What Could Derail the Markets?

Commentary

Between the fourth quarter being seasonally strong and the third year of a Presidential election cycle being the strongest year in the four-year Presidential term, investors might be asking: aren’t higher interest rates and Fed key rate hikes going to derail the stock market? The answer is yes for dividend stocks without underlying earnings growth and for value stocks. However, the answer is no for growth stocks, which have beaten value stocks for 12 consecutive years.

In fact, the bond vigilantes have been increasing interest rates globally, and countries that have shrinking populations and/or are not able to fully assimilate new immigrants, like Japan, Britain, and France, are the real targets of the bond vigilantes, since their underlying government debt might only be fixed with more money printing (quantitative easing), as the Japanese yen has demonstrated. There is now a staggering $365 trillion in government debt worldwide.

The British pound may be the next domino to fall, followed by the euro. The current political chaos in Germany after the AfD Party victories in regional elections is expected to undermine the European Union (EU), since the AfD Party wants to end open immigration and the green energy policies that have systematically caused energy prices to soar and hinder manufacturing competitiveness.

Here are the most important developments recently and what they mean:

– The big news this week is that Nvidia (NVDA) announced a $150 billion share buyback, which is an all-time record. The previous record was a $110 billion share buyback by Apple (AAPL) in 2024. Interestingly, Nvidia has not completed its previously authorized share buyback, so it can now buy back $235 billion of outstanding shares.

– For trillion-dollar companies, it appears that the physics may sometimes impede a stock’s potential appreciation, so these massive stock buyback announcements are a positive development. Nvidia currently trades at 24.6 times forecasted fiscal 2028 earnings, while Apple trades at 38.5 times 2027 forecasted earnings. I stand by my prediction that Nvidia will hit $300 by the end of this year.

– The upcoming earnings announcement season should be very exciting. FactSet is estimating that the S&P 500’s third-quarter earnings are forecasted to rise 29.1%. Naturally, with earnings surprises, the S&P 500’s earnings should be up over 33%. When our stock selection models are tight, and we know how deep to data-dive, we can invest more confidently.

– Bespoke Research recently discussed in our latest Market Buzz edition how the advance/decline line for the S&P 500 has declined, as the breadth and power of the overall stock market have decayed. However, if anything, it looks to us like the stock market is just doubling down on stocks that will post phenomenal third-quarter results, like the AI and data center-related stocks, plus the many energy-related stocks.

– All the onshoring underway is good for U.S. GDP growth. One thing that 5% forecasted third-quarter GDP growth (as predicted on Maria Baritromo’s show back in December) and higher interest rates have done is make the U.S. dollar amazingly strong. There is no doubt that the U.S. remains an oasis and is the engine behind global GDP growth. Typically, a strong U.S. dollar is great news for small-cap stocks, which tend to have more domestic revenue compared to the S&P 500 with approximately 50% international revenue. There is also a second Russell index realignment this year in November that should ensure an exciting “early January effect” in the weeks leading up to Thanksgiving.

Overall, I am expecting a strong finish to the year, due to wave after wave of positive earnings announcements plus upbeat guidance and rising order backlogs. The icing on the cake is strong seasonal pressure, plus another Russell index realignment.