I cannot recall a time when even determining if the market is strengthening or weakening was this difficult. The S&P 500, the most important index in the world, has essentially gone nowhere for almost two months and was down again last week. The "Magnificent 7" stocks that led the market for so long have been very "unmagnificent," collectively dropping almost 15% from their early May high after another 5% skid last week. The majority of S&P sectors have made no progress in months, and some breadth measures continue to make lower highs. If focusing just on these measures, it would be easy to assume that the stock market is heading in the wrong direction.
And yet, a good case can just as easily be made that the rally has been broadening recently. The Dow Jones Industrial Average, the S&P 500 Equal Weighted Index, and the small cap Russell 2000 all made new all-time highs last week. The NYSE Advance-Decline Line did as well. It isn't that nothing has been working lately; it's just that the leadership has changed. Rotations continue to occur from day to day to help keep a high floor underneath even the indices that haven't been doing as well. Capital is not abandoning stocks altogether; it is seeking new opportunities. We are even witnessing this rotation occur within themes as well. It is no secret that the "AI trade" has helped propel the stock market higher over the past year.
To just belabor this point on AI a bit further, it will be written about in future economic books as a phenomenon unlike any other in that it is expanding like a virus and gaining speed and strength at an accelerating rate. It will eventually reach a point where its importance will slow its advance, but we appear to be far from there at this point. The biggest, smartest, and most well capitalized companies in the world are doing everything in their power by way of equity offerings and debt offerings to get the funds necessary to expand their personal investment for their own concerns. How can we measure the benefit of these investments when we don’t completely understand how to even know what can be attributed to the AI investment and what is simply peripheral benefit? Again, it is an organic development that is very tough to quantify. Last week I spoke about how the markets have acted in the first 6 months of the year taking into account the Iran war, Midterm elections, Presidential midterm year, and a new Federal Reserve Chairman. So far so good! This is not what the analog for 2nd year of a presidential term has previously shown, but I think instead is reflective of the overriding effect of AI on the world. Since AI is like a form of COVID in how it has really spread and grown almost virally, it is clearly the 2026 version of the old saying, “It’s different this time.” If it is truly different this time, what could we expect going to the second half of the year? Thomas Lee upped his year-end targets last Thursday (as have many other analysts) to 8,000 for year end. This is really the cards that I feel we are currently holding:
In order to truly quantify this set of data pints, I keep coming back to earnings, earnings, earnings. At the end of 2025 the general forecast for the earnings for 2026 for the S&P 500 was $309.28. As of June 18th, due to the gross beat by the majority of the companies in the index, this number has been raised to $340.82, and subsequently the forecasts for 2027 have been raised as well:
Even though companies are making more money, and the market is higher, the index is actually priced cheaper today than it was January 1rst of this year. This basically says that the price of the market doesn’t believe that the growth in earnings is going to continue and therefore it is pricing in a slower rate of ascent. I say this as the stock market is a discounting mechanism. We listen to earnings reports- which reflect the immediate past, and then create forecasts of the future. Stock prices tend to reflect expectations 12-16 months forward. This is why it stands to reason that there could certainly be some type of correction, but it seems that staying invested should prove to be the best decision given that the earnings and revenues continue to rise. Here is where the Price to Earnings ration measurement (P/E) sits currently:
I use the measure of P/E as it is the most general way, historically, that people can attempt to compare apples to oranges. So, getting back to this general measure of price to the value of earnings, we really must scratch our head at this simple measure. How could this be? It really seems quite strange to me as a market participant. The overwhelming explanation for this utter spectral difference I believe lies in the media and concentration of the non-Trump commentaries. I know this sounds political, but it is not intended to be. I simply am saying, “How could the US companies be raging, interest rates remain stable, gold, silver and bitcoin selling off dramatically, and labor and earnings be stable and growing yet everything one reads is saying the everything is terrible?” I believe this is explained in the ‘polled” consumer sentiment numbers. I say polled as a statement to the political bias of the people whose opinions are being reflected. Investors that aren’t participating or have missed the advance are clearly upset. Those that continue to benefit say nothing as they are moving along happily. Last month I gave the statistics of the percentage of those polled that are conservative or liberal. I believe that this explains a great part of it.
Given that the media is telling a totally different story than the corporate earnings environment is, how has this looked relative to how it did around the Dot Com Bubble that burst in 2000? Well, as bizarro as it may seem, Consumer Confidence was at its highest EVER in 2000, and today it is at its lowest reading EVER. Strange but true. Here is the picture of the markets historical ascent overlayed on Consumer Confidence:
Now remember the picture above and look at the time of the seven “Black Swans” that have come home to roost since COVID.
Clearly the markets have figured out a way to deal with these unforeseen events and progress higher. Not only have the markets moved higher, but companies are collectively priced even cheaper than they were before any of these nasty situations. Again, this is truly a head scratcher, but again further testament that news sells based on negativity, but companies thrive because they figure out how to figure it out!
I believe the growing optimism surrounding artificial intelligence is partially responsible for the rotation we've seen. That should be a good thing in the long run, although it might not come without some bumps along the way. The broadening out of the rally is obviously preferred to a coordinated pullback. The resilience has been impressive, especially as many of the largest companies in the market struggle. For years, the heavy concentration in the S&P 500 and NASDAQ 100 in a small number of mega-cap names has been a major talking point and a major risk. The fact that we've witnessed these stocks fall without taking the market down with them must be acknowledged. Should these stocks strengthen once again, it can also help push the SPX and NDX higher very quickly. Of course, on the flip side it does leave the market more vulnerable in the event the recent leadership falters and there isn't enough strength in the big boys to make up for it. So far, that has not happened.
I feel I am beating a dead horse at this point, but the clear rotation into AI beneficiaries makes the complete obliteration in commodities and commodity companies even more baffling. Unless all this AI infrastructure will be built out and powered with hopes and dreams, it's going to require a ton of resources. This is why I BELIEVE the market is broadening and more companies are participating. Summer tends to be a time of slower market movement, and this year has many other factors that also add to a market that could be a little stuck in the mud. What we can rest assured by is that the underlying indexes are healthy, and earnings of individual companies in many different industries are continuing to flourish. The head scratcher is the analysis that market prices are higher, and prices as compared to earnings are actually lower. When things come back to a more normal environment, this could very well happen at much higher price levels- but not without twists and turns sure to create anxiety for investors along the way.
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Investing involves risks including possible loss of principal.
The Standard & Poor's 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The S&P 500 is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States. Indexes are unmanaged and cannot be invested in directly.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
The Nasdaq-100 is a large-cap growth index. It includes 100 of the largest domestic and international nonfinancial companies listed on the Nasdaq Stock Market based on market capitalization.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. Indexes are unmanaged and cannot be invested in directly.
The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.
Data sourced from Bloomberg (2025).
Stock investing includes risks, including fluctuating prices and loss of principal.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Bonds are subject to availability, change in price, call features and credit risk.
Government bonds are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
Bond yields are subject to change. Certain call or special redemption features may exist which could impact yield.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor’s portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
The financial professionals with Tower 68 Financial Advisors are registered with, and securities and advisory services are offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.
LPL Tracking #1132633