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MARKET CALL: The Tug Of War Between P/E And E
Last Monday saw the S&P 500 down 9.1% from its January 27 high, which we believe marks the trough of the latest pullback, for now. That was our call on Tuesday. The next two days could make or break our call. Today, President Donald Trump issued a final, profanely worded ultimatum, setting a firm deadline for what he is calling "Power Plant Day." He specified on Truth Social that Tuesday will be "Power Plant Day, and Bridge Day, all wrapped up in one." He warned the Iranian regime that they would be "living in Hell" if the blockade of the Strait of Hormuz isn't lifted by 8:00 p.m. Today, Trump also told Israeli media (Channel 12) and the Wall Street Journal that the US is currently engaged in "deep" negotiations and that there is still a "good chance" a deal could be reached before the Tuesday night deadline. Our call of a market bottom doesn't come with a money-back guarantee, of course. However, history offers some reassurance: The S&P 500 has been higher two years after the past four major US military engagements, with gains of 31% to 44% following the Korean War, the Iraq War, the Gulf War, and World War II (chart). We think there is good value in the stock market at current levels. The forward P/E of the S&P 500 peaked last year at 23.0 on October 27 (chart). It fell 17.8% to 18.9 through Monday of last week (chart). Over that same period, S&P 500 forward earnings rose 12.7%, reaching record-high territory (chart). The valuation multiple initially dropped due to concerns about AI companies' profitability, then fell more quickly amid fears that the war would trigger a global recession. However, industry analysts didn't blink and continued to raise their collective earnings outlook. Despite the typical pattern of analysts' estimates drifting lower as the reporting season approaches, their Q1 estimates stayed remarkably steady despite the war, and they have increased their forecasts for Q2-Q4 (chart). S&P 500 forward earnings continues to rise rapidly, while S&P 400 and S&P 600 forward earnings are also moving higher (chart). The broadening breadth of forward earnings in recent months is a bullish development. The wide breadth of forward earnings among the S&P 500 sectors is also bullish (chart). Information Technology continues to lead the way, despite concerns about AI's negative impact on the profitability of companies in this sector. The same applies to Communication Services. The forward earnings of Consumer Discretionary, Consumer Staples, Financials, Industrials, and Utilities are all at record highs. So far, Energy isn't much of a contributor to the bull market in forward earnings! The S&P 500's forward profit margin has continued to rise to a record high of 15.0%, led by IT at 31.4% and supported by a broad-based expansion across sectors. Many of these metrics are also at or near record highs this year, including Financials, Communication Services, Utilities, and Consumer Discretionary (chart). Total forward earnings for the S&P 500 has continued to climb, even excluding the Magnificent-7 (chart). On December 7, 2025, we lowered our rating for the Mag-7 from overweight to underweight. A couple of weeks ago, we moved back to equal-weight (chart). The forward P/E of the Mag-7 is down from 31.2 on November 3, 2025, to 23.7 currently. Energy has re-rated from 15.7 to 19.3 as the market priced in the oil price shock. The more interesting story is Financials at 14.3, down from 16.4, despite carrying the second-highest forward profit margin in the S&P 500 at 21.4%. The de-rating looks overdone if private credit stress proves contained (chart). The IT sector's forward P/E at 20.7 has now converged with the S&P 500's 19.9 (chart). For investors with a multi-year horizon, this is an attractive entry point. The share of the S&P 500’s market capitalization represented by the IT sector plus the Communication Services sector, at 43.6% currently, exceeds the dot-com era’s peak. That’s been the case over the past 12 months or so. But there’s arguably more earnings support for such a high concentration of the market in these two sectors now versus back then. Today, the forward earnings share of the two sectors, at 42.0%, is only 1.6ppts above the market-cap share (chart). At the dot-com peak, the gap between market-cap share and earnings share exceeded 15ppts. Today’s concentration is well deserved. We asked Michael Brush for an update on insiders: "Insiders had turned cautious (in week three of the war) ahead of the declines in the past two weeks. Insiders turned more bullish in the past two weeks as stock prices declined further."
