Corporate Profits Fueling Equity Gains
In the absence of government data, investors are left to rely on earnings reports and narratives to provide fuel to what is setting up to be a very strong year for equity returns. Last week equities added to their strong year-to-date gains with the Dow gaining +2.2%, the S&P 500 rising +1.9%, the Nasdaq jumping +2.3%, and the Russell 2000 lifting by +2.5%. The S&P 500 broke out of a multi-week period of consolidation on Friday when it closed at a new all-time high. The technicals suggest this now opens the door for it to push up to the 7,000 level before year-end. Hard for me to argue against this view, as the gains to date have already eclipsed my expectations. Think about the wall of worry equities have overcome through the last six months: navigate an epic and disjointed surge in tariffs (up to an 18% effective rate at this point), weakening employment with a negative monthly print, gold breaking above $4,000/oz (historically viewed as a risk off asset), consumer sentiment readings in the bottom 1% share of all-time, U.S. involvement in several regional geopolitical conflicts, and a government shutdown that is setting up to be the longest on record.
That’s a healthy dose of headwinds for equity bulls to overcome, but they have, and that isn’t to say there hasn’t been a solid list of constructive tailwinds propelling it forward. For starters, we have oil prices and interest rates near 1-year lows. Not to mention the average price of a gallon of gas across the nation is sitting at its lowest since 2021. Without question, this helps some households offset the pinch they are experiencing from inflationary forces in other areas.
Add to this a favorable liquidity impulse from around the globe, where the U.S. dollar is down 5% on the year and global central banks have implemented as many interest rate cuts as was the case 24 months after the Lehman bankruptcy in 2008 (see the chart below from BofA Merrill Lynch). Recall that U.S. nominal GDP experienced a peak-to-trough decline of -2.5% back then, versus U.S. nominal GDP up +11% over the past 24 months. No wonder investors around the globe are positioned for debasement, economic booms, and bubbles in some niche areas.
Over the weekend, Treasury Secretary Bessent was on Meet the Press and Face the Nation, providing some soothing comments on a framework for a U.S.–China trade deal while adding that the threatened 100% tariffs from President Trump are now off the table. Correspondingly, China seems to be delaying its sweeping export controls on critical minerals. In a nutshell, it looks as though recent talks among senior officials on both sides have set the table for Trump and Xi to finalize a deal when they meet later this week. Sure, we all can question the details and fine print of a deal when/if it is agreed to, but as it relates to markets, a détente on the trade file between the two largest economies in the world is much more important than the individual ingredients.
Arguably, Q3 earnings results are what really have equity markets on solid footing even at what are historically rich valuations. Coming into today we’ve had 145 S&P 500 companies representing 30% of the index having reported results where earnings are coming in +8% ahead of consensus estimates. When you factor in what is expected for the rest of Q3 results (Mega Cap Tech highlights this weeks reports) it looks like year-over-year EPS growth will come in around +11-13% when all is said and done. Below is a table from FactSet breaking down bottom-up EPS results and estimates for the broad U.S. indices across market cap segments. What stands out is the robust expectations from the mid-cap and small-cap space looking out into 2026 – time will tell if they can deliver.
As I stated previously, in the absence of economic data, earnings have definitely stepped up to validate equities trading at current levels. Without question, I think valuations are stretched with the S&P 500 trading at a forward P/E multiple of 23x and 28x trailing earnings, but in an equity market that has undergone a structural regime change due to passive flows, regulatory capture, and hyper-financialization – mean reversion in valuations is an ineffective metric to build an investment strategy upon. Will stretched valuations matter at some point? I think so. When, I don’t know, but my guess is when the labor market rolls over in a more dramatic fashion and when retirees living off their nest eggs start to sell in larger quantities to fund their expenses in retirement. We’re not there yet on the latter, but the math suggests this point is drawing closer.
The challenge for investors constrained by a finite timeline where they actually need to monetize their portfolio’s is that over the past 24 months equity prices in the S&P 500 are running at close to double the trend in corporate profits. The news may well be good on the business front, aided and abetted by the wave of AI and related spending, but at some point, the issue has to be addressed as to when perhaps too much good news has been more than fully discounted.
