The S&P closed Friday at a record high. That is six weeks in a row of an up move. We are 17% above the low trade of March 30 and now stand at better than 8% in total return on the index for the year. How did we get here? Three things: relative stability in the Gulf, stellar corporate profitability, and an economy on solid footing.
Start with the Gulf, because it is the most emotional issue and the one people get wrong. Oil peaked at $120 a barrel on April 9, the day the ceasefire agreement was announced, and it is down 20% from that level. We closed Friday at $95. More telling, oil traders have put the back month futures below $60 a barrel. Those are the people sitting in the middle of all this, and they are pricing a calmer world. My view is that oil keeps falling from here. I could be wrong on that, but it is where the money is positioned.
Corporate profitability is the second leg. Q1 earnings growth for the S&P 500 is running at 27.1%, the best quarter since Q4 of 2021 during the pandemic stimulus era. The Mag 7 grew earnings 61%. The other 493 members grew earnings 16.4%, and that is the most bullish number in the whole set, because it says the strength is broadening out past big tech. Meanwhile the forward price to earnings multiple on the S&P is 21, against almost 25 a year ago. The index is cheaper than it was. Earnings are going up faster than prices. That is a very good sign. Add Broadcom to the group and those eight names carry a market capitalization of $24 trillion, larger than all the stock markets around the world combined. That is why the dollar is firm and why money keeps flowing into this country.
I am an interest rate guy. I started in this business as a bond trader, and I read the bond market first and most closely. Its message right now is stable to lower interest rates. The Fed is statistically still in easing mode, which is the first algorithmic green light anybody gets. One year breakeven rates in the TIPS market were 5.3% a couple of months ago and are now below 3%. So when someone tells you inflation expectations are rising, check whether they are talking their own book, because the numbers say otherwise. Credit is calm too. Spreads are benign, and demand for leveraged loans is firm at every endowment, foundation, pension, insurance company and sovereign wealth fund I talk to. Retail investors are bailing out of that paper because the risks were never properly explained to them, which is not their fault. The bottom line is it should not hurt most portfolios.
The third leg is the economy, and the economy is doing well. This is an AI industrial revolution, financed through Wall Street, paid for in part by investors who need income, with the government involved as well. People in the technology sector will tell you that government investment here is a matter of national security, and I believe that is right. This revolution is just getting started. It will not be a straight line and there will be ups and downs. But if you own the technology sector and you pay attention to which parts of it are working at any given time, my view is that you do fine in this market.
