Hello, and welcome to Truist Wealth's third quarter webcast, On Deck, AI, the Economy, interest rates, and the market's next test. I'm Sabrina Bowens Richards, head of the investment advisory group's client and adviser engagement, and we're glad you could join us.

As we've reached the midpoint of twenty twenty six, one word stands out, and that's resilience.

The first half of the year delivered no shortage of challenges.

Investors navigated geopolitical tensions in the Middle East, a sharp spike and subsequent reversal in oil prices, shifting expectations for interest rates, and continued debate around inflation and economic growth.

Yet, through it all, the economy continued to expand, corporate earnings surprised to the upside, and market moves markets moved higher with broad based gains led by small caps and emerging markets.

What these developments remind us is that headlines rarely tell the full story.

When we step back and follow the weight of the evidence, the core themes that guided our outlook entering the year remain largely intact. Economic growth continues near the low two percent range, Earnings remain the primary driver of equities, and higher yields have improved opportunities for fixed income investors.

Today, we'll discuss these themes and what our clients should be watching as we move into the second half of the year.

Joining me for a deeper discussion are Keith Lerner, chief investment officer and chief market strategist Mike Scordellis, Head of US Economics. And Chip Huey, Managing Director of Fixed Income.

So Keith, I'll start with you. You know, the first half really challenged conventional wisdom and you covered some of this in our latest Market Navigator. Let's just spend a few minutes on some of the biggest surprises that we saw in the first half.

Sure. And great to be with everyone during the summer months. It's it's been an interesting year to say the least. And, you know, as a strategist who's been doing this for a long time, you know, it's one of the years that if you had the headlines ahead of time, it may have not helped you out. Meaning if you think about some of things you already touched on, the the war, which wasn't on anyone's bingo card coming into the year, there was concerns about AI displacement, private capital. Markets have held in there remarkably well. And as I think about these different dichotomies, one that really stands out to me is that the magnificent seven, like these big large cap AI names, were actually down for the year.

Despite that, the S and P five hundred had strong gains, and the technology sector was still up almost twenty percent. So think about that. These large seven names which account for almost a third of the overall market was down, but the rest of the market actually held in pretty well. And then we say, so what caused that dichotomy?

And there's a couple things. One, we actually saw a broader market. We had nine of the eleven secondtors up, and then semiconductors ripped. They were up eighty percent for the quarter.

So all in all, that's how you had this contingent of the of the market down, but the rest of the market actually held in there really well.

And one of the second surprises that we saw was oil. Right? So oil surged towards, what, dollars one hundred and twenty and then round trip back into the '70s. Mike, I'll turn to you. So what really drove that?

Yeah. So we actually were a unique situation. Usually you get one side, a demand problem or a supply problem. In this case, there was a demand and supply problem.

But both of them sort of resolved themselves over the course of these couple of months. So in the case of the demand side, one of the biggest things was China using a whole lot less oil than they had previously. And on the supply side, there was rerouting of oil around the Strait of Hormuz using pipelines, but also OPEC, Canada, the United States, among others, increasing supply dramatically. And then you had strategic petroleum reserves being released, not just by the US, but by most of the major countries around the world.

So that helped offset things and helped kind of put oil markets back into balance a little bit. Unfortunately, with the ceasefire kind of unraveling here in the last week or two, we've seen oil prices bounce back up. But we're still well below the lows, and we're kind of brushing against eighty dollars here today.

Well below the highs.

Well below the highs, yes, sorry.

And just to carry through on that conversation, I'll turn to you Chip. Typically, we see geopolitical tensions rise, as Mike just discussed, gold prices usually rise, but we actually saw them fall Right. The first part of this year. Can you talk a little bit about what happened there?

Yeah. I think it's helpful to start with a little bit of context first. Right? Gold entered the year very extended. It was up about a hundred and sixty five percent from the start of twenty twenty four through, you know, to call it through mid to late January of this year. So that's a little bit of kind of where we had come from. Since then, what we have seen is interest rates rise somewhat sharply since the the, you know, the end of January or so.

And also the US dollar has has strengthened. So what's happened is that's actually attracted new investment into those areas and that's outweighed that traditional safe haven relationship that investors typically associate between rising geopolitical tensions and higher gold prices.

