Equities

We Can Justify This Bull Market

We think the bull market will continue in the second half. Our overweights are in stocks relative to bonds, small- and mid-caps over large-caps, and the U.S. over foreign equities.

Though many of the Magnificent Seven stocks have had a rough spring and summer, general participation in the rally is broad. We count eight of the 11 S&P 500 sectors currently resting above their 50-day moving averages while nine are above their respective 200-day averages.4 We don’t like seeing the cyclical Energy and Consumer Discretionary sectors as two of the three weaker areas (Communication Services is the other), but at least we can say that Energy is weak for a good reason: the stock market is getting past the Strait of Hormuz as a bearish driver.

On that matter, stocks have been given serious respite: the plunge in Brent crude oil from $115 in May to the current $72. Still, don’t take your eyes off the Strategic Petroleum Reserve. It has witnessed 84 million barrels drained in three months, a deeper draw than the 2022 Russia-Ukraine reaction, Obama’s 2011 Libya draw, or any previous tapping.5

Additionally, managed money short interest in Brent just touched a new record high, indicating intense bearish sentiment that is noteworthy for the contrarian-inclined.6 The real shock for the rest of the summer is if oil decides to disappoint the bears and head higher, hitting consumer sentiment. If the oil price does find footing, we imagine it will benefit our models’ underweight to overseas equities, owing to greater energy independence in the U.S. than in places like Europe, South Asia and East Asia.

Meantime, Health Care has suddenly found some oxygen. The group has had a rough half-decade but is suddenly challenging 52-week highs. On price-to-sales, the sector trades at a 58% discount to the S&P 500, the widest gap in the last 20 years, while Health Care’s quality measure, ROE (18%), roughly equals that of the S&P (19%).7

Because the sector has generally been on the outside looking in ever since the COVID-19 crash, its weight has dwindled to 7% in the S&P 500 Growth Index, but it is 12.5% of the S&P 500 Value.8

In Russell indices, this summer just witnessed something eyebrow-raising: the large-cap Russell 1000 Growth Index divided by the small-cap Russell 2000 Value has broken several support levels on multi-decade horizons. Critical support registered in 1999 and 2020 has become resistance in recent weeks. Similarly, post-First Gulf War support from 1991 and 1992 has also been taken out.

We are paying attention to this because in our model work, we upgraded our exposure to Growth this spring. But aside from the tough price action, Tech, and in turn a large chunk of Growth, is justifying itself with earnings resilience. Nothing is wrong with Value fundamentally; the group grew earnings 7.1% last year and is forecast to grow 17% and 9% again in 2026 and 2027, respectively. But for context, the 2025–2027 EPS growth rates for the S&P itself are simply higher: 12%, 24% and 17%, respectively. The S&P 500 Growth Index’s respective figures for 2025, 2026 and 2027 are higher than that: 20%, 29% and 26%.9

Big figures, yes. Doable? Also yes.

Consider that the market is sitting on a gift of several rate cuts from outgoing Fed Chair Jay Powell, the first of which occurred 22 months ago in September 2024. After pausing for most of last year, the Powell Fed followed through with more easing again in the second half of 2025. Looking at Fed easing cycles since the early 1980s, the S&P’s annual earnings growth rate peaked 53, 76, 59, 44, 40, and 41 months after the Fed embarked on rate-cutting cycles. The year-over-year earnings growth rate at those peaks was 41%, 20%, 16%, 23%, 41% and 51%, sequentially.10 Again, continued broad market earnings growth rates in the twenties would mark a big number, and we respect that. But if prior Fed cycles are the guide, it is very doable.

We are also constructive on small caps relative to large caps. The small cap S&P 600’s P/E is 22% lower than the S&P 500, and thus lower than about four-fifths of all readings since 1972. Critically, small caps’ biggest discounts came in three clusters: 1973-1976, 1998-2001 and most of the time since Covid arrived. The major secular runs for small caps were from 1974-1981 and from 2000-2017.11

Our predilection for small caps has one clear obstacle: the group is simply not forecasted to grow earnings as fast as large caps, largely because the big semiconductor and memory stocks are large caps. The S&P 600 is forecast to grow earnings “only” 13% this year, but in 2027 the group should clock in at a similar pace as the S&P 500.

One thing to keep in mind for a small cap outperformance run, should it be global: such a thing may hinder our overweight to the U.S. relative to foreign equities, as most bourses simply do not have the megacap skew of the NASDAQ and NYSE.

Nevertheless, by placing a chunk of capital in small caps, our models mitigate the potential for error if that megacap skew flops, i.e., if the AI storyline of robust distant year cash flows goes sour.

After all, 24% of the S&P 500’s market cap is in stocks that are trading north of 10x FY0 revenues. In the S&P 500 Growth Index it is one-third. In contrast, just 4% of the small cap S&P 600 Index trades at such a multiple.12 We like that situation in small cap because it is a nice little offset if we get things wrong on the recent Growth upgrade.

On the big players, these numbers are so stunning. Goldman says Amazon will spend $200 billion on capex this year, while Alphabet will spend $175 billion–$185 billion. Similar figures apply to the other hyperscalers.

Some of the Magnificent Seven players have already depleted their cash hoards and are issuing debt and/or equity to fuel the AI buildout, sending free cash flow negative in many cases.

We tally the Q1 total free cash flow across Amazon, Alphabet, Tesla and Meta at just $6.6 billion. Oracle, also in the “hyperscaler” conversation, had negative free cash flow in 2025, with the Street expecting deeper red ink from 2026–2028. At least Microsoft will have positive free cash flow in 2028, though it trades for 76x that figure.

In prior cycles, these valuations would have necessarily been an obstacle for our Growth overweight. But in this cycle, many of the index houses, from S&P to FTSE Russell to MSCI to WisdomTree, characterize chunks of the Magnificent Seven in both Growth and Value. To name one index as an example, Apple, Amazon, Intel and Tesla are all in the top seven holdings of the S&P 500 Value Index. If the AI story busts up, we are all taking a hit.

One more thing on equities. Something wild just happened in the market’s internals. At first blush it looks bad for the bulls, but it’s not.

At one point toward the end of Q2, we clocked the 60-trading day performance gap between the surging S&P 500 High Beta Index and the left-behind S&P 500 Low Volatility Index in the 99.5th percentile of its historic range.

Gut instinct shouts danger when you see that type of thing, but the historic record is more mixed. For example, a similar reading for High Beta vs. Low Volatility was marked in December 1998, a year-and-a-half before that cycle’s S&P 500 top. Then again, we saw High Beta snap furiously higher after the September 11th plunge and the bears would have gotten that one right: 2002 was an ugly year. But other extremes were marked in 2003, 2009, summer 2020 and January 2021. Nobody would have been happy getting out of the market off those readings, though the NASDAQ peak in 2021 was only ten months away.

In summary: it is okay to be bullish on U.S. equities here. We think heady S&P earnings growth projections in 2026 and 2027 have a live chance of coming to pass. We are sticking with the overweight to U.S. equities over developed and emerging markets with an emphasis on SMID.

4 Refinitiv, as of 6/30/2026.

5 Energy Information Administration, as of 6/19/2026.

6 CFTC, as of 6/30/2026.

7 WisdomTree PATH software, as of 5/31/2026.

8 Ibid.

9 Ibid.

10 Refinitiv, as of 6/30/2026.

11 Ibid.

12 Ibid.