Add to the constructive profit backdrop the fact that Fed fund futures are now pricing in a 97% chance of another rate cut at this week's Fed meeting, and 90% odds of another cut on December 10th, and you have yourself a yummy cocktail for a continuation of the upside momentum into year-end. For those in the bubble camp, Paul Tudor Jones, Dan Niles, several talking heads on CNBC advocating that investors should embrace it rather than fight – I say, be careful for what you wish for. Not to say I disagree, but I prefer to embrace it with a smaller exposure going forward rather than giving investors the impression that they should be doing so with both hands.
One area that continues to fly under the radar this year is how well overseas markets have performed where the MSCI All Country World ex. U.S. index is up +26% ytd vs. a +15% gain for the S&P 500. Digging into some of the individual markets I see Korea’s Kospi up +64% ytd, China is up +37% (MCHI), Japan’s Nikkei +25%, the German Dax +22%, and even the politically troubled and fiscally challenged U.K FTSE 100 is up +19% in 2026. All of these regions trade at a cheaper valuation relative to the U.S., most of them for good reason, but many will benefit from the ongoing reset of the Global World Order, broadening nationalism, and redrawing of global allegiances.
Let me touch on a gold for a moment. It is finally cooling off after the scorching run it has been on since the start of September. Over the past week, gold has declined nearly 10% since clipping the $4,400/oz level on October 20th. For those who have little or no exposure to the yellow metal this may set up to be a good entry point to gain or increase your exposure especially if it were to slipe below $3,800/oz or even dip back down to the $3,500/oz level that it broke out from in late-August. Keep in mind, this structural bull market began in 2018, after Trump 1.0 decided to push forward with pro-cyclical tax cuts for an economy that was already operating at full employment and in not need of additional stimulus. This marked the beginning of the transition from monetary dominance to fiscal dominance, with gold trading around $1,200/oz in the Fall of 2018. Since then the general direction of gold has been up and to the right but along the way, there were numerous pullbacks of size: -13% in 2018; -12% in 2020; -20% in 2022; and -10% in 2023.
For those thinking this structural bull market started at the turn of the century, the gains and corrections have been even more plentiful. From the 1999 lows to today’s highs, the gold price has soared by nearly sixteen-fold. But there were no fewer than ten significant corrections along the way. Like everything else in the realm of financial markets, nothing moves in a straight line. We have not seen a pullback in gold of any significance since the spring of 2023, so I sense we are overdue because when it comes to gold, we do tend to see one every two-to-three years on average. We remain long-term bullish but are wary over the near-term outlook because any chart that looks like a dotcom stock circa 1999, makes us a tad circumspect.
Keep in mind that what touched off the bull market at the start of this century was not Quantitative Easing, the Putin invasion of Ukraine and subsequent White House freeze of Russian dollar reserve assets, or the Trump tariffs – all of these just added to its allure from an investment perspective. It was the 1999 Washington Agreement that got this structural bull market underway, as it ended the global wave of central bank gold dumping. However, the current secular bull phase must be assessed with the lens of the two-decade bear market that preceded it, when there was a coordinated effort by the world’s monetary authorities to deliberately shift their reserve base towards paper and away from bullion.
As it now stands, 24% of global FX reserves are in gold (as of June 2025), closing in on the 30% long-run mean and well below the 70% share at the bubble peak in 1980. So, we are not one bit bearish beyond the most recent parabolic leg-up. Also keep in mind, and a tip of the hat there to the Goldman Sachs research team, only 6% of global investable assets are concentrated in gold, and while that is up from 4% two years ago, it is still far from the 22% peak posted back in 1980 as well. The ratio of gold to the S&P 500 is -0.5 of a standard deviation below the long-run average… so I dispute the notion that gold is in a bubble.
We have a big week ahead of us, and the data is sure to be market-moving, starting with the conclusion of the two-day Fed meeting on Wednesday. A 25bps cut is already a forgone conclusion, which makes the forward guidance and any color Chair Powell provides during his press conference the focus of investors' attention. The swaps market is priced for another 100 basis points of cuts for the rest of 2025 and 2026 which would bring the fed funds rate close to what many economists estimate is the neutral rate – 3.0%. Then on Thursday we have the scheduled meeting between Presidents Trump and Xi at the Asia Pacific Economic Cooperation Summit in South Korea where anything short of a deal (or something getting us to that conclusion) will be a disappointment for markets
On top of that we have a gauntlet of crucial earnings reports (more than 170 companies will be reporting) highlighted by Visa, Catepillar, Microsoft, Meta, Google, Eli Lilly, Amazon, Apple, Chevron, Exxon, and Boeing. The key here will be what the hyperscalers indicate about future capex investment in the race to win the AI arms race.
