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It started with the big banks. As the days passed, companies across various industries began to share their quarterly results. Now, with Microsoft, Alphabet, Tesla, Amazon, Apple, Meta, and other market heavyweights all set to report earnings over the next two weeks, we’re quickly approaching the heart of this third-quarter earnings season. Those upcoming reports will likely determine stocks’ trajectory into the end of the year. If the quarterly results are strong, stocks will likely soar into 2025. If they’re not, investors may find some coal in their stockings this year. Though, fortunately, we think those upcoming results will be very strong. And that is primarily because we have quite an attractive setup going into this earnings season. In short, profit estimates have fallen over the past few months – but they shouldn’t have. That means companies have a “lowered bar” that should be easy to jump over. Indeed, back in July, analysts expected earnings across the S&P 500 would rise about 7.4% in Q3. By late September, that estimation fell to 4.7% and now sits at just 4.2%. In other words, earnings growth estimates for this quarter have dropped from ~7% to ~4% over the past two to three months. We attribute those falling estimates to worries about the economy. After all, it was around August and September that fears about an incoming recession rocketed. So… earnings estimates have crashed on recession fears over the past few months. Yet, the recent economic data shows that those fears are overblown. That bodes well for stocks. A Broad Economic Overview Meanwhile, average hourly earnings rose 4%, with inflation running just above 2%. That means real wages rose almost 2% last month – their biggest jump in years. And the all-important ISM Manufacturing and Services surveys – great proxies for manufacturing and services economic activity – both reported huge jumps in their New Orders indices for September. The manufacturing survey registered 46.1% in the index, up from August’s 44.8%. And the services’ New Orders Index expanded to 59.4%, markedly higher than August’s 53% reading. Clearly, the economic data has meaningfully strengthened recently. In fact, Citi’s Economic Surprise Index – which broadly measures how economic data compares to expectations – has risen from nearly -50 in July (its lowest since summer 2022) to +15 today (its highest since April 2024). In other words, while estimated Q3 earnings growth has dropped from ~7% to ~4% since July, the relative strength of economic data has improved for multi-year lows to multi-month highs. That means Q3 earnings estimates are too low. Companies will likely crush estimates this earnings season and will sound far more positive-than-expected about current business trends. And, of course, that all means stocks should power meaningfully higher this earnings season. Therefore, we are very bullish on stocks right now. But we are also bullish beyond this moment – because the next few earnings seasons should be very good, too. The estimated profit growth rate for this quarter is about 4%. That is the lowest estimated profit growth rate for the next several quarters. But by early next year, profit growth is expected to improve to about 10%. And by late next year, it’s expected to improve to about 15%. So… from today through the end of 2025… profit growth rates are expected to improve from ~5% to ~15%. That growth acceleration should provide a solid foundation for stocks to push higher for the next several quarters. Continued Market Strength Ahead Additionally, this stock market rally will likely become increasingly broad, too. One of the “knocks” against the current rally is that it has been very narrow, almost entirely led by Big Tech. Most other stocks have been left behind. But that’s due to a massive divergence in profit growth trends between Big Tech and the rest of the market – and that gap is set to narrow meaningfully over the coming quarters. This quarter, Big Tech stocks are expected to report ~20% profit growth. The rest of the market, known as the S&P 493 – the S&P 500 excluding the 7 Big Tech stocks – is expected to report roughly flat growth. Over the next several quarters, Big Tech stocks are expected to stabilize around 20% profit growth. The S&P 493, meanwhile, is expected to see profit growth accelerate higher, from flat to ~15%, by late summer 2025. As this gap narrows, we think the stock market rally will become increasingly broad, with more and more stocks joining in. So… broadly… we see a lot of reasons to be optimistic on stocks in both the short and long term. The earnings trends and outlook are just so good. They warrant continued market strength. As such, now looks like a really good time to be looking for stocks to buy in this strong market. And in our view, the best stocks remain AI stocks. The Final Word on the Q3 Earnings Season The AI Boom is only getting stronger, folks. Despite the rumors about a potential bubble, this boom just keeps booming – and with substance, not hype. OpenAI just launched the world’s first AI model capable of complex reasoning (a huge breakthrough) and followed that up by closing a $6.6 billion fundraising round – the biggest VC fundraising round ever. Taiwan Semiconductor – the world’s largest chipmaker – just reported a better-than-expected 39% increase in Q3 sales, a sign that robust demand for AI chips is not slowing down at all. Alphabet introduced a new AI tool called NotebookLM, which, frankly, we think could be as value-additive to workflows as ChatGPT. Meta debuted its new Meta AI tech in several new countries. Amazon is rolling out more AI features into its shopping and logistics businesses. Nvidia just said demand for its new Blackwell AI chips is “insane”; the chips are backordered for 12 months! As I said before… the AI Boom just keeps booming. We see continued bullishness ahead for this red-hot sector. Stay long AI! Sincerely, | 
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