Forget the Headlines—Here’s Why I’m Still Bullish

Forget the Headlines—Here’s Why I’m Still Bullish

• The NY Fed’s supply chain pressure index shows no stress.

• Money market fund assets hit a new record.

• The S&P 500 could rally another 10% over the next year.

The stock market has room to run higher…

Investors face their next big test this week on the inflation front. On Tuesday, the U.S. Bureau of Labor Statistics (“BLS”) is set to release its June consumer price index (“CPI”) data. According to the Federal Reserve Bank of Cleveland’s Inflation Nowcast data, prices are expected to rise 0.25% on a month-over-month basis.

That’s important because CPI was flat last June—so if this year's data shows growth and last year's soft print rolls off, it pushes annual inflation up from 2.4% to 2.6%. While that result would match Wall Street expectations, it could fuel fears of a rebound.

The S&P 500 recently hit new highs, and I believe investors are still positioned for worst-case tariff risk. That means a better-than-feared print could spark fresh upside—but a hotter CPI might trigger profit-taking.

With that in mind, here are some charts that keep me optimistic about the longer-term upside potential for the S&P 500.

But don’t take my word for it, let’s look at what the data’s telling us…

Global Supply Chain Function:

Given the concerns about trade, tariffs, and inflation, I wanted to look at how well global supply chains are functioning. After all, the lack of normal activity during the pandemic was one of the primary drivers of price increases.

One of the best ways to observe this is the Federal Reserve Bank of New York’s Global Supply Chain Pressure Index (“GSCPI”). It was built to gauge the importance of supply constraints with respect to economic outcomes, aka inflation. It measures activity in standard deviations to discern whether processes are functioning normally. Regular operation is represented by the number “0”. In statistics, 68% of all outcomes will lie within one standard deviation of that number while 96% will fall within two standard deviations.

Look at current supply chain stress...

The June GSCPI was “0” compared to the “0.3” result in May. That’s far below the 4.4 reading in December 2021 when costs were skyrocketing. The latest result tells us that global supply chains aren’t currently stressed. This implies we shouldn’t be seeing upward pressure on prices stemming from supply chain disruptions. That should help to keep a lid on future inflation growth.

Technology Influence on Inflation and Economic Growth:

Given the advancements being made with artificial intelligence and the increasing uptake by businesses and households, I wanted to look at the implications for longer-term inflation growth. I thought the closest comparison would be the increase in internet usage between 1990 and 2020.

In the above chart I compared data World Bank numbers on internet usage as a percent of the U.S. population compared to the annualized CPI data. As you can see, increased internet uptake helped to drive price growth down. Increased access to pricing data as well as access to goods likely increased competition. In turn, that helped to drive down costs.

Now look at internet uptake relative to economic growth…

In this chart I compared the same World Bank numbers against the U.S. Bureau of Economic Analysis’ gross domestic product (“GDP”) figures on a total dollar basis. Between 1990 and 2020, GDP in dollar terms shot up from $6 trillion to $21.4 trillion. In other words, the uptake of cutting-edge technology and the resultant efficiency improvement helped drive a more than three-fold economic expansion.

Given the rapid uptake of AI and the potential for a similar cost reduction and economic expansion, what could that mean for the stock market over the next 12 to 18 months?

Fair Value Multiple for the S&P 500:

Based on recent commentary from companies like Oracle, Nvidia, Microsoft, and Amazon, businesses can’t get their hands on AI technology quickly enough. All those data infrastructure companies have discussed being capacity constrained when it comes to meeting customer demand. As the resulting build-out unfolds, it should generate more revenue for the businesses selling those products—and improve margins for the companies using them.

The shift has meant that technology companies’ weighting in the S&P 500 has risen above 31%. That’s important from a fair value multiple standpoint. Traditionally, the gauge’s multiple has been considered high at 18 to 19 times the forward 12-month price-to-earnings multiple. Currently it sits at 22.3 times compared to the five-year average of 19.9 times.

However, traditionalists aren’t taking the weighting shift into full consideration. High growth technology companies like the ones previously mentioned can often trade at a fair value multiple of 30 to 32 times forward earnings. So, if we do the weighting adjusted math, using a 30 times multiple on 30% of the S&P 500 and 19 times on 70%, we get a fair value multiple of 22.3 times. And if we slide the tech weighting up to 40% doing to rising demand for those companies’ goods and their share prices, the fair-value multiple quickly jumps to 22.9 times.

Now lets take a look at earnings expectations…

For the calendar year 2025, Wall Street currently anticipates S&P 500 member companies to report $264 in total earnings. The number jumps to just over $300 for 2026.

Since we’re trying to be forward looking with our investment, let’s use the previously mentioned fair value multiples to get an upside target range for the S&P 500. Based on my math, I get to a target range between 6,700 and 6,861 over the next 12 to 18 months, if numbers don’t change. That’s roughly 10% upside from where we are currently.

Money Market Fund Assets:

Lastly, I wanted to look at the funds currently parked in the money markets. According to the personal finance website Bankrate.com, some funds are paying as much as 4.3%. That’s a solid return for a cash-like, safety-oriented investment.

According to the Investment Company Institute, money market mutual fund assets are at a record $7.1 trillion…

As you can see, the amount of assets parked has swelled since our central bank started raising rates in early 2022. And since policy has remained restrictive, the interest payments remain high. Based on recent guidance from policymakers, the Fed will likely start cutting once more in the fall. When that happens, the money market payout will drop. That should encourage those investors to seek the higher returns of the stock market.

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