I’m going to end this week’s missive with some thoughts on the impact reshoring, reindustrializing American manufacturing, electrification, and AI capex spending are having on energy markets. Let me start with an excerpt from the EQT earnings call, where EQT is the largest U.S. natural gas producer. Natural gas is an area of the energy market that we’ve recently become constructive on over the next several years and see it as one of the beneficiaries of the power requirements needed to serve the interests of the massive investment themes referenced above.
I know everyone has cast aside oil and gas as energy sources while focusing on nuclear, solar, and wind as the power sources of the future. I agree with the idea that the world is pursuing environmentally friendly power sources. Still, I think a lot of investors have overlooked just how far away the global power grid is from being able to substitute away from tried and true energy sources like oil and gas. Take the global electricity grid as a subset of overall energy demand, where coal and natural gas account for over 56% of the world’s electricity. Hydropower (14.3%) is the single largest low-carbon electricity source, followed by nuclear (9%). Wind (8%) and solar (7%) are the fastest growing, but remain a long way off from displacing coal and gas.
Suppose we are talking about total energy demand (not just the electrical grid). In that case, the IEA estimates that oil’s share of total energy demand is around 31-34% - far and away the largest source of primary energy supply, followed by coal (27%), natural gas (23%), and low-carbon sources (15% - nuclear and renewables). Yet the energy sector, which is largely concentrated in a couple of large integrated oil companies, makes up less than 3% of the S&P 500 at the moment, and this is well below the historical average, closer to 12%.
I’m of the opinion that U.S. investors have ignored the physical infrastructure and physical world for 30 years in favor of ‘asset light’ models and service industries because the ROIC’s (return on invested capital) were higher, more stable, and therefore could easily be levered up. Add to this thought a global trade war between the two largest economies in the world, where the U.S. is recognizing fragilities and vulnerabilities in its system after having largely outsourced key industries like manufacturing, pharmaceuticals, mineral extraction, and refining capabilities… While acknowledging such a transition is underway, I still think investors are underestimating the realities involved with reshoring, as was pointed out by Luke Gromen in his latest missive over the weekend:
This is not simply about “having the will”…it is about having the will and having the turbines (said to be a 3-year lead time)…and having the regulatory approvals (said to be a 4-5 year lead time)…and having the engineers and welders (should we take them off the AI projects they’re working on now to build the grid, factories, and/or REE refiners, or should we leave them on AI?)…AI which is running out of power without sufficient grid already.
Many US investors and policymakers are investing like a particular class of people who believe that water comes from a faucet, food from the grocery store, and electricity from the wall socket. Sure, for them it does, but perhaps it's time (as investors) to start thinking about where these things come from before they reach their end use. Additionally, what is the intrinsic value of that end product if it's no longer in our national interest to source it from the world’s low-cost provider? If U.S. policy is really going to pursue reindustrializing key industries in the interest of not being reliant on countries that may not be reliable when we need said outsourced input, then it's incumbent upon investors to recognize the investment implications. Which, in my estimation, implies higher inflation, higher volatility, policy incentives favoring needs over luxuries, and a prolonged period of financial repression. In such a world, the energy sector will constitute a much higher proportion of the U.S. equity market than 3.0%.
Ayn Rand once said “You can ignore reality, but you cannot ignore the consequences of ignoring reality.” While I remain neither concerned nor overly excited about the U.S. equity market as it likely makes a push up to 7,000, I think those investors with a time horizon that extends beyond days, weeks, and months to quarters and years would be well served to continue to look at investments/countries/industries/companies that have pricing power and are tied to real assets. Not that big cap tech doesn’t check a lot of those boxes which is helpful for major U.S. indices. Still, a portfolio that continues to favor real assets over financial assets, prudence over greed, and flexibility over conviction is more likely to be a successful formula in the years to come versus YOLOing (You Only Live Once) on that latest Meme or SPAC.
I will not be penning a missive next week as I’ll be on the road visiting clients. I look forward to your thoughts and feedback on my latest mind dump upon my return.
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