Thankful for Many Things

Markets are experiencing more volatility in November relative to the October melt-up, which marked an all-time closing high of 6,891 on the S&P 500 October 28. Anticipation of an end to the government shutdown, which has now happened, helped boost the US market back above 6,800.

The “Magnificent 7” stocks gained 17.6% during Q3, and corporate capital expenditure in AI infrastructure continued at record levels. Growth stocks, particularly those with ties to AI, continue to outperform their value stock peers, as the Russell 1000 Growth Index has outpaced the Russell 1000 Value Index.

The Information Technology and Communication Services sectors led quarterly gains, while Consumer Staples faced pressure, and Healthcare struggled to keep up with its growth peers.

With a little more than a month and a half to go, it’s possible that the S&P 500 will experience double-digit returns for the third year in a row—it currently sits comfortably in the mid-teens YTD. That prospect surely has US equity investors giving thanks.

Always worthwhile to check on earnings and margins, as they are very important.

Corporate profits for the year continue to exceed forecasts, and corporate margins remain high. Let’s dive a little deeper on each:

Chart 1, 0:40—  Q3 S&P 500 earnings are tracking at 14.3% EPS growth, marking the ninth consecutive quarter of growth.

You can see the quarterly trend and history in the left-hand chart. The results over the past eight quarters partially explain why US stocks have had a rewarding run.

Shifting to the right-hand chart, the EPS beat rate stands at 82%, indicating a strong performance by companies in exceeding earnings expectations.

Notably, analysts increased their estimates heading into the quarter, resulting in the first positive revision trend since late 2021.

Margins have proven resilient despite tariff headwinds. Margin expansion is increasingly concentrated in mega-cap technology companies.

Chart 2, 0:40—  It’s well noted that a handful of mega-cap technology and AI-driven firms now account for a record share of index returns. The last column in the left-hand chart illustrates the top 10 companies contributing to the S&P 500’s YTD return. Seven of those are considered part of the “Big 10.” Shift your eyes to the right to see how the relative weight of the “Big 10” has grown (we’ve expanded the previously used “Magnificent 7”). A key takeaway is the elevated concentration. As this narrow leadership grows, the overall index is more vulnerable to volatility caused by disappointing news in these few names.

Key risks remain, including policy missteps, margin pressure, geopolitical escalation, fiscal credibility, and labor market friction. The near-term outlook is constructive, but investors are navigating a transition marked by slower growth, high nominal rates, and elevated political risk, requiring discipline and selectivity.

It is important that investors focus on earnings quality, balance-sheet strength, and sustainable margins rather than speculative growth narratives. Discipline and selectivity are being rewarded over broad risk-taking, with a need to diversify client portfolio equity exposure. In particular, we are strongly considering an allocation back into international markets. More on that next month.

Each year at this time, we express our thanks for the relationship we have with you and the opportunity to guide clients and advisors to reach their financial goals.