No Ordinary Cycle

No Ordinary Cycle. The capitulatory price action and EPS estimate cuts we saw in April of this year around Liberation Day represented the end of a rolling earnings recession that began in 2022. Now, we appear to be transitioning to a rolling recovery backdrop aided by positive operating leverage, AI adoption, dollar weakness, cash tax savings from the OBBBA, easy growth comparisons, pent up demand for many sectors, and a high probability of Fed cuts by 1Q26. The historically sharp inflection we're seeing in earnings revisions breadth confirms this process is underway—an underappreciated development, in our view. This rebound in revisions also suggests that returns for the average stock are likely to be quite strong over the next 12 months based on our back-test. And the Probability of Our Bull Case Is Going Up. Last week, we discussed that we're leaning more toward our bull case for the S&P 500 by the middle of next year—7200 (22.5x forward EPS of 319). Earnings growth is on solid footing as evidenced by output from our earnings models (our Non-PMI Leading Earnings Model is pointing to mid-teens EPS growth). Furthermore, high valuations are likely to remain supported as our regime analysis shows it’s rare to see multiple compression in periods of above-median EPS growth and accommodative monetary policy—our views into next year. The Industrials Sector Stands Out. Industrials remains our top sector pick even after an extended period of strong performance (it's the best performing sector in the S&P both YTD and over the last month). Relative earnings revisions remain durable, capacity utilization is stabilizing, and aggregate C&I loans have surpassed $2.8T (the highest level since 2020). Our US Multi-Industry analyst Chris Snyder favors US capex beneficiaries (ROK, ETN, TT, JCI) as the combination of structural tech diffusion and a domestic infrastructure focus from this administration are leading to a more capital intensive backdrop. Bonus depreciation should also benefit the space both from a cash tax savings and top line perspective as it should incentivize a broader pickup in equipment investment. We’re Bullish into 2026, Though the Near-Term Set Up Is Not Without Risks. These include still elevated (and possibly higher for longer) back-end rates, tariff-related inflation and softening seasonals. Thus, we do expect some consolidation tactically, but would reiterate that we expect pull-backs to be shallow, and we're buyers of dips.