So certainly lots of moving headlines as we saw in the first half. Keith, I want to switch to you quickly and talk a little bit about our views. So what what's our expectations relative to what we thought coming into the year?

Yeah. Well, I think, you know, big picture is our key themes. They're largely intact. Some of the undercurrents have switched a bit, but we had three main themes coming into the year which you which you kinda touched on.

One was on the economy. We expected, you know, growth in the low two percent range. So Mike will dig more into that, but that's still largely intact. And some of the reasons for that as far as steady employment, tax incentives, and it's really this AI boom that I still feel is somewhat underappreciated from an economic standpoint is still intact.

For the equity market, we've been using this same line for a bit that the bull market deserves the benefit of the doubt. You know, maybe maybe like feels very repetitive, but that is still I think the case today. You know, behind that has been our thesis that earnings remain the North Star, which it has. The AI and tech theme is still the dominant theme as well, so that's still intact, even though we do expect somewhat of a bumpier path than what we what we saw, you know, more recently.

And then on the fixed income side, we we discussed a lot and Chip discussed a lot that as we saw yields reset higher, we thought that the backdrop was improving for fixed income investors. And now since the beginning of the year, have seen those rates drift even a bit higher. And from our standpoint, the risk reward has actually improved. So again, Chip's gonna dig a lot more into that as well.

So our core themes haven't changed despite all the twists and turns we saw this year.

Why do you think the markets are still so resilient right now?

Well, if I had to bring it down to three main things, it's profits, profits, and profits. I really think that's the main story. I'll just give you a quick stat. In the first quarter, analysts expected earnings for the S and P five hundred to be about thirteen percent.

They came in about double that. I mean, so that that is the key. That's the North Star as well. And another point I'll just bring up is that, you know, even though we had this shock on the oil shock that you just talked to Mike about, well, we had a tariff shock last year, and before that we had a COVID shock, and then we had an inflation shock, and we had a interest rate shock.

And our company's ability to adapt, is just, you know, showing again and again and again. So I would just say the agility and ability of our companies to basically maneuver, and they're better at it now because they've gone through so many many of these shocks. So don't underestimate corporate America's ability to adapt. So based on what I hear, it's resilience, resilience, resilience.

That's that's another way to say that. Yes.

So what would be on your radar for the second half of the year?

Well, I I think profits are gonna still be front and center, but I do think, going back to the bumpier side, I mean, we have the midterm election, which we're gonna see a lot of headlines. We tend to see a little bit more choppiness as we head into that midterm election. We have a new Fed chairman as well. There's an old saying that markets like to test a new Fed chairman. So I think that can cause some more volatility and that will feed into interest rates and also inflation. So those are some of the risks that we're monitoring as well. But again, I think it really comes back to profits and the AI theme as well.

So before we move on, let's talk a little bit about positioning. What's our current house view and and what changes have we made recently?

Yeah. So I would say kind of consistent with our big picture themes. We came into the year with a a tilt towards equities from a global asset allocation perspective that's still in place. We still like the US on a relative basis. We've been talking about that AI and tech theme in large caps, but we also talked coming into this year, we thought there'd be sharp rotations and that we thought small caps would play an important part in that, and small caps have done well as as you noted before.

You know, so and by the way, we did upgrade emerging markets in January of of this year, so we benefited from the, you the nice rise. And then more recently we did downgrade international developed markets, which we'll talk more about, but we're just seeing the earning trends and economic trends somewhat weaker there.

On the fixed income side, we did extend what we call duration or we find more opportunity with some longer term bonds, which Chip will talk about.

We also downgraded gold twice this year. Back in January when Chip mentioned how extended gold had become, in late January near the highs we downgraded gold, and then more recently we downgraded again just because it's not providing that typical portfolio diversification even though we think some of the structural factors are still positive longer term. So that's that's kind of where we stand from a big picture asset allocation perspective.

We do get a lot of questions from clients on sectors. Did you have any any thoughts on that?

Yeah. Just quickly, we've been saying that every bull market has a dominant theme, that AI and tech is a dominant theme. So we've kept a core position in tech where their earnings trends are still the strongest in the market.