Read Full AnalysisECONOMIC WEEK AHEAD: April 6-10
This week will continue to be dominated by developments in the Middle East, though a heavy slate of data releases—including the FOMC March Minutes, February personal income, and March CPI—will compete for attention. President Trump confirmed Wednesday night that the United States could conclude its involvement in the Iran War within two to three weeks, providing an exit ramp from a conflict that has roiled energy markets since late February. Yet, oil prices remain stubbornly elevated, reflecting concerns about the Strait of Hormuz, which Trump said the US would leave to other countries to reopen. Then again, this weekend, Trump warned Iran that unless the Strait is opened immediately, Monday will be Obliteration Day, when the US will bomb Iran's electric power plants. The March 17-18 Fed Minutes (Wed) will offer a direct window into how Fed policymakers were thinking about the early stages of the conflict. The March CPI (Fri) will provide the first look at how the surge in gasoline prices has fed through to consumer prices. Here are the key US economic releases most likely to shape investors' thinking on economic growth, inflation, and the monetary policy path this week: (1) GDP. Thursday's final Q4-2025 GDP revision is expected to come in at 0.7% (saar), a backward-looking number that is unlikely to move markets. It was depressed by the government shutdown. The more important story is Q1-2026. The Atlanta Fed's GDPNow model has drifted down to 1.6% (chart). We think that bad weather in December, January, and February contributed to the recent weakness in real GDP growth. During those three months, there was a significant increase in the number of workers who either did not go to work or worked part-time due to worse than usual winter weather (chart). (2) CPI. The March CPI report (Fri) is the most consequential release of the week. The Cleveland Fed Inflation Nowcasting estimates that the headline and core inflation rates rose m/m by 0.84% and 0.20%, or y/y by 3.25% and 2.60%, up from 2.40% and 2.50% y/y in February (chart). The historical relationship between oil prices and headline CPI makes the March jump entirely predictable; every major spike in crude oil prices has been followed by a corresponding move higher in headline inflation (charts). We expect oil prices to peak in the next two months; though this, of course, would depend on a speedy resolution in the Middle East. (3) Unemployment. Friday's payroll employment report surprised to the upside, offering reassurance on the near-term health of the labor market. Initial jobless claims (Thu) have continued to trend lower, with the four-week moving average at 207,800 (chart). So far, there is no evidence in the claims data that the war is weakening the labor market. (4) Consumer Sentiment. The preliminary University of Michigan Consumer Sentiment survey for April is expected to edge down to 52.0 from 53.3 in March, with expectations already at a depressed 51.7 (chart). Conference Board consumer confidence surprised to the upside last week at 91.8, suggesting sentiment may have more resilience than the consensus implies.
Read Full AnalysisStocks: Was That The Bottom On Monday?
On Tuesday night, we suggested that the S&P 500 might have bottomed on Monday, with a pullback of 9.1% (i.e., just under a 10% correction) from its January 27 record high. Tuesday's strong equity rally was triggered by reports that the US had found an exit ramp from its war with Iran. Wednesday night, President Donald Trump confirmed that the US would exit in two to three weeks. Stocks opened lower today as oil prices rose on fears that the US would exit the war without opening the Strait of Hormuz. Stocks then recovered during the day on reports that Iran and Oman are in the "final stages" of drafting a new joint protocol for the Strait of Hormuz. However, this is not an agreement to "open" the waterway in the traditional sense; rather, it is a move to formalize a new, restrictive navigation regime. Apparently, traders interpreted the "protocol" as a sign that a framework for managed transit is at least being discussed. Our stock market bottom call is also based on the sharp declines in our two favorite sentiment indicators (chart). Their low readings tend to provide buy signals from a contrarian perspective. They worked like a charm last year when the market bottomed on April 8. In fact, in our April 7, 2025 QuickTakes titled, "Looking For A Stock Market Bottom In Fundamentals & Technicals," we wrote: "The latest reading of the AAII Bull/Bear Ratio, at 0.35, is as depressed as during previous bear markets. The same can be said about the Investors Intelligence Bull/Bear Ratio, which was 1.00 during the April 1 week. From a contrarian perspective, that's bullish." The S&P 500 was 9.0% overbought relative to its 200-dma on January 27, when the index rose to a record high (chart). It is now 0.9% below its average. More importantly, three of the largest sectors of the S&P 500 are selling well below their 200-dma: Consumer Discretionary (-7.0%), Financials (-5.8%), and Information Technology (-3.6%). These three have led the rebound from Monday's low and should continue to do so. The Middle East conflict is the latest test of the US economy's resilience. If the war wraps up within the President's 2-3-week timeline, the economy should pass its latest test. Consider the recent batch of upbeat economic data: (1) Initial unemployment claims dropped last week to 202,000, confirming that layoff activity remains at historically low levels (chart). The four-week moving average fell to its lowest reading since the start of the year. Continuing claims edged higher, but the four-week moving average declined to the lowest since September 2024. The 4-week moving average of jobless claims suggests that the unemployment rate might have dropped during March from February's 4.4% (chart). (2) According to the Challenger layoffs report, US employers announced 60,620 planned job cuts in March, up from 48,307 in February but down a striking 78% from the 275,240 recorded a year ago (chart). Of the announced planned cuts, 25% cited artificial intelligence as the reason, up sharply from just 7% in January. (3) The recent streak of better-than-expected economic indicators has pushed the Citigroup Economic Surprise Index into solidly positive territory since the start of this year. Economic activity was strengthening, not weakening, when the war began. (4) But what about the Atlanta Fed's latest downward revision in Q1's real GDP growth rate to only 1.6% (chart)? We blame it on the weather. February 2026 was arguably the worst February we’ve seen in at least a decade.
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