Corporate earnings are booming!  Yet, the market is only trading at its 5-year average price-to-earnings multiple.  This indicates the market is undervalued, even though it has recently traded at record highs.  As earnings season draws to a close for the second quarter, other less significant issues might also move the markets.  

Longer term bond yields are trading at two-decade highs.  There are several possible reasons for this.  Higher interest rates can impact the economy, equity and bond market returns.  

Although fundamentals are most important to longer term investment success, there are seasonal factors that come into play, this time of year.  September is known to be the worst performing month for the stock market, historically.  October is known for its choppiness.  We might be in for a couple of interesting months before earnings season resumes in mid-October, and before the traditional sweet spot of November – January arrives.  Historically, those three months are the highest performing consecutive months of the year for equity returns. 

As we’ve long reiterated, and will likely do so again and again, we believe it is a mistake to allow one’s political ideology to influence their long-term investment plans and strategies.  With mid-terms soon approaching, there will be some who react to the election.   The problem with allowing politics into investment planning is that when one’s leader is in office, it is easy to become overly bullish, whereas when one’s leader is out of office, it is easy to become overly pessimistic.  

We attempt to view things purely on fundamentals and leave political biases at the door.  However, this does not mean one should bury their head in the sand and ignore policy changes.  In that light, we are increasingly concerned over the ongoing attack to traditional free-markets / capitalism.  The lines have blurred, and many free-market capitalists’ systems and ways of doing business which have produced incredible outcomes for our country are currently being challenged.  Is the US still deserving of a higher multiple vis-à-vis other countries when some of our policies are beginning to more closely resemble those of other global economies?  As long-term investors, this gives us pause.  

This is to serve as a brief synopsis to a rather lengthy update.  With further elaboration, all of the paragraphs above could easily be a complete market update in and of themselves.  To summarize today’s update, in general, we remain bullish due to strong corporate earnings and a reasonably priced market, regardless of near-term volatility. 

Now, for those wishing to dig further into the details…

Corporate earnings are booming.

Second quarter corporate earnings for the S&P 500 are up over 50% year-over-year second quarter 2025.  Excluding some one-off earnings from two large companies (Amazon and Alphabet), overall S&P 500 corporate earnings are still up over 32%, per FactSet.  This is following Q1’s increase of over 27%.  Current street consensus calls for 2026 calendar year earnings to be up 30% over 2025.  For comparison, the average earnings growth rate over time has been mid - high single digits, depending on the time period.  Artificial intelligence and its buildout continue to be the driving force for increased earnings.  We believe this is likely to hold true for years to come due to the backlog of orders and the new AI revolution that is taking place.  However, it’s not simply AI that is driving corporate earnings.  Ten of the 11 sectors of the S&P 500 are experiencing increased corporate profitability.  The lone sector not experiencing higher profits last quarter is Healthcare.  It too would show positive earnings but for two major companies within its sector (Gilead and Merck), per FactSet.  Believing that fundamentals are most important when it comes to long-term performance, higher corporate earnings is great news for long-only equity investors!

The equity market is trading near its 5-year average price-to-earnings multiple.

With equity markets trading near record highs, at least over the last few weeks, one might assume the market is currently trading at a higher, more expensive multiple than it had at the beginning of the year.  It is not.  Although market values have increased, corporate earnings have grown at a higher rate.  Therefore, the market is less expensive today than it was earlier in the year.  In fact, according to the most recent FactSet report, the S&P is actually trading slightly below the five-year average, but still trading higher than the 10-year average.  This is significant.  One would normally expect a higher multiple when earnings are growing more rapidly.  This brings the PEG ratio to a very attractive price, indicating the market is undervalued.  (Please see our May 29 Market Update on the PEG ratio: https://www.joycewealthmanagement.com/updates/market-update-cruising-along-and-listening-peg).

As earnings season draws to a close, other less significant issues might move the markets.

This week will all but wrap up earnings season for the second quarter.  This means investors are more vulnerable to acting on any number of random issues that otherwise would not carry significance during earnings season.  Therefore, economic releases, geopolitical issues, and numerous other matters, while important, normally would not be as market-moving during earnings season.  These random items likely take on enhanced significance until earnings season resumes, once again.  Financials will kick off Q3 earnings the week of October 12.  Earnings season is almost always welcome for it allows the focus to be on true fundamentals and not the latest crisis du jour.  Honored to be quoted in yesterday’s (August 31) Wall Street Journal regarding the “no-man’s land” between earnings seasons.  https://www.wsj.com/finance/stocks/u-s-stocks-fall-as-iran-war-inflation-heats-up-6f44ff44.

The bond market is acting up.  Yields are rising.  Why?

