Markets Climb the Wall of Worry, but What’s Next?

Following a volatile first half of the year due to policy uncertainty, the financial markets and the U.S. economy have delivered surprising strength and resilience. The list of market concerns throughout the year has been extensive and continues to grow. First, there were tariffs and trade wars, rising geopolitical tensions, higher inflation, cracks in the labor market, and soft housing data. Now, we are seeing questions about central bank independence and a government shutdown. Yet, the markets have continued to move higher, crossing all-time highs yet again. Despite the uncertainties, it is important to remember that every bull market climbs its own wall of worry. This one is no different. Markets are rallying on three main catalysts:

1. AI Enthusiasm - There is significant enthusiasm surrounding AI. We certainly see the benefits of this new technology and have positioned portfolios to take advantage of this opportunity. AI will have a profound impact on our lives and allow us to be more efficient with our time. Our concern is that valuations in some of the technology stocks have gotten extremely expensive in a short period of time.

   
   

2. Tax Reform – The passing of the OBBBA in July extended corporate tax rates and provided incentives for companies to expand through research & development and immediate depreciation recapture. It also included lower tax rates for many seniors. The tax reform has created a sense of certainty going forward, which is ultimately stimulative for companies and consumers.  

   
   

3. Earnings Strength - With the first two quarters of earnings behind us, corporate revenues and earnings have been better than anticipated, and estimates are moving higher for the rest of the year. Companies found ways to navigate through the tariff uncertainty, and there was more clarity on tariffs that included announced deals and carve-outs for specific companies and industries, which has stabilized the earnings outlook.

   
   

On balance, the economy has been growing more than expected over the past six months, and the economic outlook is better than originally anticipated. The consumer continues to drive earnings, particularly in the high-end, but we are starting to see some cracks in the labor market. This is why the Federal Reserve began cutting rates again in September, something we are keeping a very close eye on. The labor market does give us cause for concern, but at this point, we are not seeing a deterioration bleeding into layoffs. An outright recession is also something we do not foresee today unless there is some sort of external shock, which is not something we predict as our base case.

This Commentary is provided by Spraker West Wealth Management, a registered investment advisor, and is for informational purposes only. It should not be construed as investment advice and is not intended as a solicitation of any specific product or service. Investments and/or investment strategies include risk including the possible loss of principal. There is no assurance that any investment strategy will achieve its objectives. Information provided is not intended as tax or legal advice and should not be relied upon as such. You are encouraged to seek tax or legal advice from a qualified professional.