I am concerned that my phone is broken as I haven’t received an unsolicited text message in hours!
Now that the midterms are over, we once again find ourselves with political gridlock. So far, the market seems to appreciate this. Historically, gridlock has been good for the market, as little can get passed. This allows companies to make decisions about longer term projects without worrying that tax laws or subsidies will change. For example, the revocation of the EV tax credit has significantly changed which models automakers are building, and ruined many of their previous long-term plans, costing them billions. While several years ago it was common to hear automakers promise to fully electrify their lineup, those promises have been walked back and few builders have stuck to those plans. Hopefully, the gridlock in the Government will spur companies to invest and grow their product lines.
Another positive for the market is that PE ratios have fallen significantly over the course of 2026. Around a year ago, large cap PE ratios were at just under 24, a peak not seen in over 20 years. If you recall, there was quite a bit of worry about a bubble and subsequent crash. However, earnings have come in so strongly that forward PE’s are now closer to 18, a level that is more consistent with the last decade of pricing. There is still a worry of whether those earnings can persist, as much of the growth is fueled by AI spending. However, that was already a worry at the beginning of the year, and regardless of whether the earnings can last, a lower PE does still lower the overall risk of a crash. We have also seen resilience in other sectors of the market when AI stocks have stumbled, keeping our portfolios more stable and providing some risk protection against having too much in the AI sector.
Last week, the Federal Reserve paused their rate hikes, and we will see what happens in the coming meetings, but we don’t expect too many hikes as the average American is struggling with stagnant wages and high fuel prices. Mortgage rates are in the mid 7% range, which caused pending home sales to fall to the lowest level since 2001 when the NAR began tracking it. This level is lower than both the 2008 crisis and 2020. If we see the slowdown in real estate also hit other industries, we could well see the Fed cutting interest rates, which would be a tailwind for stocks.
Overall, the market is significantly better priced than it was at the beginning of the year, and that should allow more room for upside growth.