Investment Rating - The report raises the S&P 500 return and earnings forecasts, indicating a positive outlook with new 3- and 12-month return forecasts of +1% and +11% respectively, leading to levels of 5900 and 6500 [2] Core Insights - The report emphasizes that lower tariff rates, improved economic growth, and reduced recession risk have led to an upward revision of S&P 500 earnings and returns forecasts [2][5] - Revised S&P 500 EPS forecasts are $262 in 2025 and $280 in 2026, reflecting a 7% year-over-year growth for both years, which is an increase from previous estimates [2][5] - The current P/E ratio of 21x is in the 90th percentile since 1990, with a forecasted 12-month P/E valuation of 20.4x, indicating reduced uncertainty and faster earnings growth [2][10] - The report highlights that light equity investor positioning suggests potential for continued near-term market upside, with the US Equity Sentiment Indicator registering -1.5 standard deviations [2][17] - The report recommends focusing on stocks with high pricing power to maintain margins amid elevated input costs, as tariff rates are expected to be higher in 2025 than in 2024 [2][26] Summary by Sections Earnings Forecasts - The report updates the S&P 500 EPS growth estimates to +7% for both 2025 and 2026, reflecting an improved economic outlook and lower tariff rates [5] - The revised 2025 real US GDP growth forecast is 1% on a Q4/Q4 basis, an increase from 0.5% previously, indicating a more favorable economic environment [6] Valuation - The report notes that the current P/E of 21x is 5% below the peak of 22x earlier this year, with an updated fair value estimate reflecting lower inflation and renewed confidence in fundamentals [10][18] - The report anticipates only one Fed rate cut in 2025, down from three previously expected, which may influence market dynamics [10] Positioning and Market Sentiment - The report indicates that light investor positioning creates the possibility for equity prices to overshoot fair value in the near term, with hedge fund net leverage at low levels [17] - The report also mentions that cyclical stocks have outperformed defensives by 18 percentage points since April 4, indicating a shift in market expectations [21] Sector Focus - The report suggests that AI stocks are expected to regain momentum as tariff-related volatility diminishes, with strong earnings growth profiles attracting investor interest [3][32] - The report emphasizes the importance of high pricing power stocks, which have historically outperformed during periods of margin pressure [26][30]