New Address as of 10/4/24 — 60 Broad Street, 39th Floor, New York, NY 10004
We can understand why many forecasters are warning of a bear market ahead. The Iran conflict appears far from over and Yemen’s Iran-aligned Houthis are blocking the Red Sea. WTI crude oil futures are trading back toward $85 a barrel which suggests inflation may not be under control. Goldman Sachs is warning that crude oil could climb above $120 a barrel in the fourth quarter if shipping disruptions continue. (Déjà vu?) And if crude oil prices spike, interest rates could rise, which would hurt an already weak consumer and housing market. Many technology leaders, including SpaceX (SPCX – $123.54) and Oracle Corp. (ORCL – $127.05), have had substantial debt offerings to underwrite large AI-related capital expenditures expected over the next twelve months. SPCX carries a BBB investment grade rating, but recent bond spreads of 1.62 points exceed even the BB junk average of 1.55. Oracle debt was just downgraded by S&P Global Ratings to BBB–, just one notch above speculative grade, or junk. These credit warnings make both bond and equity investors nervous since the bond market is often a predictor of equity market woes. Not surprisingly, the massive data-center spending initiated by many AI companies is coming under scrutiny as investors wonder when, or if, this spending will reap rewards. In short, there are plenty of risks for investors to worry about.
If a Bear Market is a 20% Correction…
However, in our opinion, the bear market forecasted by many is already in progress. A recent article in Seeking Alpha (“30 for 30: Meet the 30 S&P 500 stocks that are down over 30% in 2026” July 15, 2026) noted that of the 500 stocks in the S&P index, 182 are in negative territory for the year, and 30 companies have declined more than 30% as of mid-July. The list includes stocks like Intuit Inc. (INTU – $289.92), Accenture PLC (ACN- $140.86), Adobe Inc. (ADBE – $227.16), Salesforce Inc. (CRM – $170.06), Oracle, Nike Inc. (NKE – $42.96), ServiceNow Inc. (NOW – $102.06), and Abbott Laboratories (ABT – $99.67).
However, this article is year-to-date performance, and it does not cover all the big declines seen this year. International Business Machine (IBM – $210.50) is currently down 36% from its recent peak. And many other stocks have had peak-to-trough declines of 25% or more this year. This list would include Tesla Inc. (TSLA – $378.93), Netflix Inc. (NFLX – $68.67), Meta Platforms Inc. (META – $643.81), and Micron Technology Inc. (MU – $970.82). Even Alphabet Inc. (GOOGL – $347.15) has had a 16% correction this year and the bellwether Nvidia Corp. (NVDA – $207.29) weathered an 18% peak-to-trough decline in 2026.
Although the broad market is overdue for a correction of 10% or more — and one may appear at the end of this consolidation phase – beneath the surface there has clearly been a rolling bear market. And there has been a simultaneous rotation in leadership. Over the last 20 trading sessions the best-performing areas of the market have been iShares Russell 1000 Growth ETF (IWF – $121.33), iShares Nasdaq Biotechnology ETF (IBB – $189.31), Energy Select Sector SPDR (XLE – $58.50), Health Care Select SPDR (XLV – $160.25), and SPDR S&P Bank ETF (KBE – $69.55). The worst performers have been the previous high flyers like iShares MSCI South Korea Capped ETF (EWY – $172.90) and SPDR S&P Semiconductor ETF (XSD – $528.66). See page 12 for details. Rotation of leadership is what keeps a bull market healthy and alive. In sum, we remain a buyer on weakness.
Valuing Equities
The main reason for our long-term bullish view is earnings growth and valuation. Second quarter earnings season is being scrutinized, which is good, but to date, the results have been excellent. The S&P 500 is currently trading at 22.8 times the IBES 2026 earnings estimate and 18.4 times the 2027 estimate. Neither of these price-to-earnings multiples are high given the fact that trailing earnings growth is currently 22.6% and forward earnings growth is projected to be 22.5%. Compare these PE multiples and growth rates to the long-term average PE multiple of 17.4 times and the long-term average earnings growth rate of 8.1%. One might almost call this stock market “cheap.” See pages 7 and 8.
Economic News
Retail sales for June were reported to have increased 0.2% in the month, down from the 1.0% monthly increase seen in May; however, this was misleading in terms of the strength of June sales. The seasonally adjusted total sales of retail and food service establishments increased 6.3% YOY which was the largest increase seen since the 8.1% increase in October 2022. Retail sales excluding autos increased 6.6% YOY. However, without seasonal adjustments, total retail sales increased an impressive 8.4% YOY, the best since September 2022, and retail sales excluding autos also rose 8.4% YOY. More importantly, retail sales excluding autos and gasoline station sales increased 7.2% YOY. In all categories retail sales exceeded inflation in nominal terms, which is how retail merchants measure performance. In sum, the consumer appears to be healthy! See page 3.
June PPI data showed inflation decelerating with the PPI finished goods index at 6.7% YOY, down from 8.8% YOY in May. Much of this decline is a result of the decline in the price of crude oil, which closed at $106.88 a barrel at the end of April and is currently at roughly $85 a barrel. WTI futures had year-over-year gains of 84%, 43%, 6.7%, and 19% at the end of the months of April, May, June, and July (to date) this year, respectively. In our view, a WTI oil price of $80 or less would be favorable for future inflation data and for the equity market. Fingers crossed. See page 4.
Housing, on the other hand, continues to be weak. The pending home sales index declined to 72.5 in June from 76.6 in May. This was the lowest reading since January 2026 and represented a decline of 0.3% YOY. The NAHB/Wells Fargo Housing Market Index declined in the month of July to 34 from 36 reported in June. All components of the index contracted and while all components remain above their 2025 lows, they were back to levels reported in April. See page 5.
Residential housing starts for June increased 3.5% YOY but this gain was entirely in multi-family housing. Single-family housing starts fell 3.2% YOY. New housing permits were 2.3% lower than a year ago and single-family housing permits were slightly better, but still marginally lower on a year-over-year basis. Total existing home sales rose 2.8% YOY in June, to 4.09 million units (annualized rate). Existing home inventory was 1.56 million units in June, up 6% YOY. Months of supply of single-family homes increased from 4.3 months to 4.6 months, which was the highest level seen since July 2016. See page 6.
One could add the weakness in the housing market as another economic risk, particularly if interest rates rise. However, housing prices have been out of reach for many young potential buyers, and this slump may be a good thing for that consumer.
Gail Dudack
PLEASE NOTE: Unless otherwise stated, the firm and any affiliated person or entity 1) either does not own any, or owns less than 1%, of the outstanding shares of any public company mentioned, 2) does not receive, and has not within the past 12 months received, investment banking compensation or other compensation from any public company mentioned, and 3) does not expect within the next three months to receive investment banking compensation or other compensation from any public company mentioned. The firm does not currently make markets in any public securities.
Back to Insights