quite possible that we have reached the market lows but we do not think that a sustainable rally is possible at this point and that, instead, a trading range is more probable. First, we must have clarity with regards to a sensible tariff policy. Second, we must have tax relief, rather than a tax increase to offset the effects of the tariff increases. Finally, we must have some cooperation from the Federal Reserve, which has so far maintained a restrictive policy. 

                                                                                                                                      April 2025

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The S&P 500 returned 2.4% for the fourth quarter of 2024 and over 20% for the year. Once again, most of the outperformance was in a handful of stocks known as the “Magnificent Seven”. On an equally weighted basis, the S&P 500 rose 13%. Unique to the year was the weakness during the last two weeks, or the lack of the “Santa Claus Rally”—primarily caused by an apparent shift in Federal Reserve policy, and a rise in interest rates.

At the Federal Reserve’s December meeting interest rates were lowered by 25 basis points, as expected. However, the statement and accompanying forecast of future rate cuts was anything but dovish. While only several weeks ago forecasters were expecting three or more rate cuts in 2025, the Fed forecast only one, indicating a renewed emphasis on fighting inflation, rather than unemployment. Could the Fed’s policy change be frontrunning the new Administration’s tax and revenue proposals, which are perceived to be more inflationary?

The U.S. economy appears to have grown at a 3% annual rate in 2024—a healthy rate, if sustainable. While stable growth is always welcome, we believe there are several reasons to be cautious about the outlook. Rates on 30-year fixed-rate mortgages are now well-above 7%, causing a sharp falloff of residential construction activity. Manufacturing has been struggling for quite some time and manufacturing capacity utilization has been contracting since 2022. State and local spending, which has lifted GDP growth over the last year is poised to moderate, and the U.S. Dollar exchange rate has surged, making U.S-produced goods less competitive.

It is too early in the year to hold firm convictions about 2025. Most market forecasters believe S&P corporate profits will advance on the order of 12%, yet most economists see a slowing in U.S. GDP growth to around 2%. A lot depends on the passage and ultimate success of the new Administration’s tax and spending policies. High interest rates are not good for the economy or corporate profits, and the growing budget deficit eventually must be addressed. There is great promise, however, in the concepts of reshoring, infrastructure spending, increased domestic production, and artificial intelligence applications. We expect 2025 will be a positive year for investors, but with more volatility than the one just ended. 

January 2025

                                                                                                                                  

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The third quarter of 2024 may well be remembered for the dramatic shift in Federal Reserve policy. With a fifty basis-point interest rate cut, Chairman Powell made it quite clear that rising unemployment was more worrisome than inflation, which was gradually falling towards the Federal Reserve’s 2% goal. In addition, most market observers now believe that there will be two more policy cuts this year and several more in 2025. After an initial hesitation, the markets have responded positively to this change, in spite of significant risks such as the escalating war in the Middle East, a structurally imbalanced Chinese economy, and uncertainty around the U.S. presidential and congressional elections. We attribute this apparent contradiction to the wave of liquidity from elevated fiscal stimulus measures and central bank easing both here and abroad.

To say market forecasts have been subject to change is an understatement. Since the Fed’s policy change, past economic data has been revised to show significantly more robust growth than previously estimated, and the latest jobs numbers blew past economists’ projections. Rather than falling, the September numbers showed that non-farm payroll increased by 254,000—more than 100,000 above the consensus among economists—and the prior two months tally was increased by 72,000. As such, the unemployment rate, which was expected to rise, fell to 4.1% in September from the prior month’s 4.2%. These types of numbers make one want to question the perceived scenario of steadily falling interest rates through 2024 and 2025.

Despite evidence that low-wage earners in the U.S. are having a difficult time, overall consumer spending and confidence have held up remarkably well. In addition, the world economy may be getting a welcome shot in the arm from a just-announced massive stimulus program in China. While few details have been announced, it would appear to target not only China’s faltering housing market but also consumers themselves. 

With the popular equity indexes recently hitting record highs, earnings and earnings guidance become more important. Consensus numbers are for the S&P 500 earnings to rise 8% this year and 14% in 2025. While we believe a “soft landing” is possible this year, we also think 2025 earnings estimates are quite aggressive, and may leave the markets subject to a pullback early next year.                                   

October 2024

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While the major averages again performed well during the second quarter, breadth continued to narrow. In early June the number of stocks outperforming the S&P was at its lowest level since 1980. We believe this type of market action cannot continue, and is usually resolved by some sort of correction or at least consolidation in the current market leaders.

The Federal Reserve’s interest rate hikes have now begun to slow the economy. On July 5^th it was reported that the unemployment rate had climbed three months in a row to a fresh high of 4.1%. The last time the unemployment rate rose for three consecutive months was in 2016, when the Fed backed off from interest rate hikes. Payroll growth has slowed with the three-month moving average of nonfarm payrolls at 177,000—the slowest in over two years. The risks are in one direction, and the Fed ought to lean against those risks. It is questionable, given recent rhetoric, that the Fed will cut in July, but it can use the July meeting to strongly signal a cut is coming in September. We believe any further delay risks losing the Fed’s hoped-for “soft landing”.

While Federal Reserve policy and the direction of interest rates are paramount in our thinking, there are many reasons to believe this is still a decent environment for stock returns. Economic growth may slow in the coming quarters, but we are not looking for an economic contraction, and although the unemployment rate has ticked up, there are still 161.2 million people working in our country, close to the record amount of 161.8 million attained last November. There is also ample liquidity in the system with money market funds reporting a record $6.4 trillion in early June. Nor are we seeing any signs of stress in the banking system, with credit spreads acting well and the stock prices of most major banks near all-time highs. In addition, analysts are still projecting S&P 500 earnings growth of 9-to-10% this year and next.

We are at that time of year when some weakening can be expected in the popular averages, and recent winners in particular. But stocks have finished positively in every election year since 1944, with average returns of 16%. With the long-term drivers of stock returns, earnings and interest rates going in the right direction, we expect that any pullbacks will likely be a contraction in an ongoing bull market.

 July 2024

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