US Government Bond yields are trading at two-decade highs.  Due to the inverse relationship between price and yield, investors holding fixed income (bonds) are seeing their prices deteriorate as their lower yielding coupons trade at a discount to the current higher yields.  Why the current higher yield?  There are a number of possible reasons.  1.  The US $40 trillion debt might be causing some bond investors to demand a higher yield due to our greater indebtedness.  2.  With inflation persistently higher than the Federal Reserve’s desired 2% target, longer-term bonds might be trading lower due to investors demanding higher longer-term yields to account for the decreased purchasing power over time.  This is true domestically, and internationally as oil-related inflation continues.  3. With major technology companies borrowing more and more to further build out their AI capabilities, there is now greater competition, and therefore demand for debt.  Many of those companies with major CAPEX have significant balance sheets and can almost be viewed as competitors to Treasuries.  However, tech companies, regardless of their strong balance sheets, do not have the ability to tax, nor to print money, as do sovereign debtors.  4.  With corporate earnings looking stronger than usual, it might be that investors are placing more funds into equities and therefore not as much into bonds.  5. It is believed that Central Banks around the world are currently no longer buying as many US Treasuries as they once did.  This can ebb and flow.  Time will tell… 6.  It is important to know, higher interest rates are not simply occurring with US Treasuries.  The same is being experienced with government debt yields around the world.  As an example, Japanese 10-year government yields are at the highest level since 1996.  If rates get high enough, maybe we too will become interested.  For now, it is difficult wanting to buy bonds when the outlook for corporate earnings, and therefore equity returns, look so strong.  And, as interest rates are possibly moving even higher, there will be further downward pricing pressure on bonds.    

Seasonality, although not fundamentally based can serve as a backup factor.

If we’ve been working very long together, you know that it is our recurring mantra that fundamentals move the markets longer-term.  However, other factors often come into play, shorter-term.  These include psychology, fear and greed, knee-jerk reactions, and even seasonality.   There are few logical reasons as to why seasonal factors influence market returns.  And, therefore, we do not use seasonality as a primary decision-making tool.  Nonetheless, if enough people buy into seasonality, then at times, these beliefs can result in a self-fulfilling prophecy.  As we enter September, history tells us it has been the worst performing month in the markets.  Will it be this year?  Only time will tell.  Afterall, there are a number of exceptions to the rule.  Many guess that October is a poor performing month.   In reality, October has been a positive month historically.  However, there are a number of instances of great volatility occurring during October.  Fortunately, November, December, and January have historically made up the best three consecutive months of the year.  Nice to know the sweet-spot is right around the corner!  We view seasonality and market returns more as trivia than facts to act upon.  Nonetheless, we are mindful of what other market participants might be thinking.

Blurring of traditional free-markets / capitalism and implications.

We are seeing an increasing number of situations whereby traditional capitalism is under attack.  Having long been a lover of free-markets and capitalism, it is painful to see the blurring of lines especially since our policies have provided US exceptionalism resulting in a premium for domestic stocks.  The US government is currently taking stakes in private/public companies.  This is a slippery slope, and it is not good.  It causes the government to choose winners and losers.  We have the US government commenting and acting on everything from corporate profits, international trade, telling corporate boards who to fire, and dictating to corporations as to what can be sold abroad along with payments to be made to the US government for the privilege of transacting business.  The world has experienced the downfall of controlled economies.  History tells us how the story ends.  We have gathered an ongoing list of specifics and are happy to elaborate in greater detail for those interested.  How much more government intervention is needing to occur before we lose our US market premium? 

On a brighter note, although it seems we might currently be in the minority, we are particularly impressed by the free-market stance of our new Federal Reserve Chair Kevin Warsh.  If time permits, strongly encourage watching/reading his recent Jackson Hole speech.  Keynote remarks by Chairman Warsh at the 2026 Jackson Hole Economic Policy Symposium.  He seems committed to leading an independent Fed in lowering inflation – at least rhetorically, so far.  Hopefully, his words indicate actions soon to follow.  His use of hiking analogies at the beginning of his speech might be foreshadowing of hikes ahead.  Hopefully, the hikes will be met with the ease of Bernanke’s, and not the pain of Kohn’s, both of which Warsh references.  Ha!

Have conditions changed in your personal situation?

Things change.  Situations occur.  People age.  Should you find yourself with a change of goals, objectives, comfort with risk (or lack thereof), cashflow needs, time horizon for specific needs, etc… we welcome the conversation.  It is prudent to make certain we are on the same page that matches your wishes.  This is why we welcome the conversation to review one’s overall investment plans and wishes.  We are here and ready to discuss.

With gratitude…

Well, you made it all the way to the end.  Thank you!  As always, we thank you for your trust, for the confidence you place in us, and for doing business together.  We are humbled to be entrusted with working with your life savings.  Thank you for the opportunity.  Here, if you need anything.