After rising for the bulk of the summer, consumer prices finally eased somewhat this fall, and the consumer price index (CPI) hit its slowest pace of growth since 2021 in November. It is too early to call an “all clear” on inflation risks, as autumn data may be somewhat distorted by the government shutdown and this year’s monetary, fiscal and trade policy shifts could still pressure prices higher in the year ahead. Lower inflation will likely need to persist to help support equity valuations. The current multiple at 27X is already well above the 19-20X that on average occurred with CPI in its current range. Yet, multiples were not historically negatively impacted until CPI rose above 3.5%.

Consumer price inflation (at 2.7% in November) is now back below its long-term average growth pace of 2.9%, and if it holds there, it could help justify Fed easing toward a terminal rate near 3%. Over the very long term (since 1920), year-over-year growth in the consumer price index (CPI) has averaged 2.9%. Excluding the deflationary scares of the Great Depression and the Great Financial Crisis, the average is 3.6%. And since 1982, the average has been 2.9%. So, no matter how we slice the data, 2.7% is slightly below long-term average inflation.

Stocks are already trading at multiples well north of what is justified by inflation. S&P 500 multiples averaged 20.7X in the current inflation range of 2.5-3% since 1960. The current multiple of 27X is above all experiences except the inflation range of 0-1%, when equity market multiples averaged 29.4X. The equal weighted S&P 500 index multiple, at 22X, is closer to the inflation regime norm implied by history but also is already higher than the level justified by inflation historically. However, historical patterns suggest that meaningful derating has typically occurred when inflation rises above roughly 3.5%. Stocks multiples historically ranged between 19X-23X when inflation was anywhere between 1-3.5%, but material drops in valuation were experienced with inflation above 3.5%.

While the current level of inflation does not imply much by way of upside for stocks valuations, the direction of change as well as the level matters for equity markets, so we cannot simply rule out the potential for positive price impacts to emerge, particularly if inflation quiets enough to decrease interest rates. Consumer prices have relatively strong correlations with equity market valuations over time, and correlations between CPI and stocks’ PE, both on a cyclically adjusted and unadjusted basis, is negative. When inflation accelerates, it tends to suppress valuations, and vice versa. The correlation between CPI and interest rates is even stronger, so if lower price inflation keeps a rise in bond yields at bay and enables the Fed to decrease short-term interest rates, stocks could still benefit from some inflation reprieve.

HB Wealth is an SEC Registered Investment Adviser and the information provided is for informational purposes only and should not be construed as investment advice or a recommendation to buy or sell any security, cryptocurrency, or other financial instrument. Digital assets, including cryptocurrencies, are highly volatile and may not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal. The views expressed are those of the author and do not necessarily reflect the opinions of HB Wealth. Comments for this post are not monitored. Please consult your financial advisor before making any investment decisions.

Stocks rallied on welcome news of another round of liquidity provision and brightening growth from the Federal Reserve last week, only to unwind the trade (and then some) in recent days. Our valuations Model suggests the equity market may continue to struggle to see a few more Fed cuts as reason to push market multiples to new highs, implying the market outlook will be more reliant on earnings trends in 2026. Meanwhile, a look beneath the hood to examine the drivers of valuation reveals that rotation could help ease valuation risks to the U.S. equity market.

Rates alone aren’t likely to head low enough to support current equity valuations, and will need support from a robust earnings outlook to keep stocks’ multiples afloat in the year ahead. U.S. large cap equity P/E is hovering near levels last recorded in 2021, when short-term interest rates were near zero and 10-year Treasury yields were less than 2%. Based on current consensus expectations for the 2-year Treasury rate to hit 3.3% and the 10-year Treasury yield to be 4.1% in a year, as well as forecasts for earnings growth to rise about 14% per year for the next two years, our regression model for US large cap valuations suggests the S&P 500, trading at 22.5x earnings, is about 4 turns too rich.

