The economy is strong. Profits are up, wages higher, spending steady, and balance sheets healthy. Yet sentiment sits at record lows. That gap is the story.
Why sentiment is low, and why it doesn't drive stocks
Triple-digit oil prices feed the worry, but they are only part of it. There have always been reasons to be anxious - political division and social tension are feeding this mood - and that has been true for at least a decade, maybe longer. What actually moves stock prices is corporate profits. Profits sit at record levels, profit margins at record levels, and the economy is doing well. Focus on the hard data and things are in good shape.
Oil and rates: real, but not decisive
There has been a recent pullback tied to higher oil and higher yields. WTI crude is near $105 a barrel and Brent is above $109. The 10-year Treasury yield sits at 4.98%, up a basis point on the day. That yield gives some concern, and at some point the market gives way and we get a correction, which is normal and healthy.
Oil at $100 is unlikely to last long, and the economy is far less energy-sensitive than it used to be. A 5% yield on the 10-year is high by recent standards but not by historical ones. Neither $100 oil nor a 5% 10-year yield will hit corporate profits in any dramatic way. The economy will keep doing well.
What to watch for a turn
A retracement is normal, and we have not had one in a while. As long as corporate profits stay strong, every dip is a buying opportunity. Watch profits closely. If they start to crack, the correction likely gets deeper and faster, and I would be more cautious about putting new money to work. For now the signs are positive and this looks like ordinary market volatility.
Where to find safety
Is there any such thing as safety? No. The best move investors can make is to diversify across asset classes and across geographies. For over a decade the market was a single bet - owning large-cap U.S. tech - and everything else hurt returns. That changed a couple of years ago. The advice now is a much broader, diversified portfolio within equities and across asset classes. That is the best form of safety available.
Does diversification include healthcare? Yes. The heavy over-representation in the tech sector will ease, and spreading money across industry sectors, company sizes, and styles makes sense. Healthcare has historically been a more defensive, higher-quality sector with strong cash flows - a good place to hold some money.
AI and regulation
Over the weekend the Anthropic CEO put out a written warning, and OpenAI CEO Sam Altman added comments, both after a former employee raised alarms. The tone suggested slowing AI down, and it is hitting sentiment.
We absolutely need regulation, but thoughtful regulation is unlikely to arrive anytime soon. The bigger problem is that international regulation is needed, and that seems even further off. Market forces and human nature will push AI forward until there is a problem. Problems tend to get solved only after they appear, not before. So expect a problem, then a reaction that is incomplete and inconsistent, but still a step in the right direction. We are not there yet.
Year-end S&P 500 targets
Many recent revisions to year-end S&P 500 targets lean bullish, some as high as 8,100. Bank of America (BAC) put out a 7,400 target for year end, which implies downside from current levels. JP Morgan (JPM), asked what the market would do, answered that it will fluctuate - the best answer available.
Third-quarter corporate earnings arrive in about a month and will show how the rest of the year goes. The signs point to profits and margins beating expectations, with a higher share of companies beating - the same pattern seen over recent quarters, and the force driving this bull market. We are in a bull market until proven otherwise.
