Markets Remains Resilient Despite Political Disruptions
Even as Washington remains gridlocked over healthcare spending and the federal government stays partially frozen, markets have held firm. Despite domestic political deadlock, several surprises abroad — where political shifts are feeding a new “global reflation risk.”
In Japan, the ruling LDP party chose Sanae Takaichi as its new leader. Takaichi’s “responsible expansionary fiscal policy” platform signals more stimulus ahead - not tighter money - while suggesting the Japanese economy does not require higher interest rates at this moment.
Markets took the cue: long-end Japanese bonds sold off, the yen weakened, and equities jumped.
3 Things to Know
S&P 500 valuations (measure by price-to-forward earnings) remain in the top 5% of the last 15 years, nearly two standard deviations above the long-term average.
Yet this elevated level is supported by strong corporate fundamentals. Net profit margins are near record highs and exhibit a strong 0.74 correlation with P/E expansion.
Simply put, companies are more profitable than ever, and the market is pricing in that strength.
We do not see today’s CapEx boom as a replay of the tech bubble.
Historically, rising CapEx coincided with a surge in corporate debt. Today, companies are funding investments primarily through profits, making this cycle more sustainable. Rate cuts should further reduce borrowing costs and may unlock a fresh wave of AI infrastructure spending, especially from firms beyond the “Big 4” (AMZN, META, MSFT, GOOG).
Technology now comprises 35.4% of the S&P 500 index, up from 19.9% in 2010, and remains the most profitable sector by far.
However, not all tech stocks are created equal. We remain cautious on unprofitable growth names where valuations rest more on hope than cash flow. These stocks remain vulnerable to rising rates or stalled growth like we saw in 2022.
As earnings season looms as the next key market catalyst, with over half of U.S. market capitalization reporting this month. Roughly 60% of this year’s gains are tied to earnings growth, setting a high bar for companies to clear.
See our weekly CIO Strategy Bulletin for more details