Part of building out that once in a generation infrastructure change is the industrial. They also benefit from the build out of AI, but also, you know, resilient economy with transportation stocks and then also defense stocks, especially in this age of geopolitical uncertainty. And lastly, we've kept energy as a bit of a hedge to some of the geopolitical uncertainty that we're seeing, and after, you know, pulling back, it's responded favorably more recently.

So, Keith, that brings me back foundation beneath all of this, which is the economy. So, Mike, I'll turn to you. Coming into the year, we expected about, what, two point three percent growth in the economy with a modest uptick, and then we had the war happen. So tell us where we are. Walk us through the framework of where we are today.

Yeah. So similar to where Keith was going was the overarching narrative is somewhat the same as the growth isn't too much different than last year. But the how we got there, the composition of that growth has changed dramatically. So again, framework as far as how we're trying to think about things, we use this stoplight.

Things like higher interest rates. We thought interest rates were going to go lower. They've remained high. That kind of restricts the overall economy, slows things down.

So something that we weren't expecting. On the other hand, wages growing faster than inflation was a thing for two and a half years. This push in inflation that we got with crude oil prices and gasoline prices made that flip. So inflation growing faster than wages.

We think that that's going to ease as we move through the rest of the year, and that's going to be a boost for consumers as we move forward. But again, as we sit right now, it's still relatively a red light. Kind of moving down that red light, yellow light, green light is consumer sentiment. It's still there's still a lot of frustration out there.

I think there's still some fatigue with consumers, especially at the pump. Although, again, we're getting some relief there. We think that's going to improve as we move better.

It's off of the lows, but it's still pretty beaten up in the grand scheme of things as far as consumer sentiment. But job growth has improved. That's something that's changed. I'll dig a little bit more on that as we move forward.

And then last but certainly not least is that things like tariffs that Keith mentioned that were big headwinds last year are no longer headwinds. And we've actually gotten some benefit there. So tariff refunds coming back to companies, that's been a bit stimulative. And then the other piece certainly is tax incentives.

I'll talk more about that. But tax refunds coming in better than expected has been a big boost. So those are the kind of green light situations that are helping things. Overall, though, again, running roughly in that kind of low 2s, call it two point two percent growth on a year over year basis.

Mike, just a quick comment. I mentioned earlier about I still think from an economic perspective, the AI spending may be underappreciated even though we read about it. I think when we looked at our market navigator, the chart that we have in there is the tech spending relative to economic growth. Like, what is are we at a record at this point?

Or what what is Yeah.

We're at an all time record, and it keeps climbing by by the quarter. So this AI super cycle of investment, it isn't just a twenty twenty six story or certainly a twenty twenty five story. It's a multiyear, perhaps even decade long investment cycle that's really going to continue to boost large parts of the economy, not just tech. So we're seeing that broaden out, right? And as an example, I was driving this past weekend with my mom coming from Ohio down to Atlanta where I live.

Drove best in the middle of nowhere, cornfields in the middle of Ohio, Fayette County, a four point four billion dollars data center that's out in the middle of nowhere. And then right next to that is a multibillion dollar Honda battery plant. So ballpark, I think it's like seven billion or eight billion dollars just in the middle of nowhere that, again, didn't exist years ago that is now a thing, certainly. And it's going to create some jobs, certainly, in the near term. Things like, you mentioned industrial, so you have to build all these projects. That's things that I think are underappreciated in Yeah.

AI and technology, certainly big stories for our clients. Another thing that clients have been asking about, obviously, is the war in Iran, largely because of the impact on oil prices, inflation, and just the broader economy. What's our view there?

Yeah. So this one's a little bit dicier here. In the last week or so, we've seen oil prices bump back up. But they are well off of the highs where they were, again, pushing one hundred and twenty dollars per barrel. But we haven't seen that filter through to gasoline prices. So from a consumer standpoint, again, that's contributing these high oil prices and high gasoline prices contributing to lousy consumer sentiment.

But using the phrase of the, old sayings as gasoline prices kind of go up like a rocket but come down like a feather, it takes a while for that to filter through. We think that as we get to the back half of the year, and gasoline prices are still roughly thirty percent higher than they were, twenty nine percent higher than they were prewar, we think that those lower gasoline prices are really going to help consumers with their budgets and what have you.

