After a couple scary days based on the assumption that the next 2008-style credit collapse was upon us, stocks have pulled a U-turn. And don't look now fans, but the S&P 500 sits at fresh all-time high as I type. Nice.

So much for the new credit crisis. So much for the correction the bears have been clamoring for. And the demise of the AI secular growth theme. And the momentum play. And the bull cycle. Yada, yada.

After briefly (as in one afternoon) flirting with its 50-day moving average, the venerable S&P finds itself at new highs. As such, I fielded several questions late last week asking simply, why?

As someone who spends a healthy portion of each trading day trying to identify the "why" of market moves, I felt like this was a fair question and one that needed to be addressed. After all, one minute the sky was falling (again) and the next, well, oops, never mind!

The Set-up

To be sure, stocks were "set up" a few weeks back for some sort of a pullback, correction, pause, or sloppy period. The market had been trudging higher seemingly each and every day, regardless of the news. The indices had become overbought. Investor sentiment had reached extremely optimistic levels in general, and as we've discussed, nothing short of "frothy" levels in some of the mo-mo areas such as quantum, nuclear, rare earths, etc.

As such, it wasn't surprising to see "something" come out of the woodwork to spoil the bulls' fun. This time around, that "something" was the surprise bankruptcies of First Brands and Tricolor, and then some fraudulent loans at Zion and Western Alliance. Suddenly everybody, including JPMorgan's chief Jamie Dimon, was concerned about more "cockroaches" in credit.

But, before you could dig out your 2008 playbook, those "somethings" turned out to be company specific. I.E. The "something" turned out to be more of a nothing-to-see-here situation.

What Gives?

So, why has the market returned to its happy place all of a sudden? From my perch, it wasn't one thing but a confluence of factors that seems to have given the edge back to the bulls. As in the reason for the recent fear dissipating. As in another potential truce in the trade war with China. As in corporate earnings. And a friendly Fed. And the economy rolling along. And the trend of inflation. And the calendar. And of course, some more encouraging news from the world of AI and quantum computing.

All About Earnings

Taken together, the combination of these seemingly positive factors leaves investors feeling pretty good about the future. Lest we forget, corporate earnings came in well above expectations last quarter. And while the current results parade is far from complete, the early results support the expectations of another strong quarter. According to FactSet, with 30% of S&P companies reporting so far, the "beat rate" is the highest in four years. Not bad.

Those seeing the glass as half empty argue that high expectations for earnings leaves the market set up for disappointment. And with some very big tech names reporting this week, our furry friends in the bear camp can be heard issuing a "just you wait" warning to start the week.

However, it is important to remember that the stock market is a discounting mechanism of future expectations. And while we can argue as to the time frame stocks tend to look ahead (I'm in the 3-6 months camp), according to NDR Group, the consensus estimate for EPS growth for the S&P 500 in 2026 currently stands at a very strong +17.3%.

Yes, it is true that these analyst projections are almost NEVER right. Historically, the forward estimates tend to start high and trend lower as the year progresses. But my point is that with the current estimate above 17%, it is a decent bet that earnings should be fairly strong going forward. And thus, investors can't be blamed for looking ahead.

And the Fed

As the age-old adage goes, "don't fight the Fed." The thinking behind this is the Fed usually gets what it wants. So, with the labor market struggling a bit, Jay Powell & Company are looking to provide some support with lower rates. And the bottom line is most every investor knows that stocks tend to do well when the Fed reduces rates and the economy avoids recession. As such, my take is we can file this one in the Goldilocks category - at least for now.

And the Trade War

The big news on this fine fall Monday morning is the White House is saying that the framework for a trade deal with China has been reached and they expect Trump/Xi to finalize things later in the week.

Although I am modestly surprised that the market is celebrating such news yet AGAIN (traditionally the market rarely goes up on the same news twice) but this is a situation that just seems to keep on giving.

I guess the argument is that as long as China plays nice with the rare earths, everything will be "just fine" going forward. So, fingers crossed on this one!

And the Calendar

And finally, the bulls can count the calendar as one of their positive bullet points. Although the historical cycles suggest things could get sloppy here and there from now until the end of the year, the overall trend projection is higher into New Year's Eve.

While trying to predict exactly what will happen and when in Ms. Market's game has always been a fool's errand, the key here is we are now entering the market's most favorable six-month period. Therefore, my take is the bulls have the wind at their backs and should be given the benefit of any/all doubt here - at least until year-end.

Thought for the Day:

Price is what you pay. Value is what you get. -Warren Buffett

Wishing you green screens and all the best for a great day,

David D. Moenning
Founder, Chief Investment Officer
Heritage Capital Research, a Registered Investment Advisor

Disclosures

At the time of publication, Mr. Moenning held long positions in the following securities mentioned: JPM - Note that positions may change at any time.

NOT INDIVIDUAL INVESTMENT ADVICE. IMPORTANT FURTHER DISCLOSURES