Valuations are notoriously difficult to model with macro variables alone and are very poor timing mechanisms for stocks to boot, so multiples are just one piece of the puzzle of markets to consider. However, the recent divergence between the macro model and the market reality is worth exploring because this macro model struck an optimistic tone for equity markets for most of the last two decades. For most of the recent past, macro cues suggested equity multiples should be higher than observed. Indeed, prior to this past year, the only other extended periods in time in which the combination of bond yields and earnings growth undershot market multiples was during and just after the turn of the century tech bubble and in the mid-cycle correction of 2015-16.

Notably, as valuations for the market cap weighted index overshot our fair valuation model estimate, the equal weighted index has continued to trade at a discount to implied fair valuation, suggesting the valuation excess is concentrated in high-priced large market cap stocks. On an equal-weighted basis, stocks trade at 18 times earnings, still a touch below what the bond market and earnings trends together imply is fair valuation. This valuation gap may suggest the Magnificent-7 (Mag-7) has now emerged as a significant risk to stocks, but it also hints that there remain valuation discounts hidden beneath the heavy weight of this dominant group.

The evolution of the gap between market-cap weighted and equity weighted valuations is important to acknowledge, for it may offer hints as to what may trigger valuation normalization. The gap is largely explained by the Mag-7, and fundamental performance of this group in contrast to the rest of the index.
In recent years, Mag-7 stocks started recording both abnormally strong earnings and notably large earnings beats, particularly as the rest of the index experienced unusually weak earnings conditions. On average since 2023, the Mag-7 has recorded more than 30% earnings growth, and the Mag-7 stocks have managed to top earnings expectations each year since 2023. This Mag-7 growth phenomenon has occurred as the rest of the index has struggled to produce even average growth while continuing to miss consensus. On average, the ex-Mag-7 has recorded earnings growth of just 3% since 2023, and the last time ex-Mag 7 stocks beat forecasts was in 2021.

Given this valuation phenomenon, the outlook for S&P 500 valuations may depend less on a few more cuts from the Fed, and more on the degree to which earnings trends shift. To sustain elevated valuations and justify the gap between market cap weighted and equal weighted valuations, the Mag-7 group likely needs to keep topping forecasts and producing growth well above the rest of the index. In contrast, the valuation gap may close with Mag-7 misses and/or better growth emerging from the rest of the index. Currently, the consensus sees Mag-7 earnings growth of 18.1% in 2026. While this is slower than the pace in recent years, it is still 1.3x faster than the rest of the index, which is projected to grow earnings 13.5%. Meanwhile, the rest of the index may have an opportunity to shine, if they can recover stronger growth, and especially if they manage to beat expectations for the first time since 2021.

Disclosure: The information reflects the author’s views, opinions, and analyses as the publication date. The information is provided for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any investment product. This information contains forward-looking statements, predictions, and forecasts (“forward-looking statements”) concerning the belief and opinions in respect to the future. Forward-looking statements involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements. The information does not represent legal, tax, accounting, or investment advice; recipients should consult their respective advisors regarding such matters. Certain information herein is based on third-party sources believed to be reliable, but which have not been independently verified. Past performance is not a guarantee or indicator of future results; inherent in any investment is the risk of loss.

The Federal Reserve meeting this week offered more than just a liquidity cue for markets.  It also contained hints that the time for AI to morph from tech profits-driver to broader economic force may be emerging.  If growth accelerates while inflation eases, as the Fed now expects, S&P 500 profits may get an unexpected boost in 2026. The nature of that profits boost could result in easing concentration risk for the US equity market.

Though the Fed reduced rates at their meeting this week, the better news for stocks might be found in their forecast for growth and inflation. Growth is now expected to accelerate while inflation eases in the year ahead.  The median estimate suggests a GDP gain of 2.3% next year, a full half point faster than the September forecast for 1.8%, and core inflation is expected to rise 2.5% in the year ahead, less than the September projection for 2.6%. This implies GDP growth recovery to near pre-2025 norms and the lowest inflation figure since 2020.

For the last several years, tech has been the primary beneficiary of productivity gains, resulting in a two-speed margin landscape for the S&P 500, and contributing to concentration risk in both earnings and prices.  However, if stronger growth and lower inflation emerge, it may imply a broader recovery for S&P 500 margins. 