And while we're on the topic of consumers, let's pivot to jobs. So we've seen an acceleration in jobs despite all the uncertainty out there. What's really behind that?

Well, again, a number of things kind of came together back half of last year. So we had the tariff uncertainty that was weighing on businesses. You had multiple government shutdowns, right? And then you also had pretty sizable federal job losses because of the DOGE, the Department of Government Efficiency that went through.

And most of those kind of job losses happened, again, late last year, early this year. So we went through this choppy period with some month over month job losses. We've kind of gotten behind that. That uncertainty has faded a little bit.

We're not getting perfect clarity, of course. But as we've seen those tax rebates, among other things, help bolster consumers and hold up overall demand, you've seen companies come back and start hiring again. So this low hire, low fire environment that we were in in twenty twenty five, It's not completely faded, but it is kind of we're moving past that, and we're seeing a company starting to hire again, which is a great sign.

Yeah.

So, Mike, let's turn to an issue that's likely going to get more attention during the second half, and Keith sort of addressed this a little bit earlier. But we've got the midterm elections. Right? And typically, that's been a market risk. Tell us a little bit more about that from an economic perspective.

Yeah. So the quick answer is there's probably not going to be much impact. There will be impact, and there's going to be a lot of headlines kicked around about the midterms and what impact it's going to have. But from an economic standpoint, not much is going to change. That said, you're going to get a lot of headlines. So this past week, the sudden passing of Lindsey Graham, that's an important factor. The dropping out of the Democratic candidate up in Maine, that's a factor.

Three really tight races that are kind of a coin toss at this point in Ohio, Iowa, and Texas. So the balance of the Senate might tip. But from a what does it really mean economically and how much it's going to change, most of the important legislation has already been locked in. So things like those consumer tax cuts, but also the tax incentives that are also contributing to the AI super cycle.

So all this investment that's being encouraged by those tax changes, those things are all locked in. Whether the Senate tips by a couple of votes or the House tips by a couple of votes, they're still very narrow margins. There's kind of a low likelihood that you're going to see major changes as far as legislation in the next couple of years, again, regardless of how the outcome comes through. So again, not much changing from the economic standpoint as a result of what the midterm elections do.

I know Keith, you've done some work on midterm elections and equity markets. What's your view there?

Yeah, we've done a lot of work on elections and midterms, and the punch line that I write every couple years is elections matter, but other factors matter more collectively.

And it certainly can cause some volatility. So the chart that we're looking at looks at the blue line is the current path of the market this year relative to the historical average path toward a midterm election year.

And, you know, again, these things don't always track exactly, but what tends to happen in the summer months into the fall is you have a choppier market, there's some uncertainty that builds out builds up. And as you get closer to the actual election date and people have a better sense of where things stand, the market tends to have a sigh of release relief, I should say, and and a rally into the the fourth quarter. So I would kinda keep keep that in mind, but really, from my perspective, what's gonna be more important than than this is, you know, what happens with the AI spending? What happens with the earning trends? What happens with the economy and oil prices will have a a greater impact as well? And then maybe just one tidbit, an optimistic one, I should caveat it.

Next year, we'll move into the third year of the presidential cycle. So again, we're in the second year this year. Next year is the third year. Just a factoid, since nineteen fifty, the third year of a presidential cycle has been up one hundred percent of the time, which means I probably just jinxed the opportunity to continue that trend. But is this something noteworthy to keep in the back of your mind?

Thank you for that. And so so, Mike, as always, there will be plenty of headlines in the months ahead. But when we take a step back from the noise, I guess what's one thing you want our clients to remember?

Despite all this uncertainty, and again, there will be more crazy headlines, you know, all over the place, the economy and more importantly, the consumer remains quite resilient. That doesn't mean that everybody's completely insulated, but they're powering through. And I think somewhat like corporate America, as Keith mentioned, we've done this before. So we're working through these sort of things. But overall, while it may remain a little bit choppy, feel a little bit choppy, still have this kind of one foot on the gas, one foot on the brake feel, that the economy is going to kind of power through it and remain positive. Again, we expect about two point two percent growth.

