The Market’s Biggest Headwind—and Its Strongest Tailwind
Throughout this year, we’ve been watching two things to determine whether this bull market can keep going: earnings and interest rates.
As we head into fall, both are front and center.
Let’s start with the headwind: interest rates.
Long-term rates have moved back into focus as investors wrestle with fiscal concerns here in the U.S. We continue to spend substantially more than we take in, which means accessing the credit markets to fund that gap. We’ve been talking about this issue for quite some time because, ultimately, higher long-term rates can become real competition for equities.
For now, the bond market may simply be testing the new Fed chair. Markets don’t want rhetoric—they want to see action that can bring rates down. If that happens, the current pressure may prove temporary. If rates keep moving higher, however, that is something we have to watch closely.
So what’s the tailwind? Earnings.
And they continue to be remarkably strong.
The latest results from Nvidia were another reminder that the AI story is increasingly being supported by real revenue and real earnings. There has been plenty of talk comparing today’s AI boom with the fiber-optic buildout of the late 1990s. I think that argument became a lot harder to make after the latest numbers.
More broadly, AI investment is becoming a significant contributor to economic growth. There is certainly risk in that—the bigger something becomes, the more economic impact a slowdown can have. But there is also tremendous opportunity, and the buildout is happening faster and on a larger scale than many of us expected even six months ago.
Another important distinction from 1999 is what’s actually driving the stock market higher. Valuation multiples aren’t expanding. They’re contracting. In other words, this market has largely been driven by fundamental earnings growth rather than investors simply paying more for the same earnings.
And the strength isn’t limited to a handful of technology stocks. Participation remains broad across much of the market, including industrials, energy, and healthcare. To us, that breadth is an encouraging sign.
September can be a difficult month for markets, and interest rates remain the biggest threat to this bull market. But on balance, the fundamental momentum behind earnings—and the technological change helping drive them—continues to give us reason to be constructive as we move through the rest of the year.
