Model : "disclaimer"
Position : "left"
Welcome to this month's monthly market update. I'm Keith Lerner, chief investment officer and chief market strategist at Truist Wealth. And this month, really, there's a key story in the shift in the market backdrop. We're moving from this really powerful earnings season where the news was largely positive to a more two sided macro debate. Interest rates are back at center stage, the midterm elections are approaching.
So the bottom line is this we still remain constructive on the broader uptrend, but the near-term path is likely to become a bit more uneven. In short, we expect some choppiness. But we would view any potential weakness as an opportunity as our weight of the evidence framework still suggests this bull market deserves the benefit of the doubt. So now let's turn to our house views for this month.
Really not any, you know, big changes. We're still maintaining a modest equity overweight. We still have a preference for us large caps and growth. And we prefer emerging markets relative to international developed markets. From a sector standpoint. Technology and artificial intelligence still remain, in our view, dominant themes of this bull market, but also with somewhat of a broader market. Back
A few months ago, we became more favorable on financials and healthcare, which should really benefit from this continuing kind of improvement in market participation. And then energy still provides a partial hedge or the energy sector against geopolitical uncertainty as we think about fixed income, which we're going to dig a little bit deeper into today. We do see that these high yields have improved the risk reward. We’re certainly more focused on high quality bonds.
But I will say with credit spreads really tight, we are being patient, but we also are on alert for some opportunities in this choppy period that we discussed, just like we saw earlier in the year. And then lastly, we did upgrade our view of gold to neutral in August, and that's just reflected in some stabilization in prices. We got some new data showing central banks continue to buy gold, and there is some potential diversification benefits as well.
And also, you know, gold is still down double digits from its from its recent highs. So let's zoom out maybe a little bit more discussion back to the equity market. And really a focus on this blowout earnings season. Corporate earnings still remain the foundation of our positive view of markets. And as I mentioned this last earnings season was exceptionally strong.
We saw earnings, sales and corporate guidance broadly exceed expectations. And we really saw that across most sectors. And I think the real important point here is that we are still in this, you know, fundamentally driven bull market where all the gains this year have been driven by profits. But as I mentioned, with the earnings season behind us macro factors are now taking center stage and rates and... are especially important.
And again front and center. You know, often I get asked is there a magic threshold for the ten year treasury. And there really isn't just a magic number. But I will say in the near term there is a focus on the 4.8% level and then the 5% level for the the ten year Treasury, which could create some short term market disruption if we exceed that.
Because the way to think about it, these higher borrowing costs can pressure consumers. Also, some interest rate sensitive parts of the economy, particularly housing. But I think perspective still matters. You know, from our standpoint, and we've said this a lot in the past, and I'll say it again today, we would still prefer a resilient economy that can withstand somewhat higher rates over a weak economy that requires aggressive rate cuts.
Next, let's talk a little bit more about the potential for somewhat of a pickup in volatility. Some of you may be familiar with the VIX also known as the fear index. And you know coming into September it's relatively subdued around the lows for the year. Historically though we've actually seen during midterm election years volatility start to pick up after the summer into those midterm elections.
So I think what does that say to us. That just says that investors should be prepared for some from some some gut checks along the way. But also what's really important in our view is that despite some of these crosscurrents, maybe at choppier markets, profits still remain, you know, the foundation of the bull market or what we call the North Star.
And as I just mentioned, we had a really strong earnings quarter. 2026 estimates continue to move higher. But what's also very important is we're starting to look into 2027. And when starting to see the earnings estimates for next year also being revised higher, which I think is very positive, you know, over time, our view is the durability of this bull market will be determined more by the economy and corporate profits by any single headline around, you know, the election or short term rates.
And that's why we're still giving this bull market the benefit of the doubt. And, you know, maybe just to go one step deeper on that as as we've seen these earnings move higher, we've seen a pretty meaningful reset in market valuation. So as an example the S&P 500 forward price to earnings has declined from roughly 23 times last October to about 19 times.