Yeah.

Well, Chip, let's bring you into the conversation. So as Mike just noted, our outlook for the economy still points to some growth, which has important implications for rates in the fixed income outlook.

Sure.

So, we've talked about this all year about how you expected higher yields this year and that could create better opportunities in fixed income, and we've already started seeing some of that since February. What are you seeing in the bond market and how are we positioning portfolios around that?

Sure. I think one of the biggest developments this year has been the rise that we've seen in yields or or interest rates.

That's primarily been driven by the oil related inflation concerns, right, which has been a global phenomenon. It's not just US centric. That's been a global driver.

Because of the economic resilience that Mike just highlighted, provides upward pressure in yields. And as yields rose, we did highlight that the risk reward for extending duration, what that simply means is adding exposure to intermediate or longer dated bonds, that had meaningfully improved. And so in late March we actually upgraded our view of duration at that point. Since then, the tenure has stayed choppy, but it has found a little bit better footing.

It has been but it has been moving more in a a more sideways direction, if you will, since that that initial, you know, large move. But it is still hovering towards the upper end of our fair value range. But that is also why that we still remain favorable on duration at this point. Investors are just simply getting significantly more income while also improving the diversification potential that bonds can deliver into into portfolio.

So, yeah, I've said this before and I'll say it again that in this environment, I truly believe that we are in the midst of a generational opportunity to to capture productive income. Now that's over longer periods of time.

Yeah. So, Chip, of course, the rate outlook remains a key part to that story. And let's turn to the Fed just quickly.

You know, we've had a shift in expectations from the Fed. We've got a new Fed Chairman.

Right.

What with that transition, what's our outlook on rates?

Sure. Yeah. So in our view, the Fed's long term game plan for rates has not really has not really changed very much, but the timeline of that has has changed. And so markets came into the year. We're expecting rate cuts at the beginning of the year. Right now markets are actually flirting with the idea that the Fed might actually have to hike rates by the end of the year.

Our view remains that the the Fed is on is on hold for right now, waiting for some clarity around the inflation data that we're that's that's coming in.

And ultimately, our base case suggests that the Fed will ultimately not have to raise the Fed funds rate by the end of the year.

And just kind of hopping in there. Yeah, of course. This past week, we've gotten a number of key inflation gauges telling us just that. So additional cooling as gasoline prices have come down pretty dramatically from May to June.

That's helped those inflation readings. That kind of bolsters this case that we think the Fed will probably remain on hold. Right. It's just one month.

It's just one month. Right. But still, the fact that that's we're moving in the right direction, I think, is going to ease up the pressure on the Fed that they have to raise rates. Like, no, they might get the opportunity as things unfold here.

Yeah. I think that's a really important point to highlight. I think another important point to highlight is that, you know, the Fed is basically evenly split right now, least as of the June meeting, on whether or not a hike will even be necessary this year. So there's even still a lot of debate inside the the Fed itself.

You know, we have we have a new Fed chair, Worsch, Chairman Worsch wants to explore making some change. We've got a lot of questions about this. He's exploring making some changes to how the Fed approaches monetary policy, how the Fed is going to assess the economy. There are things that are under review around the Fed's inflation framework, public communications, balance sheet policy, just to name a few of the things that are that are being explored and we do expect some changes to emerge there.

And I think that's especially true around how and when the Fed will communicate with with the public. This seems like you you have the potential for a Fed that plays things a little closer to the vest and that's something that everyone is going to potentially have to have to adjust for. But I think most of these changes are going to be more like marginal shifts, right? And it'll take time to implement a lot of these changes that are being discussed right now.

So that's all to say that there has been some change at the Federal Reserve, but we don't expect transformational change at the Fed overnight.

Yeah, so certainly a lot of moving parts as it relates to fixed income. What does this all mean for the fixed income market as a whole?

