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The LPL Strategic & Tactical Asset Allocation Committee (STAAC) determines the firm’s investment outlook and asset allocation that helps define LPL Research’s investment models and overall strategic and tactical investment thinking and guidance. The committee is chaired by the chief investment officer and includes investment specialists from multiple investment disciplines and areas of focus. The STAAC meets weekly to foster a close monitoring of all global economic and capital markets conditions to ensure that all the latest information is being digested and incorporated into its investment thought.

With stock valuations elevated after such a strong first half, earnings growth will be key to holding, or potentially building on these gains. LPL Research believes stocks have gotten a bit over their skis, but earnings season may not be the catalyst for a pullback in the near term given all signs point to another solid earnings season and stocks have mostly performed well during the peak weeks of reporting season in recent years. We may not get an increase in second-half estimates over the next couple of months — that's a lot to ask — but we should get a few points of upside and double-digit earnings growth for the second quarter on the back of technology strength.

Return to Double Digits

Earnings season is right around the corner, with the big banks — JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC) — scheduled to report on July 12. With the consensus expectations currently calling for a 9% increase in S&P 500 earnings per share (EPS), a double-digit gain for the first time since the fourth quarter of 2021 looks highly likely. That’s the main headline, but the sub-headline is the composition of that earnings growth.

Expect Double-Digit Earnings Growth in The Second Quarter

The LPL Strategic & Tactical Asset Allocation Committee (STAAC) determines the firm’s investment outlook and asset allocation that helps define LPL Research’s investment models and overall strategic and tactical investment thinking and guidance. The committee is chaired by the chief investment officer and includes investment specialists from multiple investment disciplines and areas of focus. The STAAC meets weekly to foster a close monitoring of all global economic and capital markets conditions to ensure that all the latest information is being digested and incorporated into its investment thought.

Every year as the summer months draw near their end, LPL Financial hosts its annual conference for financial advisors. While the conference is an excellent opportunity for advisors to expand upon professional interests, discover ways to enhance their impact on clients, and connect with industry experts — learning is a two-way street. At this year’s big event with nearly 9,000 attendees in sunny San Diego, the LPL Research team had the unique opportunity to connect with many of these advisors in person to get their perspectives on the capital markets. Below are some of the frequently asked questions from the road.

Equity Discussions

The VIX spike and subsequent collapse. After a historic 65 reading on the CBOE Volatility Index (VIX), a measure of implied volatility for the S&P 500, just a week before the conference, combined with an upcoming presidential election, we would have expected more jittery advisors. However, we noted just the opposite. In fact, far fewer discussions than expected were around the recent spike in the VIX and the election, reflecting the quick return to calm by the VIX, which is well below its long-term average of 19–20, and down a remarkable 50 points in two weeks. Commonly referred to as the “fear gauge,” a rising VIX is associated with increased fear and uncertainty in the marketplace and falling stock prices, and vice versa for a declining VIX. An underwhelming July employment report and the unwinding of the yen carry trade created a storm of volatility earlier this month (more on the carry trade below). The VIX jumped to as high as 65.73 on August 5, marking its highest intraday reading since March 2020. Fear has dissipated and stocks have subsequently rebounded as economic data improved and currency markets stabilized. Technically, the VIX has pulled back through the April highs and appears poised to retest support near its 200-day moving average (dma). A break below this level would add to the evidence of the market shifting back toward a risk-on backdrop.

In his recent speech, Federal Reserve (Fed) Chairman Jerome Powell focused on the fragilities of the labor market and is preparing markets for the new phase for policy. “The time has come for policy to adjust.” A soft landing looks achievable, barring any shocks. Disinflation while preserving labor market strength is only possible with anchored inflation expectations, so an independent and credible central bank is key. One of the best concepts in the speech for investors to understand is the current data shows an evolving macro landscape. The jury is still out on if the Fed can successfully manage the risks to both sides of their dual mandate.

What a Difference a Year Makes

Last summer, Jerome Powell ended his Jackson Hole speech with an intimidating tone — this tone was almost gone at this year’s symposium. He pivoted his policy inclinations from “We will keep at it until the job is done” to a more calming promise that “The time has come for policy to adjust.”

This clarity is just what the markets wanted. As consumer prices are no longer rising at breakneck speed, the Fed can move on to the other part of its dual mandate for full employment.

The Fragilities of the Job Market

What we learned from Jackson Hole is the Fed is interested in preparing markets for the committee to start cutting rates at the September 18 meeting and to start a measured process of cutting throughout the rest of this year and into next.

