The bull case
Stock valuations look high, but the market has earned them. A raging bull market started in October 2022 and has been brutal to anyone waiting on the sidelines. Drawdowns keep coming and keep ending fast. The selloff around the tariff scare and the one earlier this year tied to the Iranian war both lasted about six weeks, then prices snapped right back. Anyone hoping to sit out a long bear market just keeps waiting for a drop that never lasts.
Earnings are the reason. Earnings growth for calendar 2026 will start with a two, somewhere in the 20s percent. If the street's forecast holds, 2027 brings 14 to 15% growth. Put a multiple on 2027 earnings and the S&P 500 trades around 19 times, with operating earnings in the country possibly near $400. Over the next six or seven quarters, little stands in the way. The one real worry is a free cash flow problem in Silicon Valley. Beyond that, the Federal Reserve looks set to keep the punch bowl in place, economic data looks okay, and the feared AI wipeout of jobs isn't showing up. Labor numbers stay strong.
The Fed and rates
Reading the next Fed means getting inside another person's head. The theory is that Kevin Warsh becomes the new Alan Greenspan, who was famous for being vague on purpose and once said that if you understood him, he hadn't done his job, because his aim was to muddy the message. Warsh is supposed to come in and cut rates, because that is what Trump wanted. Yet the street has penciled in about a hike and a half between now and year end.
WisdomTree's fixed income team, led by Kevin Flanagan, disagrees: no rate hikes at all. A dovish surprise would help many of the trades that have worked all year. Small caps have been beating large caps famously all year. The reason is debt structure. Small companies carry more floating-rate debt, which reprices with rates, while large companies carry more fixed-rate debt. A Fed that holds steady between 3.50 and 3.75 and skips hikes supports small caps into the second half.
Where to put fresh money: the pension wars
For a 12 to 18 month portfolio, the fresh angle is international equities, driven by a theme called the pension wars. A politician in a given country, wanting votes, may push domestic pension money into home-country stocks instead of US stocks. Canada has done this. Britain has pushes and whispers, with arm-twisting to get its pension system to follow. Last week came GPIF, Japan's giant social security fund, a pool of capital the size of a sovereign wealth fund. The Japanese asked why they hold only 25% Japanese equities in the plan and floated raising it, though they walked the idea back over the weekend.
WisdomTree has favored Japan for years. Many investors missed it entirely, while clients who bought got in. There's still room to run, powered by this pension wars shift, and the theme has legs.