Currently the consensus anticipates the status quo will remain in 2026 – tech is expected to record much faster margin expansion the rest of the S&P 500. Margins for tech have surged past former peaks over the last year and are expected to continue to rise to new highs by the end of 2026.  Meanwhile, only modest improvement in ex-tech margins is forecasted to levels last recorded at the 2022 high. If the Fed is right and productivity gains emerge in the year ahead, presumably partly because technological advancements start to benefit non-tech industry productivity more broadly, margins may improve more than expected for non-tech companies. This margin recovery for non-tech companies could help ease the concentration risk that has plagued the index for the last several years, strengthening the fundamental backdrop for US stocks.

Disclosure: The information reflects the author’s views, opinions, and analyses as the publication date. The information is provided for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any investment product. This information contains forward-looking statements, predictions, and forecasts (“forward-looking statements”) concerning the belief and opinions in respect to the future. Forward-looking statements involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements. The information does not represent legal, tax, accounting, or investment advice; recipients should consult their respective advisors regarding such matters. Certain information herein is based on third-party sources believed to be reliable, but which have not been independently verified. Past performance is not a guarantee or indicator of future results; inherent in any investment is the risk of loss.

Momentum is the only major factor that is working in the U.S. large cap equity market in 2025, as well as in the bull market that began in 2023.  The total return spread between high momentum and low momentum stocks is up 9% so far this year, far outpacing all other factors, which are all down at least 5%.  Since the start of 2023, long/short momentum has posted a total return of nearly 20%, and the factor is the only one in positive territory.

As momentum soars, high quality and low valuation U.S. large cap stocks are underperforming their “tails” (low quality and expensive stocks) by 655 and 500 basis points, respectively, so far this year. On a rolling 12-month basis, expensive, low-quality stocks have been outperforming cheap and high-quality counterparts since October 2024.

Quality and value factor correlations have shifted materially from pre-pandemic norms. Prior to the pandemic, these two factors were negatively correlated – quality worked when value didn’t, and vice versa.  That has changed.  In momentum’s world, quality and value factors’ fates have become rather intertwined.

HB Wealth is an SEC Registered Investment Adviser and the information provided is for informational purposes only and should not be construed as investment advice or a recommendation to buy or sell any security, cryptocurrency, or other financial instrument. Digital assets, including cryptocurrencies, are highly volatile and may not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal. The views expressed are those of the author and do not necessarily reflect the opinions of HB Wealth. Comments for this post are not monitored. Please consult your financial advisor before making any investment decisions.

AI stocks’ earnings dominance has resulted in bloated multiples for S&P 500 tech, media and telecom (TMT) stocks, as investment dollars concentrated in the strongest growth opportunities in the index.  However, the analyst consensus sees a more normalized environment for earnings emerging with policy support in 2026. This closing of the earnings gap between TMT and the rest may result in closing of the valuation gap as well.  

The S&P 500 is trading at 22.4x forward earnings, a level last recorded in November 2020, but this optimistic tone is far from evenly distributed through the market. TMT multiples touched 27.9x in October, surpassing their 2021 high, while ex-TMT is still trading at multiples near 5-year average. This valuation gap could be in part explained by an earnings gap, as investment concentrated on the strongest growers in the index.  Growth in TMT earnings averaged more than 20% since 2023, about four times the average growth of the rest of the S&P 500. Over the long term, TMT earnings have averaged about 4 percentage points more than the rest of the index.

The analyst consensus sees the growth gap between TMT and the rest as likely to move closer to those norms in the year ahead, and this may result in some closing of the valuation gap.  Earnings for TMT should still grow faster than the rest, according to consensus, but not 4 times as fast.  For 2026 and 2027, TMT may post average earnings growth of about 18% while the rest may manage 11% growth.

HB Wealth is an SEC Registered Investment Adviser and the information provided is for informational purposes only. Additionally, the information should not be construed as investment advice or a recommendation to buy or sell any security or other financial instrument. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal. The views expressed are those of the author and do not necessarily reflect the opinions of HB Wealth. Please consult your financial advisor before making any investment decisions.