That's a pretty good reset in in valuations. And then in tech the decline has been even more significance. We've seen the PE drop from 33 times last October to 21 times. So as people talk about all we need a bubble, you know, all the gains that we've seen in tech, which is over 20% this year, have been all profit driven.
And as I mentioned, we've had a pretty good contraction in valuations. In fact, technology's valuation premium to the broader market has narrowed to about 10%. That's among the lowest levels we've seen over the past decade. What does this mean? This simply suggests that some of the concerns that we're all talking about, reading about, as far as, you know, tech, tech and AI, capital spending, financial financing, and even like, you know, as far as the payoff from the AI investment, those concerns are real.
I think the good news, at least some of those concerns are being reflected in in valuations today. And then finally, maybe just moving back to this midterm elections and maybe just provide a little bit of a historical perspective as you look at this chart. Midterm election years have often experienced a choppier period, just like I mentioned earlier, with the volatility index earlier heading into the midterm elections.
But it's also important that as you start to move closer to the midterms, you know, ...we have a tendency to.... see a stronger move into year end. It's only you know, history is only a starting point, I think one Buffett said, if, if, if, if all you needed was history, the richest people would be librarians. But it does reinforce the importance of not overreacting to maybe some normal seasonal turbulence that we may see in the months ahead.
And the bottom line is this even though we expect somewhat of a more uneven near-term path, the weight of the evidence indicates the bull market foundation remains intact. The economy is resilient, earnings are strong, and valuations have reset. And what that means to us is we would still stay aligned with that primary uptrend and view potential seasonal weakness as an opportunity.
So thanks so much for listening. We'll see you next month. And as always, we'll continue to follow the weight of the evidence and keep you informed as our views evolve. Thanks so much.
Key takeaways
- The bull market remains intact. Global equity markets continued to advance over the past month, supported by another quarter of booming earnings.
- The market, however, is transitioning from a powerful earnings season to a more two-sided macro debate, with interest rates taking center stage. We expect this to result in a more uneven near-term market path, which is also typical from a seasonal and midterm election-year perspective.
- Similarly, stocks within the S&P 500 are moving less in lockstep than at any point in more than 30 years, with dispersion being fueled in part by perceived AI-related winners and losers and the dynamics of a two-speed economy.
- Still, when we zoom out and consider the weight of the evidence, the bull market continues to deserve the benefit of the doubt. The economy remains resilient, the earnings estimates for next year continue to be revised higher, and valuations have reset to more reasonable levels.
- Bottom line: We remain aligned with the primary market uptrend and would view potential seasonal weakness as an opportunity.
From earnings strength to macro crosscurrents
Global equity markets continued to push higher over the past month, supported by another impressive earnings season. Earnings, sales, and corporate guidance broadly exceeded investor expectations, reinforcing the fundamental foundation of the bull market.
However, after an earnings season that skewed heavily to the positive, we expect more of a tug-of-war in the near term. Investors’ attention is shifting back toward macroeconomic and policy factors, including inflation, interest rates, oil, geopolitics, Federal Reserve (Fed) policy, and the approaching midterm elections.
This transition is important. Earnings provided a powerful tailwind. The macro debate is likely to be more two-sided, with positive and negative data creating a more uneven market path.
Interest rates take center stage
Fed Chair Kevin Warsh’s remarks at the Jackson Hole Economic Policy Symposium placed greater emphasis on inflation than employment. While he did not commit to a rate hike at the September 16 meeting, his assessment of persistently high inflation, economic resilience, and relatively accommodative financial conditions appeared to keep a hike on the table.
At the same time, the U.S. Treasury announced expanded buybacks of longer-dated bonds, signaling heightened awareness that rising long-term interest rates can weigh on consumers by increasing borrowing costs and pressuring interest-rate-sensitive areas of the economy, particularly housing.
Yields are a key market focus. While there is no magic threshold, a move in the 10-year Treasury yield above 4.8% (its January 2025 peak) and then toward 5% would likely create some short-term market disruption.
We would still prefer a resilient economy that can withstand somewhat higher interest rates over a weaker economy that requires aggressive rate cuts.
