On one point, the competing analysts of Wall Street agree: this is a banner year for corporate profits, with S&P 500 earnings on track to rise by roughly a third. On what comes next, they part ways. (Strategists tend to be moderate in their targets, so we wouldn’t expect anyone to be talking about outlandishly large moves.) One camp sees the index finishing the year a few percent north of today’s level; another sees it roughly 5% below. And both, in the middle of two wars, have had to pencil in a price for oil.
So neither camp is predicting disaster. They simply weigh different things. Here, side by side, are two broad ways market participants are currently thinking about the path forward through year-end. We’ll tell you where they stand and then offer some thoughts of our own.
The Optimists
The optimists’ rule is simple: follow the profits. Three factors drive their view.
- First, earnings. Profits are growing about four times as fast as their long-run average this year, and the optimists expect roughly 20% more growth in 2027.
- Second, artificial intelligence. Companies tied to AI spending now make up nearly half the market’s value, and their profits are growing fastest. AI is also visibly boosting performance for more of its adopters.
- Third, inflation that stocks can live with. The optimists see today less like the 1970s and more like the late 1980s or mid-2000s, when prices ran hot and stocks still did well.
These optimists’ main worry is interest rates: when long-term rates climb sharply, investors are willing to pay less for each dollar of profit. Their case in one line: when profits grow this fast, betting against stocks tends to be a fool’s errand.
The Cautious
- The cautious camp doesn’t dispute the profits. “Earnings are not the problem,” as BofA’s Savita Subramaniam says. Four other factors drive their view.
- First, price. They argue that today’s profits run well above their long-term trend, flattered in places by big one-time gains. Value the market on more normal earnings, and stocks may look expensive after all.
- Second, inflation. They fear the current year is rhyming with the 1970s rather than the 90s: stubborn inflation, a weaker dollar, Fed rate hikes, and an oil shock.
- Third, liquidity. For years, easy money did more than profits to lift stock prices. That support is fading; in their words, liquidity has gone from “full gush” to “a trickle.” One closely watched liquidity tracker, from Michael Howell over at Capital Wars, finds the global pool still at a record, but propped up by unusually calm bond markets while central banks add little. A bond-market scare would shrink it. (See our closing note below about the MOVE Index.)
- Fourth, timing. The market has had one 5% dip this year against a typical three, and September and October are historically its weakest months.
Yet even the cautious camp calls the long-term bull case, built on rising productivity, “intact.” This is caution about price, not a call for a bear market. The cautious camp is cautious about stock prices and multiples rather than profits.
Where They Meet, and Where They Split
Both expect strong profit growth again next year: ~20% for the optimists, closer to ~10% for the cautious. Both expect gains to spread beyond the handful of tech giants. Both see rising borrowing costs as a central threat. And both expect a bumpy autumn. Research shows stocks slipping about 4%, on average, in the three months after the Fed starts raising rates, which it did on September 16 for the first time since 2023.
The real split is over what drives stock prices. The optimists say profits, and profits are strong. The cautious say price and money, and both are turning less friendly. They also read history differently: the optimists see the late 1980s, the cautious the 1970s.
A Caveat on Earnings
While we can cite earnings strength as a key reason a stock market collapse is unlikely, we have been in the business long enough to know that corporate profit growth can quickly reverse course. In 2005 and 2006 we had tremendous profit growth. 1999 did too. In each case, the ensuing 24 months saw profits decline over 50%.
This letter is general commentary — the wide-angle view. It is not a portfolio. What we do for the families we work with is the opposite of “wide-angle”: we make portfolios built around one household’s circumstances, taxes, timelines, and appetite for exactly the kind of volatility described above. We keep that roster of clients deliberately small, because that sort of attention doesn’t scale. If you’d like to talk about what it would look like for you, Aubrey Ford will make the time.
Wild Cards
The Atlanta Fed’s GDPNow model, a running estimate built from incoming “high-frequency” data, has the economy growing this quarter at a pace equal to 5.1% a year, more than double the Fed’s 2.3% forecast for 2026. That’s a note in the optimists’ favor. It also gave the Fed room to raise rates, and it is part of why the 10-year Treasury yield, the benchmark for global borrowing, has climbed from just under 4% on the eve of the Iran war to about 5%. That worries the cautious, though of course, there is also the more bullish view that the cost of money should rise during a period of robust demand for capital and accelerating industrial expansion, such as the economy is presently experiencing.
On Tuesday, President Trump told the United Nations he faces a “big decision” on Iran: whether to strike a deal, possibly after the midterms, or to “annihilate the Islamic Republic.” Oil swung about 3% within the day. After meeting Trump the same day, Volodymyr Zelensky said Ukraine is ready for a mutual halt to strikes on energy targets; Moscow wants sanctions relief attached. And Xi Jinping’s state visit this week puts trade, AI, Iran, and Taiwan on the table. Beijing wants Hormuz reopened, though expectations for a breakthrough are low. There is little common ground on macro issues between the parties from which to anchor any lasting agreements.
Oil has followed every headline. Brent crude, the global benchmark, averaged about $117 a barrel in April, $84 in July and $112 in the second week of September. And crude is only part of the bill. Traffic through Hormuz is at a six-month high, but diesel, the fuel that moves goods, still hit a record $6.53 a gallon this week, and shipping and insurance costs remain steep. Lower crude prices in the paper markets does have to translate to lower energy costs at the location (and in the form) the fuel is actually needed.
Still, every forecaster of broad stock and bond market behavior must incorporate a number into their analysis. Interestingly, the optimistic Jefferies strategist expects oil to stay high for longer. The more cautious BofA strategist’s earnings math assumes oil averages $84 this year and $74 next, well below today’s price near $100, even as it warns of a 1970s-style oil shock.
Our view is that there are few reliable trends here. The conduct and consequences of the wars in the Middle East and Ukraine cannot be penciled out with any confidence.
This is exactly where experienced professional management such as ours can help you. Not by pretending to know what a barrel will cost next year, but by building portfolios that don’t depend on guesswork: owning the profit growth both camps agree on, holding commodities and other real assets that have tended to hold up when inflation and oil shocks linger, and keeping a close eye on earnings, interest rates, inflation, and the prices of food, electricity, diesel — among many other things, including the MOVE Index that tracks bond volatility, which as we noted above is a critical factor for overall liquidity levels.
And most importantly, we do not have to attach ourselves to predictions about particular outcomes. In our experience, it is more important to know how to prepare, and have strategies for the wider range of possible outcomes.
Thanks for listening; we welcome your calls and questions.
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