The S&P 500’s 36-Month Rolling Return neared 2 standard deviations from norm in September. The chart below shows what historically happened after extremes were reached in the measure. The more extreme the deviation, the lower the return prospects.

Likewise, such extreme deviations above norm generally lower the probability of a positive return in the forward 12 months. The index was higher about 40% of the time after at least a standard deviation surge beyond norms, while it was higher more than 75% of the time after a drop of at least a standard deviation.

HB Wealth is an SEC Registered Investment Adviser and the information provided is for informational purposes only. Additionally, the information should not be construed as investment advice or a recommendation to buy or sell any security or other financial instrument. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal. The views expressed are those of the author and do not necessarily reflect the opinions of HB Wealth. Please consult your financial advisor before making any investment decisions.

The annual prognostications for equity market returns are rolling out as the end of the year approaches, and the current strategist consensus suggests a moderate 5% return is likely. Historical patterns support these low expectations, for the S&P 500 has crossed a critical threshold that implies a strong likelihood of a slowdown in stock price growth in the year ahead.

The trailing 36-month price return reached nosebleed territory in 2025. For the first time since 2021, and only the 16th time since 1930, stocks trailing three-year return hit levels more than 1.5 standard deviations above average. Using post-WWII returns only, the 36-month rolling return nearly touched 2 standard deviations above average in September and has been easing off that high with the last two months of market churn.

Historically, slower returns tend to emerge after such extremes. On average and median, stocks have struggled after reaching at least a standard deviation above long-term average rolling 3-year returns. The more extreme the deviation, the lower the return prospects, according to history, with 2 standard deviation moves in stocks affiliated with an average forward decline of nearly 3% and median drop of 9%.

HB Wealth is an SEC Registered Investment Adviser and the information provided is for informational purposes only. Additionally, the information should not be construed as investment advice or a recommendation to buy or sell any security or other financial instrument. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal. The views expressed are those of the author and do not necessarily reflect the opinions of HB Wealth. Please consult your financial advisor before making any investment decisions.

International stocks are on their way to their first year of outperforming domestic stocks since 2017, and strengthening earnings, discounted valuations, and dollar depreciation may all continue to make the case for global shares to perform well into 2026.

U.S. stocks (represented by the Russell 1000) are up 13% so far this year but have been outpaced by international counterparts. Emerging and developed market (ex-US) equities (represented by MSCI indices) are up 27% and 24%, respectively Emerging markets are on pace for their best year since 2019 while developed markets outside of the US are set for a gain last matched in 2017.

US stocks have been outpaced by either emerging markets or developed markets in just 2 of the last 12 years, making 2025 appear as a relative anomaly. But several signals, including earnings, valuations, and the dollar all suggest this year may mark the beginning of a new performance dynamic in global equities. Earnings growth was a support to many non-domestic markets in 2025 that may persist in 2026.

Emerging markets at large are on track to post more than 12% earnings growth in 2025, despite modest growth in China, and developed markets like Canada likewise topped US growth. While analysts expect US growth to strengthen from about 10% this year to 13% in 2026, a strengthening earnings recovery in China could carry Emerging market growth to 18% next year. Canada, Germany, France and Italy are all likewise expected to post growth faster than the US.

Meanwhile, valuations still point to discounts available in international equities, while the US trades at an extraordinary premium. Emerging market equities trade at 12.9X forward estimates while developed market shares outside the US command 15.3X, both still well below the US multiple of 21.4X. Despite the relative strengthening in earnings prospects outside of the United States, international stocks still trade at a discount 1.7 standard deviations below 20-year average when compared to the US market.

Dollar depreciation has also historically correlated with excess global equity market returns, and easing policy at the Fed, escalating debt and budget deficit, and uncertainty over the trade policy landscape all may make a case for continued dollar weakness in the year ahead. The US dollar has been negatively correlated to Emerging Markets equities 80.5% of the time and Developed Markets equities 90.7% of the time over rolling 60-day periods since March 2010.

