Happy Fourth of July,

Since the beginning of the current bull market on October 1st, 2022, the equities in your portfolio have benefitted from consistent growth.  Major domestic equity indices, including the Dow Jones Industrial Average, S&P 500, and NASDAQ, are trading at or near their all-time highs. Ethan Feller, in a recent article for Zacks titled “Do Not Fear. The Bull Market Is Here (To Stay),” highlights several positive economic indicators:

• The Federal Reserve Bank of Atlanta estimates annual GDP growth of 3.1%.
• The Tech sector is showing an impressive +15.1% earnings growth for Q2.
• The “Magnificent 7” tech giants are expected to see a +25.4% increase in earnings on +13% higher revenues.

The significant appreciation in stock prices has led to higher-than-intended equity allocations in many portfolios. For instance, portfolios designed to invest 70% in stocks have now reached approximately 80% allocation. To manage this, we have already reduced stock-based mutual funds by 10% in our Mutual Fund Investment portfolios. We recommend a similar 10% reduction for clients who invest directly in stocks.

We believe that the higher levels of investment in stocks resulting from appreciation of prices during the past twenty months poses risks that are unacceptable for the majority of our clients. Importantly, we believe, as does Ethan Feller above, that stocks will continue to perform well into 2025 and 2026 based upon forecasts of earnings growth, which we cite so often in these letters. Never the less, lower allocations lessen volatility due to unexpected market weakness should it occur.

Future Outlook

According to Zacks, the future looks promising for S&P 500 earnings per share (EPS) and revenue growth:

• 2024: EPS up +9.0%, Revenue up +1.7%
• 2025: EPS up +13.4%, Revenue up +5.7%
• 2026: EPS up +11.4%, Revenue up +6.2%

Regards,

Dave, Joe, Sangam, & Anton