In December 2023, Vladimir Putin declared that the 2024 BRICS Summit, hosted by Russia, would be focused on establishing a “fair world order” based on shared principles. At the core of Putin’s goals for stronger BRICS economic integration is a longstanding and overriding objective to provide a viable alternative to the West’s global hegemony in nearly all facets of political, military, economic, financial, and security affairs.

Challenging Western Dominance

Creating a common currency designed to curtail — and displace – the dominance of the U.S. dollar as the world’s reserve currency has been a central theme when the BRICS Summit was formalized in 2009 with initial founding membership of Brazil, Russia, India, and China. Today, the dollar remains the commanding currency in global transactions, involved in an overwhelming number of exchanges, although a growing number of dealings involve the euro.

Putin has recently called for BRICS to establish a “safer and harmonious world” with a goal towards creating its own parliament.

Today, BRICS as an intergovernmental organization is comprised of Russia, China, India, Brazil, South Africa, Egypt, Ethiopia, Iran and United Arab Emirates. Saudi Arabia, due to join formally in January 2024, has not yet declared its official membership, while rumors persist that North Korea is seeking affiliation. Argentina was also invited to join, although newly elected President Javier Milei has made it clear the nation will not be joining in the near-term.

Second quarter earnings season is in the books, and it was a good one. S&P 500 companies collectively grew earnings at a double-digit pace for the first time in three years. Companies beat estimates at a solid 79% clip. Guidance from company CEOs and CFOs was relatively upbeat. And although some were a bit disappointed by big technology results based on stock reactions, the problem was high expectations more than anything else.

The Numbers

Second quarter numbers were quite good and generally in line with LPL Research’s expectations. In our earnings preview on July 1, we called for double-digit earnings growth and we got it — S&P 500 earnings per share (EPS) grew nearly 12% in the quarter, or over 13% excluding a $9.1 billion write-down of media assets by Warner Brothers Discovery (WBD). Profit margins expanded quarter over quarter by a not insignificant 0.4%, indicating companies did a good job controlling costs.

Earnings Growth Accelerated Nicely in Q2, Keeping Second Half Expectations High

Source: LPL Research, FactSet 09/05/24
Past performance is no guarantee of future results. Estimates may not develop as predicted.

With the first presidential debate behind us, it’s safe to say election season is in full swing. While last week’s debate was light on economic policies, the future of tax policy (along with potential efforts to arrest elevated federal deficits) could have broad implications for the municipal (muni) market — some good, some not so good. With the Tax Cuts and Jobs Act (TCJA) set to sunset in 2025, the election will go a long way in determining the future of tax policy in the U.S. And for muni securities and their unique tax-exemption characteristics, the election will go a long way in determining future demand for the asset class. But with the Federal Reserve (Fed) embarking on a rate cutting cycle likely starting this week, the next few months could be the last “best time” to buy munis, regardless of changes to tax policy.

Spending > Income = Deficits

While there are still several months until the election is decided, the expectation is that regardless of who ultimately becomes our 47th president, the biggest loser could be the fiscal deficit. Per the Congressional Budget Office (CBO), the U.S. government is expected to run sizable deficits over the next decade — to the tune of 5% – 7% of gross domestic product (GDP) each year. According to the CBO, the deficit increases significantly in relation to GDP over the next 30 years, reaching 8.5% of GDP in 2054. That growth results from rising interest costs and large and sustained primary deficits. CBO deficit projections assume the personal tax cuts within the TCJA will expire at the end of 2025, so deficits are likely to be even higher assuming either Kamala Harris or Donald Trump will extend most, if not all, of the tax cuts. If tax cuts are fully extended, budget deficits are expected to be in the 7%–8% range of GDP over the next decade. Deficits will remain elevated regardless of who is in the White House in 2025, even without new spending or tax cuts due to higher spending on Medicare and Social Security plus the (growing) interest expense on the (growing) debt pile.

Jeffrey Buchbinder, CFA, Chief Equity Strategist
Adam Turnquist, CMT, Chief Technical Strategist

A positive January has historically been a bullish sign for stocks. Yale Hirsch, the creator of the “Stock Trader’s Almanac”, first discovered this seasonal pattern back in 1972, which he called the January Barometer and coined its popular tagline of ‘As goes January, so goes this year.’ Here, we assess the likelihood that this popular stock market adage delivers more gains for investors this year. The weight of the evidence leans toward yes, as we explain.

Jeffrey Roach, PhD, Chief Economist
Jeffrey Buchbinder, CFA, Chief Equity Strategist

When we wrote the annual outlook last November, the data was mixed. Some metrics hinted at emerging cracks in the economy while others suggested the growth trajectory in capital markets and the economy had legs. So, the variety of the data produced the narrative that business activity in the New Year would grow on an annual basis but experience some bumps in the first half of the year. Now, enter the revisions.