HB Wealth is an SEC Registered Investment Adviser and the information provided is for informational purposes only. Additionally, the information should not be construed as investment advice or a recommendation to buy or sell any security or other financial instrument. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal. The views expressed are those of the author and do not necessarily reflect the opinions of HB Wealth. Please consult your financial advisor before making any investment decisions.

Thanksgiving week normally kicks off a period of positive seasonality in stocks, in part because the U.S. consumer rarely disappoints during the holiday season. But high market expectations for recovery in 2026 may be tough for the consumer to overcome in the year ahead. Consensus and market implied expectations for growth in the consumer discretionary sector are elevated relative to norms, and in the face of very low confidence levels and slow retail sales growth.

Discretionary stocks (excluding high tech companies Amazon and Tesla) are on track to post a decline in earnings year-over-year for a fourth consecutive quarter in 4Q, implying that low holiday sales expectations may be fairly easy for consumers to hurdle. However, after 4Q, earnings growth is expected to surge back into positive territory, with 6.6% average growth in 2026. Easy comparisons to 2025 certainly help, but nonetheless this forecast is for growth to double the sector’s norm. The group averaged 3.6% growth quarterly in the five years prior to the pandemic.

Likewise, valuations for the segment are extended relative to historical norms. On a forward basis, the PE multiple for ex-AMZN and TSLA consumer discretionary is 19.6x, or 29% above pre-pandemic 5-year average.

Even as nominal sales have grown 7.8% from the beginning of 2023 to date, real sales have dropped 0.2%, evidence that the consumer is continuing to tread water. Meanwhile, confidence continues to languish near all-time lows. While policy support in the form of lower interest rates as well as tax refunds could help revive consumer trends and support stocks, deteriorating job growth, low consumer confidence and poor spending trends are all conspiring to spoil the market’s forecast in 2026.

HB Wealth is an SEC Registered Investment Adviser and the information provided is for informational purposes only. Additionally, the information should not be construed as investment advice or a recommendation to buy or sell any security or other financial instrument. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal. The views expressed are those of the author and do not necessarily reflect the opinions of HB Wealth. Please consult your financial advisor before making any investment decisions.

The longer-term equity bull market remains intact, supported by S&P 500 moving averages that are still trending higher, but stocks’ short term sell-off looks likely to deepen nonetheless. Momentum, represented by 14-day RSI, is not yet oversold and MACD (moving average convergence divergence) has just crossed into negative territory, hinting at a deeper correction emerging. Typically, 14-day RSI needs to reach the 30 level before short term corrections are complete in the index. Notably, momentum non-confirmations (RSI failed to rise with price) throughout October, correctly signaling a correction coming in November.

HB Wealth is an SEC Registered Investment Adviser and the information provided is for informational purposes only. Additionally, the information should not be construed as investment advice or a recommendation to buy or sell any security or other financial instrument. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal. The views expressed are those of the author and do not necessarily reflect the opinions of HB Wealth. Please consult your financial advisor before making any investment decisions.

The jobs market has signaled a weak economy for years, even as other indicators such as corporate profits suggest the economy is holding up reasonably well. This may help explain why consumer confidence remains near record low levels, even as the stock market is at record highs.

The unemployment rate has been on the rise since mid-2023, and now stands at 4.4%, 60 basis points above its record low reached more than two years ago. There is no other instance in history since 1960 in which the unemployment rate rose for two years outside of recession. Prior to 1990, recessions were largely coincident with the start of the rise in unemployment, but since then, the rate rose an average of 9 months and by 35 basis points from its low by the time recession was underway.

Likewise, the Conference Board’s Consumer Confidence survey shows that “Jobs Hard to Get” has been gathering momentum relative to “Jobs Plentiful” since early 2022. While the differential between the two series is still positive, the directional change of the difference has historically been a more accurate cue for recession timing. On average, recessions have emerged within 8 months of peaks in the difference.