Yeah, so Fed policy, right, it really is much more of a direct impact on short term rates. Short term rates meaning call it t bills out to two or three years on the yield curve, but still, you know, towards the front of that yield curve. And because the market is pricing in the potential for a Fed rate hike, short term yields have actually moved above the current policy rate that the Fed has set. It's the first time we've seen that in about three years. So from our perspective, from an investment perspective, this creates an opportunity deploy cash for clients that are looking for income. We have a lot of clients asking about is now the right time to go from cash into fixed income.

And that's possible now in an opportunity where yields have moved above the Fed policy rate and without having to take on a tremendous amount of interest rate exposure, right, which is which is greater as you move further out the curve. We're seeing a pretty interesting move in the front end of the curve. And, you know, as we said, we that we we actually think that the Fed is is is more likely on hold as of right now. But even if the Fed does raise rates by the end of the year with what yields have done, you're actually already being paid for that.

So, Chuck, we've covered rates, we've covered Fed, we've covered positioning. What is one thing you want our clients to walk away with today?

I I think I think the the takeaway would be that fixed income is delivering on those two key mandates that investors expect from from the asset class. Right? And that's one is your productive income streams and that's thanks to these higher starting yields that we are seeing right now. And then as a result of that, those steady income streams, we're also seeing your better portfolio diversification, the benefits of fixed income, which is is the is just as important as an investor within within fixed income. So I think that that the fact that we're delivering on those two, you know, key mandates right now is is worth highlighting.

So fixed income is once again offering attractive opportunities and at the same time, markets are powering higher. Keith, one of your central messages has been that the bull market deserves the benefit of the doubt even if the path is is bumpy. Walk us through your thoughts there.

Yeah, well first, think Chip's excited as a fixed income guy.

I mean, was a long period of low rates.

Going to the equity markets, as a reminder, how we go about markets is we use a way of the evidence approach. We always say follow the data, keep an open mind, and and shift as the data, changes. So just using that framework for, you know, why why do we still have a constructive view? I'm gonna break it down by the kind of the four buckets we think about.

The first one is history. We came into this year with a positive outlook, and part of that was predicated on when we looked back at bull markets that had a third year anniversary, which this one just did, since nineteen fifty there's been seven of them. All of them had gains and the average gain the next year was about fifteen percent. So we're actually tracking pretty well.

Now bring that forward a little bit. We had this really strong second quarter of about fifteen percent for the S and P five hundred. Now often we get is has the market moved too far too fast?

Well, we can test that out and say, historically, when we've seen strong quarterly gains, what does that tend to mean for markets? When you look six months forward, so really to the end of the year, the market has been up eighty five percent of the time. Now that's a good starting point, but I've used this quote before. I'll use it again.

You know, Warren Buffett said is if all you needed was history, the richest people would be librarians. You can't stop there, but it does tell you that momentum tends to feed on itself. That's in this historical bucket. If we move to the second bucket on the economy, that helps us decide whether we want to be on offense or defense.

Mike talked about this resilient economy kind of pushing through. That still suggests at least being moderately positive on equities. We filtered to the third bucket, which is fundamentals. You asked me before, what is the most important part of this market?

Profits, profits, profits. And right now, even though you can say historic valuations are still somewhat high relative to history, All the gains this year have been driven by earnings. So that's still in a overall a favorable side. And then the fourth bucket is the market signals.

What is the market telling us? And I would say that the main positive is that the primary market trend is still positive, and we wanna be aligned with that primary trend. There's certainly some pockets of froth. You know, there's that we've we saw semiconductors, I mentioned, up eighty percent last quarter.

That's the most in the history of the data that we go, you know, as well. So and you're seeing some divergences below the surface as well, and I would say sentiment is a bit mixed, you're also seeing more money in some leveraged products. So those are things we definitely wanna keep an eye on. But, again, weigh the evidence on balance, it suggests to still have a constructive backdrop for the equity market.

So you make a very strong case for staying positive in equities, but as you've pointed out before, the bull market never tends to move in a straight line.

Yep. Why might you think we can still get some bumps ahead? Well, I mean, first thing is off the lows in March after that oil shock, markets rose twenty percent. And again, that's positive looking out twelve months, but what happens is you move up a lot and you have great earnings, the expectations go up.

