Core Viewpoint - US stocks advanced on Friday due to softer inflation data, which increased optimism regarding the Federal Reserve's rate-cutting trajectory and expectations for continued economic support and higher equity valuations [1] Group 1 - The Dow Jones Industrial Average rose by 228 points, or 0.5% [1] - The S&P 500 gained 0.6%, reaching a new record [1]

Market Valuation - The current equity market is perceived as "fairly highly valued," with many experts agreeing that valuations are at least "richly priced" if not "overpriced" [4][5][6] Federal Reserve Actions - The Federal Reserve is navigating a challenging environment with conflicting signals regarding employment and inflation risks, indicating that there is no risk-free path forward [5][6] - A recent quarter-point rate cut was made due to uncertainty, with the possibility of further cuts being considered, although they may not be significant [6][8] Small and Medium-Sized Enterprises (SMEs) - The National Federation of Independent Business (NFIB) surveys indicate that SMEs, which create 80% of jobs in America, are not currently concerned about access to credit, but are worried about labor availability and retention costs [8][9][10] - Immigration policies are cited as a factor complicating labor relations for these businesses, leading to increased costs [10][11] Pricing and Inflation Concerns - The percentage of firms planning to raise average selling prices has dropped to 21%, the lowest since October of the previous year, suggesting a potential easing of inflationary pressures [12] - There is uncertainty regarding how companies will respond to cost changes and whether they will absorb costs or pass them on to consumers [13]

Core Insights - The discussion highlights the current volatility in the tech sector and the implications of the Federal Reserve's stance on interest rates, indicating that the market may be overly optimistic about potential rate cuts [3][4][6]. Market Valuations - Extreme valuations in the market are noted, with historical data suggesting that such extremes can predict three-year returns, emphasizing the importance of earnings as a driving factor for market performance [2][7]. - The market is currently pricing in a scenario where rates could fall below 3% by next year, contrasting with the Fed's more cautious outlook [4][6]. Economic Indicators - Recent retail sales data has shown strength, which complicates the Fed's decision-making process regarding interest rates, as they are wary of past inflation experiences [6][7]. - The overall economic backdrop is crucial, with the expectation that avoiding a recession will support market growth [7]. Market Performance - The market is on track for a strong September, potentially the best since 2013, with significant gains in technology and communication services [9][10]. - There is an expectation of consolidation following the recent market run-up, with a focus on the fourth quarter potentially leading to further gains [8][10]. Sector Strength - While technology remains a focal point, there has been notable strength in other sectors such as financials and industrials, indicating a broader market resilience [12][13]. - The current market dynamics suggest fewer valuation opportunities, as strength is not limited to growth stocks alone [13].

Market Sentiment & Strategy - The market is near new highs, prompting a debate between defensive and offensive investment strategies [1] - Some clients questioned the need for defensive measures given the upward price momentum [2] - The consensus anticipates a soft patch in the market around August to October [5] - The combination of not seeing a bare case in June and a belief that earnings of the biggest 50 stocks won't be impacted much has people thinking the market is headed to highs [4] Earnings & Resilience - The largest 50 stocks in the S&P 500 contribute 50% of the index's gross profit dollars and have shown resilience to growth scares and higher inflation [6] - Smaller companies initially showed less concern about rising input costs, but median stock margins might be affected [7] - The focus is shifting towards companies with good but not excessive growth [8] Future Outlook & Investment Themes - AI-related trades, including semiconductors, utilities, and power, have performed well since the April 8th bottom [9] - 2026 is anticipated as a key year for realizing the benefits of current investments in company margins [9] - Investors are anticipating productivity gains from long-term trends, making them inclined to "buy the dip" [10][11] - The expectation is that trade tensions will not worsen significantly from current levels [12] - While some companies are experiencing negative impacts, it's not significant enough to impair S&P 500 earnings incrementally [14]