Five for Friday

Profits, Growth, Leaders, Concentration, and On This Way

1. Profits

While the ferocity of the market’s recent rally came as a surprise to many, a bigger surprise may be how shallow the selloff was in the first place. At its worst, the market was down 9% from its all-time high, falling well short of the average intrayear drawdown of -14%. And while there are plenty of explanations for the market’s resilience, the simplest are that 1) corporate earnings estimates never flinched, with earnings expected to grow 18% in 2026 (an expectation already being reinforced by strong Q1 results) and 2) profit margins continued to expand. Earnings won’t always track prices one-for-one, but per Evercore ISI, double-digit S&P 500 earnings years coincided with positive index returns 10 out of 11 times since 1996 (with an average return of +13%). Corporate fundamentals help to set a floor under the market, and big selloffs and recessions have not tended to happen when profit growth is as robust as it is today.

2. Growth

Earnings growth is also important for contexualizing how expensive (or not) the market is. The PEG ratio, popularized by investing legend Peter Lynch, allows for apples-to-apples comparisons between stocks or sectors with different growth profiles by dividing the price-to-earnings ratio by expected earnings growth. Despite the Technology’s more than 100% return over the last 3 years, it is actually the “cheapest” of the 11 sectors (equally weighted) because its earnings are expected to grow more quickly. By this metric, the Tech sector is less expensive now than at any point since 2012. AI could still develop into a bubble. But as of today, demand is substantial, revenues are real, and growth is genuine.

3. Leaders

From here, we need to look at the composition of the market’s rise to get a sense of this rally’s durability. In other words, how broad is this rally and are economically-sensitive, cyclical, risk-on sectors leading the charge? We’re not even one month into this rally, but early signs are promising. To start, breadth is solid: not only has the (large-cap, U.S.) S&P 500 made a new all time high, so has the (small-cap, U.S.) S&P 600 index and the (mid/large-cap, global) MSCI AC World index. Big Tech and AI are driving the car, but plenty of passengers are along for the ride. On the question of cyclical stocks leading, there’s a lot to like in this chart. To me, that looks like a bull market led by cyclical sectors, with interruptions by shocks such as the yen crash, April 2025 tariff announcements, and air strikes on Iran. Stocks could still sell off from here, but evidence suggests that this is an ongoing bull market until proven otherwise.  

4. Concentration

I think it would be wise to internalize a piece of data from Hendrik Bessembinder’s latest paper, “One Hundred Years in the U.S. Stock Markets.” Looking at the lifetime return outcomes of nearly 30,000 stocks over a century, Bessembinder found that the average buy-and-hold return was 30,621% and the median buy-and-hold return was -7%. Said another way, despite tremendous gains in the broad market, fewer than half of stocks actually delivered a positive return over the last century. This adds to the argument for diversification – not just to smooth returns and offset volatility, but also to increase the odds of holding the stocks that will become the long-term outperformers of the future.

5. On This Day

in 1901, the NYSE recorded one of the most extreme single‑stock trading days in its early history, driven by speculation in Union Pacific – which alone accounted for roughly one‑third of shares traded on that day. This mania (in reality, a massive short squeeze) led to the Panic of 1901, considered by many to be the NYSE’s first big crash. Leverage, concentration, and speculation were as complicit in crashes of 125 years ago as they are in crashes today.

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This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. Market and economic statistics, unless otherwise cited, are from data provider FactSet.

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