HB Wealth is an SEC Registered Investment Adviser and the information provided is for informational purposes only. Additionally, the information should not be construed as investment advice or a recommendation to buy or sell any security or other financial instrument. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal. The views expressed are those of the author and do not necessarily reflect the opinions of HB Wealth. Please consult your financial advisor before making any investment decisions.

The equity market is enthusiastic about prospects for AI spending to remain a primary driver of earnings growth, and while a cooldown in valuations may be needed to keep expectations from getting too far detached from reality, both investment trends and stock multiples are less extreme than they were in the turn of the century tech bubble in the U.S. Contrary to the years-long tech capex extremes during the 1990s, AI-related spending may just be getting started, and valuations remain well below those bubble-era peaks.

While valuations for large cap AI-focused tech stocks are high relative to much of the recent past, their premium to the rest of the market remains limited compared to the premium that developed in the late-1990s tech boom. U.S. large cap tech and communications stocks trade at a trailing P/E multiple of 34.7x – high compared to their post-pandemic average of 28.3x, but still only about half the peak multiple reached in 2000. Now valued at 1.5 times the rest of the S&P 500, the group traded at 2.8 times their large cap counterparts in 2000. Likewise, the 4 major “AI Hyperscalers” – Microsoft, Alphabet, Meta and Amazon – trade at an average 30.3 times trailing earnings, a far cry from the 80X level the “Four Horsemen” – Cisco, Microsoft, Dell and Intel – traded to by 2000.

Meanwhile, investment has packed a stronger punch to GDP, but it has been underway for a much shorter time than the buildup to the tech bubble. On average over the last 20 years, investment accounted for 0.31 percentage points of growth in GDP quarterly, but in the first half of 2025 it averaged more than a full percentage point of growth, comparable to the norms last set in the late 1990s. The 1990s high level of investment contribution went on for 4 years, however, where the AI-capex boom has been arguably only become extreme for the last few quarters.

The “AI-Hyperscalers” are in aggregate on track to spend around $380 billion in 2025, and have committed to spending $1.7 trillion by 2030, suggesting investment is likely to remain a robust contributor to economic growth. Until these entities signal a significant slowdown, enthusiasm is likely to remain. And as AI-investment among the few morphs into AI-utilization among the many, the AI-theme may continue to offer ballast to profits and support high expectations embedded in stock markets.

HB Wealth is an SEC Registered Investment Adviser and the information provided is for informational purposes only. Additionally, the information should not be construed as investment advice or a recommendation to buy or sell any security or other financial instrument. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal. The views expressed are those of the author and do not necessarily reflect the opinions of HB Wealth. Please consult your financial advisor before making any investment decisions.

Bitcoin is down more than 25% from its peak in early-October, and this doesn’t bode well for U.S. tech stocks, which have dropped less than 6%. If past proves precedent, and unless Nvidia can revive confidence with their earnings report tomorrow, US tech could be due for a bigger decline yet to come.

Bitcoin has posted its worst 5-week decline since December 2021, and a continued drop in the cryptocurrency may weigh heavily on U.S. tech stocks. Contrary to its sporadic relevance to stocks in the decade prior to 2020, bitcoin’s correlation with and fundamental link to the stock market has grown more persistent in the post-pandemic environment. The cryptocurrency’s 40-day correlation with the Nasdaq has been positive since 2020, with only a brief exception in 2024. Past corrections in bitcoin of more than 25% do not always cause major strain for stocks, but two of them occurred in tandem with major risk-off periods in 2021 and 2024. Crypto tops in 2021 and 2024 led to significant short-term tops in the Nasdaq and broader US equity markets.
 
Notably, the link between bitcoin and US equities is more than purely technical in nature, as US companies have increasingly added bitcoin onto their balance sheets. With those now subject to swings in bitcoin, the tie between cryptocurrency and stocks may remain relatively strong. 

HB Wealth is an SEC Registered Investment Adviser and the information provided is for informational purposes only. Additionally, the information should not be construed as investment advice or a recommendation to buy or sell any security or other financial instrument. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal. The views expressed are those of the author and do not necessarily reflect the opinions of HB Wealth. Please consult your financial advisor before making any investment decisions.