The stock market is full of old sayings.
Perhaps the most literally true is that ‘for every buyer there is a seller’. What this really means is that a difference of opinion is essential for any market transaction. And today there are several pros and cons in the market. To keep with the literal theme, the ‘pros’ are the prominence of earnings growth, which has in turn created a procession of estimate increases. The ‘cons’ are the consistently increasing multiples attached to stocks, and the confusing state of global politics.
Let’s take a closer look at the main moving parts. The US stock market trades on a price to earnings ratio that, in recent years at least, has only been reached in the dotcom boom and covid distortion of 2020. On the face of it, that’s clearly a concern. But the aforementioned earnings momentum provides essential context.
This results season has been very fruitful. Almost every time a company has reported figures, there has been some good news. And it is not just the tech sector delivering. Across sectors including banking, healthcare and natural resources, the common theme has been positive surprises. The US is on track to deliver another quarter of double digit earnings growth, with over 80% of the companies that have so far reported delivering results above expectations.
If this growth continues and forecasts for the year are met (analysts are baking in +11.5% earnings growth over 2025 as a whole) it would be a result bettered only by 2021 and 2018 in the post-financial crisis era. 2021 clearly comes with a large asterisk attached, given its growth followed a disastrous 2020, while 2018 benefitted from one-off tax reforms. With the current momentum expected to power similar growth in 2026 and 2027, and the potential for AI to move the dial on productivity across the economy a very real one, this is arguably as good as we’ve had it in years. Therefore, it would be a little strange if the rating wasn’t higher than normal.
Of course, high growth and high valuations can surely not coexist indefinitely. Either, or (given their co-dependability) both could break down, and one should expect them both to be largely mean-reverting over time.
As above, it is rational to think that earnings momentum informs valuation. There is plenty of time for earnings projections around 2026 and 2027 to be revised, and assuming too many more years of double-digit earnings growth surely requires too much blue-sky thinking. Business leaders including JPMorgan’s Jamie Dimon are sceptical, and there is increasing concern around the circularity of the cash flows around the AI companies. They have been remarkably profitable for investors, and have undoubted potential, but the sector’s revenues are a bit ‘to me, to you’.
The problem is predicting anything in the short-term is incredibly challenging, and getting the timing right is nigh-on impossible.
The sentiment behind the old adage that economists have predicted ‘9 of the last 5 recessions’ feels applicable to forecasters predicting bear markets. And even if you are right, don’t forget that ‘the market can stay irrational longer than you can stay solvent’.
It’s particularly difficult given the potential for erratic policy changes from the White House. It was only a few months ago that the tariff meltdown spooked investors. I do not believe that will be the only market shock Trump creates.
With potential for a wide range of outcomes on both the upside and downside, the need to have a disciplined strategy is ever-more pressing. I see little reason to change my view that a focus on quality is the best strategy for direct equity investments. Businesses with outstanding products are likely to weather the ups and downs better than most. If they are well-managed and generate ample cash flows that can enhance both shareholder returns and fund further growth, these businesses become attractive long-term investments.
Which leads me to the final, and perhaps most impactful market adage of them all. ‘Time in the market beats timing the market’. This feels particularly apt today.
George Salmon – Senior Investment Analyst
FPC25566
Hawksmoor Investment Management Limited is authorised and regulated by the Financial Conduct Authority (www.fca.org.uk) with its registered office at 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. This document does not constitute an offer or invitation to any person in respect of the securities or funds described, nor should its content be interpreted as investment or tax advice for which you should consult your independent financial adviser and or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. The editorial content is the personal opinion of George Salmon, Senior Investment Analyst. Other opinions expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represent the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. Currency exchange rates may affect the value of investments.
