As autumn ushers in a touch of cooler weather, investors seem cautiously optimistic about this evolving market environment. The S&P 500 has just concluded its second-strongest September in 27 years, supported by falling interest rates, strong earnings growth, and anticipated tax cuts that are expected to strengthen corporate balance sheets. Meanwhile, U.S. GDP has been revised upward to an impressive 3.8%. In this encouraging environment, even the specter of a government shutdown hasn’t rattled markets much. We are encouraged by the participation of international equities in this broadening global bull market. At the heart of this surge lies robust earnings: consumers and businesses are actively spending, generating substantial revenue for corporations. Yet, as the market climbs this “wall of worry,” a dash of caution keeps us grounded and ready for what’s next.
Strong earnings growth doesn’t always guarantee high stock returns—it’s a useful reminder to temper our enthusiasm during today’s AI-driven rally. In the 1940s and 1970s, earnings grew strongly, but high inflation and external pressures like the post-World War II recovery and oil shocks kept overall gains modest. Interestingly, dividends were the real drivers then, providing most of the returns and showing the importance of steady income streams.
We are continually amazed by how AI enthusiasm keeps powering ahead, boosting stock prices and economic progress. A fresh JP Morgan analysis spotlights this: AI-linked stocks have fueled 75% of the S&P 500’s returns, 80% of its earnings growth, and 90% of capital spending jumps since ChatGPT launched in November 2022, while the “Magnificent Seven” tech powerhouses now hold a whopping 37% of the index’s market value.
Valuations for top players like Nvidia are tough to pin down precisely in this environment, but here’s a key insight: capitalism is like a competitive arena where companies “eat or be eaten” in the race to the top, sparking incredible innovation along with some shakeouts—not every AI player will come out on top in this bustling field. Think of Nortel (formerly Northern Telecom), a star in wiring the world during the late 1990s internet boom, whose overexpansion eventually led to a downfall as the bubble burst. We expect similar twists ahead, though timing is anyone’s guess. That is why our best advice is to stay diversified over the coming months and years, zeroing in on companies with reasonable valuations and strong fundamentals to build lasting resilience.
Shifting focus to international equities as a balanced complement in this environment, valuations present far less of a puzzle. The MSCI EAFE Index carries a reasonable forward P/E ratio of 15.2x expected earnings, with its payout ratios now standing competitively against those in the U.S.
International firms are sharpening their strategies to enhance shareholder value, increasingly repurchasing shares alongside offering solid dividends. After lagging behind for more than a decade, non-U.S. equities finally have strong momentum for a catch-up.
In summary, while we’re embracing the market’s upbeat momentum, we advocate a balanced approach with diversification to navigate potential risks ahead. As we step into the fourth quarter, please feel free to reach out to any of us for assistance—we remain committed to our long-term partnership and truly appreciate your continued confidence in us.