And markets are all about expectations and how things come in relative to those expectations. So I think that's a little bit of a risk that's resetting now. We already talked about the other ones, inflation, interest rates, geopolitical, midterms. The other thing I'll point out, just on average, again looking at history, you tend to have about three pullbacks of five percent or more a year.

So far we have one. Doesn't mean we have to have three, but so those are all things that suggest a little bit of a bumpier path relative to, you know, maybe more recent action. But, again, we wanna be more focused on that primary trend. And if we get further pullbacks based on what we're looking at today, we would look at that as as opportunities.

So you touched on this a little bit earlier, but, you know, we expect a bumpy path. Market's still expected to go up. How do earnings play a role in that?

Yeah. So, you know, we've hit on this theme a couple of times, today, but I wanna show a chart that really hopefully brings it home because we're still getting questions. Are we, you know, in a bubble because of, you know, especially because of semiconductors I would say, but this is the S and P five hundred, the chart we're looking at, and it looks at the breakdown of the return composition. So, you know, let's say, you know, right now the S and P is up almost ten percent for the year.

We can say is that coming from valuations where people are getting more excited and just paying more, or is it coming from earnings? And what this chart shows is that top line earnings this year have driven the entire market return. So let me give you another stat.

From where we started this year, the forward earning estimates for the S and P have been revised up nineteen percent. Again, from where we started the year, up nineteen percent. That's the strongest upward revision that we've seen in the history of the data that we have that's going back to two thousand. So what is the takeaway? The main takeaway is that this has been an earnings driven market.

The North Star is earnings and we continue to expect as we move into the second half and into next year, that's going to be the key for the sustainability of this of this bull market.

And and part of this bull market, I know you talked about this before, has been driven by some of the technology themes that we've had, that we've seen.

But we've recently got a pause in technology. Can you walk us through what's happened there?

Yeah, and one last point before I hit on tech specifically, one other point I want to say is, I talked about earnings, the valuations for the market, while not cheap, are actually below where they started the year, so keep in that mind. And that's also the same with tech, by the way. So, you know, we've talked about, you know, on these quarterlies about this dominant theme of AI and tech, and as we look at this next slide, you know, tech, the big picture for tech is that since this bull market began in late twenty twenty two, which we call the ChatGPT bull market because that's in late twenty twenty two is when ChatGPT became a household name. The technology sector is up over two hundred forty percent.

Two hundred forty percent. That's more than like double the S and P five hundred. But when you look at this chart itself, it has not been a straight line. You've had several corrections of more than ten percent. So it's often we often say markets are two steps forward, one step back. Well, look at the most recent rise that we had before the kind of this cooling period. In two months, off the lows during this oil shock, technology sector went up forty seven percent.

For context, during that rise it was the only sector to outperform the S and P five hundred. Right? And so so we had this move up and then we started pointing out in our market navigators that even though we like tech, the road map just got too stretched. So in some ways, another way to think about it is instead of going two steps forward, one step back, we went three steps forward, and now we're taking a bit of a step back, which we think is actually a good sign because you don't want things to get so extended that the more extended, the sharper they eventually drop. And I think this cooling period likely has a bit further to go, but it is still in the context of a bull market in tech that remains in place.

So you talk about tech being over forty percent, semiconductors being over eighty percent. We don't think technology's in a bubble, do we?

No, not generally, but there are, I mean, to be fair, there are signs of like things that have, you know, individual stocks that have just gone too far too fast, that have bubble ish characteristics, but I would say more more broadly we don't see this as an overall tech bubble. I think this next series of of charts really hit home. So what are we looking at? The chart on the left hand side shows the earnings trends for all the different sectors, and we've purposely highlighted the tech sector in that, I guess, bluish purple color at top.

The main takeaway, don't worry about all the other squiggly lines, just realize it's on top. The earning trends for tech are by far the strongest. And as tech has been kind of going through this cooling off period, on the right hand side we see the valuation for the tech sector. Valuations for the tech sector are now towards the lower end of its range, again, lower than where it started the year.

And also look relative to last year where we were hitting around the thirty two PE on the tech sector, that's down to twenty three. So again, you know, to me the fundamentals are still intact. We always are looking for things that can change the overall story because this is such a big part of the market, But all in all, we do not see a tech bubble.

