The Objective Advisor

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.

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.

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.

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

Developments in artificial intelligence may be the antidote for an aging population, but it takes time for these advancements to work themselves into the fabric of our nation’s businesses. The impact of new developments can persist in markets, so investors need to carefully discern what could be different this time around.

"The four most dangerous words in investing are: 'this time is different.'" — Sir John Templeton

ARE WE IN A BUBBLE?

While some are drawing parallels between the current period and the late-1990s tech bubble and concluding that a crash may be coming, that’s not our view at all. This market environment is very different given who is leading the charge – the highest quality, most profitable companies in the world – and much lower valuations. Still, we think this history lesson can be instructive. The internet buildout took a number of years to play out, suggesting this buildout and its impact on stock prices may still only be in the early-to-middle innings. A Stanford University professor has some insights we will share later in this commentary.

Now, that doesn't mean technology stocks are going to continue to surge for years to come. There are many other important factors that matter than just artificial intelligence (AI). A likely path for markets, we believe, is a pullback or mild correction in the second half, offering investors the opportunity to buy on dips. We would not chase this narrow, AI-fueled rally, and maintain our neutral recommended technology allocation.

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.

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.

When it comes to investing, gold may be the antithesis of artificial intelligence (AI). The precious metal has acted as a store of value for thousands of years with zero technological innovation — gold is discovered, not developed. Gold is also a real tangible asset and can act as a potential hedge against inflation or a safe haven during times of crisis. Given these properties and the backdrop of a risk-on-record-setting equity market, many investors are wondering what’s behind the paradoxical price action of gold’s rally to new highs and how the yellow metal has matched the momentum in AI stocks over the last several months (gold and the equal-weight Magnificent Seven Index are both up around 20% since March). Herein we discuss the key drivers of gold and why this rally is no flash in the pan.

Melt Up in Gold

After consolidating sideways for several years, spot gold prices finally reached record highs in March. The rally continued into the summer months as expectations for a monetary policy pivot from the Federal Reserve (Fed) firmed. Interest rates and the dollar subsequently declined as the market began to price in higher probabilities for rate cuts. This was an expected response from gold, as lower U.S. interest rates and a weaker dollar increased the appeal of non-yielding bullion.

Perhaps more surprising is the lack of demand for gold exchange-traded funds (ETFs). Until recently, ETF holdings of gold had inexplicably decoupled from the precious metal over the last two years. However, with gold breaking out to new highs and creating a lot of headlines along the way, fear of missing out appears to be kicking in. Buyers have returned to chase this rally as gold ETF holdings recently reported seven straight weeks of positive inflows, marking the longest inflow streak since March 2022. History suggests this trend could continue as peaks in gold ETF holdings tend to occur after peaks in gold prices.

On October 12, 2022, there were very few comments suggesting that a new bull market was in thethroes of being born as the S&P 500 opened at 3,590.83 and closed at 3,577.03.

After all, inflation was still running hot even though the Federal Reserve (Fed) began its rate-hiking campaign on March 16, 2022, by raising rates by 25 basis points (0.25%) and moving to a 50-basispoint hike on May 5, 2022, as it tried to quell inflationary pressures. By mid-June, a series of 75- basis-point hikes were introduced as the Consumer Price Index (CPI) peaked in June at 9.1%.

The October 13 rally that ended the bear market at a low of 3,577.03 began with the S&P 500 selling off in the morning only to rally dramatically higher into the market close. The CPI report earlier in the day showed headline inflation at 8.2% on a year-over-year basis, but Core CPI ─ not including food and fuel prices ─ beat the consensus estimate at 6.6%. The S&P 500 closed at 3,669.91 and the bull market had commenced.

The Bear Gives Way to the Bull

The explanations for the market reversal that day traversed from excessive short covering to the deep pessimism embedded in the market psyche that allowed investors and traders alike to witness a modicum of improvement in the CPI report.

S&P 500 Maintains Its Growth Over the Last Year

The bar for third quarter earnings is low, with analysts currently expecting only about a 3% increase in S&P 500 earnings per share (EPS). That low bar and a supportive economic environment points to potential upside. However, stocks may already be pricing in solid results, with the S&P 500 up more than 7% since the third quarter began on July 1. Here we preview earnings season and discuss some of the key drivers of earnings growth in the year ahead.

Quick Numbers Check

The S&P 500 consensus earnings growth number of 3% for the third quarter is not something to write home about, especially after double-digit earnings growth in the second quarter. The soft number is partly due to a tougher comparison. In Q2 2024, earnings had an easier comparison with a 3.3% drop in earnings in the prior-year quarter (Q2 2023 vs. Q2 2022). For the third quarter now being reported, the comparison gets tougher as earnings growth in Q3 2023 was over 5% (vs. Q2 2022).

The biggest drags on earnings this quarter are likely to come from the energy and industrials sectors, while the biggest contributions are expected to be from technology, communication services, and financials. The largest, technology-oriented companies — the so-called Magnificent Seven (Mag 7) — will again drive a big chunk of overall earnings growth even as their growth has slowed (more on that below).

As December rolls forward, it’s natural to reflect on another year almost in the books. This time of year invites introspection, offering us a moment to pause, look back at where we've been, and prepare for where we’re headed. It’s an interval brimming with potential and an opportune moment to reflect on one of the most crucial aspects of financial planning and investment—timing.

In our financial endeavors and personal journeys, timing often emerges as the invisible hand that guides success. Just as the right decision made at the right moment can accelerate growth, a mistimed move can create undesirable challenges. As we prepare to bid farewell to 2024 and usher in a promising new year, understanding the nuances of timing can empower you to seize opportunities and navigate potential pitfalls with perspicacious agility.

The imposition of tariffs by the United States this week has understandably sparked volatility in the markets.

It's in the face of such challenges that our diversified, strategically balanced, long-term approach demonstrate their true value. Our goal has always been to withstand market ups and downs, minimizing exposure to individual market events and maximizing potential returns through diversified investments across various asset classes.

When it comes to investing, the biggest threat to your portfolio isn’t the market—it’s your own brain. Evolution equipped us to survive in a world of immediate threats, not to stay calm in the face of volatile markets or abstract probabilities. As a result, our instincts often push us toward short-term comfort and away from long-term wealth.

We buy when others are euphoric, sell when fear takes hold, and convince ourselves that this time is different. As decades of behavioral research have shown, investors usually lose not because the odds are stacked against them—but because their biases and impulses overpower their logic.

For decades, U.S. Treasury bonds were regarded as among the safest of investments—so reliable, in fact, that they came to be viewed as the foundation of the global financial system.

But today we are facing an environment where those old assumptions may no longer hold true. With U.S. debt growing at an accelerating pace, confidence in Treasuries is being tested in ways we have not seen for generations. What was once considered unquestionably secure is now subject to doubt, challenging the traditional idea that there are permanent “safe havens” in investing.

When Fortune magazine asked an AI model to sum up Wall Street’s 2026 outlook in a single word, the result was the word “precarious.” It’s an interesting choice—and not entirely wrong. With markets weighing shifting interest rates, inflation trends, talk of an AI bubble and global realignments, “precarious” certainly could capture the moment. Yet while some analysts accept that word, you have the opportunity to choose your own.

Your word could shape the next 365 days. Maybe it’s “abundant,” “balance,” “growth” or “power.” The word you choose can frame your outlook, guide your decisions, and remind you what you want this year to be about—financially and personally. Because no matter what the markets are doing, your intentions define the meaning behind your actions.

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.