The debate around rates is intensifying as political rhetoric surrounding the midterm elections heats up and questions around AI persist. With the volatility index, or VIX, subdued near 15, the setup appears ripe for a gut check or two over the coming months.
Profits remain the north star
Although interest rates and the midterm elections matter, the health of the economy and corporate profits will ultimately determine the durability of this bull market.
The good news is that, following an earnings boom in 2026, estimates for 2027 are rising at a brisk pace. Consequently, valuations are well below recent highs, helping keep investor expectations in check.
The S&P 500’s forward price-to-earnings (P/E) has fallen from roughly 23x last October to around 19x. The market’s gains this year have been driven entirely by earnings growth rather than multiple expansion.
The shift is even more striking in tech. The sector’s P/E has dropped from a peak of 32x to roughly 21x, while its premium to the S&P 500 has narrowed to just 10%, among the lowest levels of the past decade.
This suggests that concerns surrounding substantial debt and equity issuance, circular financing, and monetization of significant capital spending are at least partly reflected in share prices.
That said, stocks within the S&P 500 are moving less in lockstep than at any point in more than 30 years. Much of this dispersion is being driven by tech, where AI is creating a wider divide between winners and losers. A similar divide is evident within the consumer discretionary sector, between companies serving higher- and lower-income consumers.
This greater dispersion is expanding the opportunity set for active managers while also widening the range of potential outcomes.
Tactical positioning
Equities
From a global asset allocation perspective, we maintain a modest equity overweight, with a continued preference for U.S. large caps and growth given stronger fundamentals.
We continue to favor small caps as a partial portfolio hedge against periodic rotations away from mega-cap growth. That said, we have seen some deterioration in relative price trends that we are monitoring, as higher interest rates may be starting to weigh on these more rate-sensitive areas.
Within international markets, we are neutral on emerging markets (EM). Earnings momentum remains robust, though elevated tech concentration presents a two-sided risk.
We are less favorable on international developed markets, where relative earnings trends continue to deteriorate and relative valuations remain mixed.
Within U.S. sectors, we continue to favor tech as a core long-term investment theme, alongside industrials, financials, health care, and energy as opportunities broaden. Tech and industrials benefit from AI tailwinds, financials and health care should benefit from broader market participation, and energy provides a partial portfolio hedge.
Fixed income
We also see the risk/reward improving in fixed income as yields reset higher. Elevated starting yields provide greater income potential and a larger cushion to help offset volatility. For example, even if the 10-year U.S. Treasury yield rose another 50 basis points (0.50%) over the next year to approximately 5.35%, fixed income investors would see a positive total return given the size of the coupon buffer.
We're biased toward higher-quality bonds, while remaining alert to opportunities. With credit spreads still near historically tight levels, selectivity remains key.
Alternatives
We upgraded gold to neutral mid-August. Stabilizing prices, continued central bank buying, its role as a partial hedge against a weaker U.S. dollar, and gold trading at roughly 16% below its prior highs support a more balanced view. Still, competition from elevated yields and a rangebound U.S. dollar are near-term risks.
We also see opportunities within alternatives for qualified investors. As dispersion increases, hedge fund managers have a broader opportunity set to seek returns on both sides of the market.
Within private markets, manager selection remains paramount, particularly as disruption accelerates, more mega-IPO (initial public offering) candidates move toward the public markets, and investors increasingly differentiate between likely winners and losers across private equity and private debt.
Bottom line
The shift from a powerful earnings season to a more two-sided macro debate, with rates taking center stage, is likely to create near-term turbulence for both equities and fixed income.
Still, when we zoom out and consider the weight of the evidence, the bull market continues to deserve the benefit of the doubt. The economy remains resilient, the earnings boom continues, and valuations have reset.
We would stay aligned with the primary trend and view potential seasonal weakness as an opportunity.
As always, we will continue to follow the weight of the evidence, keep an open mind, and update you as our views evolve.
The market is moving from a powerful earnings season to a two-sided macro debate, with rates at the center. Expect choppiness but view weakness as an opportunity.
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