I had lunch this past weekend with a peer in the industry (you know who you are!) and we, of course, discussed the markets. The top topic was the great returns we have seen so far this year with the S&P 500 (IVV) up +15.6% to another all-time high, as well as great returns last year and the year before!! Over some nice hot pizza, we ruminated over the many factors that are stacking the deck so far to date.
First and foremost, pressure on the Fed in mid-2025 to shift to an “easing” policy - that eventually led to easing statements in August - influenced market watchers to view this as an “all clear” to allocate funds to U.S. equities. After all, most of the rest of the world had been easing almost all year so why not join the party! The European Union, the U.K., and Australia, amongst others, all cut rates during 2025 prompting great returns so far for international developed markets (SCHF, +28.9%), as well as emerging markets (SCHE, +27.6%)!
But it is never just one thing! Another big one is the AI (artificial intelligence) factor. Since AI burst into the world in 2022, people have been talking about the impact AI will have on business productivity and profitability. It is expected that the impact will be revolutionary, and we are still very early in its life cycle.
My favorite mass media “perma-bull”, Tom Lee of Fundstrat, is an AI disciple and is quite bullish. He does not view this as a “bubble” since forward P/E’s are still quite low compared to P/Es during the dot com crash. He thinks that factor could be driving most of the market froth; he sees companies expanding spending into this sector since they are starting to see some payoffs.
Not to be overlooked, of course, is strong growth in business earnings that is the main driver of stock returns. Consensus estimate for the full year 2025 are coming in at about a 10% growth – a strong number that complements the strong growth rates of 2023 and 2024. There are a multitude of other quantitative and qualitative factors including some broadening market depth, stronger corporate balance sheets, and strong momentum.
So, no need to fear this rally, so far. Most D&A clients are fully invested in their target strategies with a bit of overweight to equities to help gain some extra return. When people ask me where I think the market is going I always say, “Beats Me!” But, like Tom Lee, I am always bullish since I expect the market to always go up over time. Best to stay fully invested to your target strategy to help achieve your goals.