Market Thoughts: A late summer slowdown... don’t worry be happy?

For markets, the path of least resistance seems higher... with bumps along the way. Earnings are anchoring multiples. That’s allowing investors to remain confident buyers of risk assets. Bullish doesn’t quite capture sentiment. Exuberance? Absolutely, validated by earnings.

Not only have earnings beaten forecasts, companies are hinting at strong earnings ahead. If we see 25% and 15% yoy earnings growth this year and next, a 21x multiple on the S&P 500 (S&P) gets you to about 8400 as a target next year. A 22x multiple lands you right around 8800. That’s the simple math behind current ‘eye-popping’ revisions to S&P forecasts.

Those earnings estimates are conservative. Investors are comfortable supporting a 22-23x multiple. It’s why a multiple on the S&P of 20-21x appears readily digestible. If earnings come in higher, S&P targets will be revised up. If longer-dated Government bond yields continue to rise, valuations will be challenged. By extension, so will forecasts.

Recent de-leveraging across global equity markets has abated. But it’s circling. Enjoy the pause between bouts of volatility – it will undoubtedly return as we move into the fall and mid-term elections come into focus. Air pockets ahead…?

Gearing that’s front-footed, then rashly unwound, hasn’t left the zeitgeist. For retail and institutional investors alike. Markets are struggling to ‘enjoy’ a late summer slowdown. Add to that the haze of repeat promises to reopen the Strait of Hormuz. Animal spirits have reached a point where they’ve chosen to ignore threats and promises.

AI-related earnings have been spectacular. The breadth of earnings growth across the S&P is equally striking. The median stock grew earnings by about 15%. Across sectors and market cap alike, earnings continue to hold their own. Eight of the eleven S&P sectors generated double-digit earnings growth this earnings season. That’s truly impressive.

The bashing of Kevin Warsh’s communication style continues. Get over it. I tend to read repeat headlines like that as positive. Pundits with apparently little else to talk about. Rinse, Warsh, repeat? There’s a new boss at the Federal Reserve. He’s trying to define his role. Board members are trying to figure out how best to work with the new Chair.

The one thing I think may be here to stay, a broader group of more active speakers from the Fed. That may create confusion, depending how loud the disparity in views.

Monetary policy is determined by consensus across Federal Open Market Committee (FOMC) voting members. The Chair doesn’t have a ‘super’ vote. They’re all counted equally. That may prove good or bad news for future rate decisions. We’ll have to see how the Fed’s great communication revamp evolves. Get the popcorn.

I do think it adds to market volatility. As the expression goes, confusion has its cost. I don’t expect much ‘new’ from Kevin Warsh at the Kansas City Fed’s end of August Jackson Hole bash. If I were in his shoes, I might tease out some of the work being done across each task force. Leading the horse to water.

Warsh may also hint at changes to the frequency of FOMC policy meetings. Four are required, eight the current norm. What he intends to do with the post-meeting press conference would make for an interesting twist as well.

He’d be well-served—after his last performance—to announce he intends to stick to read remarks. No questions. He could cancel pressers altogether. Pundits would have a field day with that. So would bond markets, just as they’re beginning to settle down.

Benign July inflation numbers offer the Fed an opportunity to stay on hold in September. They should take advantage of it. A rate hike isn’t an ‘obvious’ immediate call to action. October and December FOMC meetings offer more than enough time to see how inflation advances. For the hawks, try not to frown… a rate hike may yet be in the offing.

“Cause when you worry, your face will frown / And that will bring everybody down / So don’t worry / Be happy, don’t worry be happy now.” Bobby McFerrin

Unless explicitly stated otherwise, all data is sourced from Bloomberg, Finance LP, as of 8/13/26

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