The S&P 500’s forward P/E ratio is at 22.8, well above the 10-year average of 18.6, leading to a debate on whether stocks can keep climbing. Dan Niles believes the rally may continue due to earnings growth and a friendly Fed likely to cut rates again in October.
Niles suggests focusing on less-loved stocks as a way to benefit from a friendly Fed boosting economic growth. The likelihood of another quarter-point rate cut in October is at 94%, driven by the deteriorating jobs picture, with the economy losing 32,000 jobs last month.
Niles points out that small-cap stocks are catching up to big caps, driven by Fed cuts. He believes earnings growth will support a slow grind higher in equities. Wall Street expects the S&P 500 to post 8% earnings growth in Q3, marking the ninth consecutive quarter of growth.
Despite the government shutdown, which Treasury Secretary Bessent acknowledges is a GDP drag, markets have historically looked beyond shutdowns. There have been 20 shutdowns since 1976, with stocks trading flat during them and producing an average 12.7% return 12 months after they’ve ended, according to Carson Group. Veteran fund manager Dan Niles predicts a prolonged shutdown, with upcoming Q3 earnings, continued AI enthusiasm, and anticipated Fed rate cuts as key factors in the market. A record $7.5 trillion in money market funds signals investor confidence, despite high valuations. Niles remains bullish on stocks, expecting further gains.
Investors are torn between high valuations and positive catalysts like Fed rate cuts, earnings growth, and AI advancements. Niles is optimistic about the stock rally, anticipating a rate cut in October with a 94% probability. He advises diversifying into less-popular stocks and highlights the outperformance of small-caps over large-cap tech stocks.
The ongoing debate over valuations versus bullish indicators continues to shape market sentiment. Niles’ outlook leans towards a sustained rally, driven by expected Fed actions and solid Q3 earnings. With a focus on diversification and small-cap opportunities, investors navigate the uncertain terrain of market dynamics.
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