You know, and I think this brings up, you know, another question. This kind of speaks to the broadening theme that I think you touched on earlier. We're starting to see leadership outside of technology.

Is that rotation into other areas of the market healthy?

Yeah. We we think it is healthy. And, you know, what we're looking at is a couple of different charts here, the S and P five hundred and tech on on the left, and then the equal weight index, which is the proxy for the average stock and small caps at the bottom. And what we've seen is the S and P really for almost two months now has been just chopping sideways, and that's because tech has also been trading sideways and it's a big tech is a big component of the S and P.

But what's happened? Money hasn't left the market. It's just rotating. The average stock is at an all time high, and then small caps is also at an all time high.

So when we ever when markets when you see a sector that's been loved and it comes a little bit out of favor, what we look for is money leaving the market or is it rotating? In this case, it's rotating. I think that's a healthy sign.

And so one of the areas you talk about is small caps. And I know in our twenty twenty six annual outlook, you talked about how small caps can really help balance our positive view on technology. Is that still the case?

Yeah, it is. And going back to the annual outlook, what we talked about is that what we've noticed, and we showed that chart with tech, that you tend to have these really sharp rotations, so people love tech and then they get more concerned about tech. And during that time you can have these sharp vicious rotations. And our thesis coming into the year is one way to balance that is small caps, which actually has worked out pretty well.

Now the question is it's done really well. Is there still upside? And we would say yes. We still think there's upside based on that way of the evidence framework.

For one, if you zoom out, small caps are still underperforming large caps by a wide margin since this bull market began. And then zooming out even further, late last year, caps relative to large caps, the valuations hit one of the lowest levels in about twenty years. So in the context, we still think it makes sense even though maybe small caps have a little bit of cooling to do as well.

So certainly opportunity still in the US. Let's let's finish with global markets. How are you thinking about opportunities outside the US?

Yeah. But I just I do wanna hit on what you said. We still we still like the US and we have that US bias. This chart that we're looking at is looking at earning trends for the US emerging markets and international.

You can see US has been kind of the steady grower and moving up. So we still like the US. I mentioned in in January we upgraded our view on emerging markets. You've seen that basically this hockey stick move up in earning trends.

So we we we we still see opportunity in emerging markets. The one caveat there is it's very concentrated. If you take EM and remove tech, it's actually down for the year. The big two components of EM this year is Taiwan and South Korea, and what do they have in common? AI, semiconductors.

It's basically tech on steroids in some ways. So the trends are favorable, relative price trends are favorable, but just kind of keep in mind, that's why we're not necessarily overweight emerging markets, but more of a neutral posture. And then I mentioned earlier, we did downgrade international developed markets. Doesn't mean there's not opportunities there, but the relative economic and earning trends have been somewhat weaker there, and we just see opportunities elsewhere. And Mike, I don't know, we've talked a lot about the international growth Yeah.

And so earlier I was talking about the U. S. Getting roughly two point two percent growth.

Two of the biggest chunks within that international developed are the European Union and Japan. Both each of them are expected to get roughly zero five percent of growth. So yes, the market is not the economy and the economy is not the market. But especially in those markets where a lot of the stocks tend to be more consumer oriented, so the economy not doing as well and being more consumer oriented and less tech oriented, I think, it, you know, doesn't help them. Again, market side is a little different than the economy, but their economies are still really sluggish.

Yeah. Keith, I know we covered a lot of ground today. What's the single most important message you want our clients to remember?

Yeah. So I've talked a lot about earnings. So I would just say that, you know, earnings power the markets higher. That's gonna continue to be the North Star. I do think we'll have somewhat of a bumpier path, but the bottom line is the weight of the evidence still suggests the bull is intact.

Well, thank you for that. So what we've heard today is that despite the likelihood of more curveballs in the second half, the foundations remain intact. The economy continues to show resilience, fixed income is offering more compelling opportunities, and earnings remain the key driver of the equity market. Keith, Mike, Chip, thank you so much for sharing your perspective and your expertise with us today. As always, we will follow the weight of the evidence, maintain an open mind, and keep you informed as our views shift. To explore today's charts and insights in greater detail, connect with your Truist team and review our latest market navigator and house views publications.

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