The United States economy is full of innovation. It has to be. Manufacturing industries that dominated the economy decades ago - textiles, televisions, even automobiles to a large degree - have moved overseas, where labor and materials costs are lower. Yet the U.S. economy, even during the pandemic and the recent period of high inflation, has expanded to record levels. If U.S. corporations weren't innovating, creating new products (such as AI and vaccines) and services (such as Zoom calls and Netflix), as well as moving into new markets (clean energy, rare drugs), the domestic economy would not be growing, and capital would not be flooding into the country. Consider that U.S. GDP was approximately $1 trillion in 1930 but was almost $30 trillion at the end of 2024. That's growth of 30-times. Meanwhile, the U.S. population has grown less than 3-times during that time span, to 340 million from 120 million. The delta between GDP growth and population growth has been driven, in large part, by innovation.

The steady march of the charts from bottom left to top right continues, and it feels like the one-day downside wonder on October 10 never happened. The major indices are near or at all-time highs as we are firmly in the most favorable seasonal time of the year. We are also about to enter a three-week period with many, many earnings reports. We think next week will be critical, as five of the eight companies with market caps above a trillion dollars will report (MSFT, META, GOOGL, AMZN, and AAPL). All the mega-cap as well as the mid- and small-cap indices rose between 1.1% and 1.6% on Monday, and breadth was fairly strong -- with NYSE advancers leading decliners by 1,700. Advancing volume was more than 80% of total NYSE volume for the second time in the past six days. Sector strength was broad again, with nine of 11 S&P 500 sectors up between 0.8% and 1.2%. Some breadth measures remain neutral to slightly bullish on an absolute basis, and weak-to-neutral on a relative basis if we consider what most indices have done since April. Some 57% of companies in the Nasdaq 100 (QQQ) are above their 200-day moving average, down from 86% three months ago. For the S&P 500, the reading is 65%, and for the S&P 100, it is 71%. Historically, these numbers are around 75%-85% after an advance such as we have seen. The deterioration in the QQQ is at least mildly concerning. But because of the heavy IT weight in the index, the weakening breadth doesn't seem to have hurt the price action. If the titans start to correct, there isn't enough underlying strength to support the index. (Mark Arbeter, CMT)

We have three strategic asset-allocation models, based on risk: Conservative, Growth, and Aggressive. We make tactical adjustments to the models, based on our outlooks for the segments of the capital markets. In terms of performance, stocks and bonds started the year close, but stocks have pulled ahead through September. From an asset-allocation standpoint, our Stock-Bond Barometer still slightly favors bonds over stocks for long-term portfolio positioning. We are over-weight on large-cap stocks at this stage of the market cycle, favoring them for growth exposure, financial strength, and exposure to the IT sector. Our recommended exposure to small- and mid-caps is 5%-10% of equity allocation, below the benchmark weighting. The dearth of IPOs has meant a lack of exciting new companies in the marketplace. While top-tier stocks (i.e., the Mag 7) have soared on enthusiasm for AI, the legacy small companies haven't been able to innovate to the same degree. One of the market surprises this year has been the performance of global stocks, which have taken an impressive performance lead in 2025. We expect the long-term trend favoring U.S. stocks to ultimately re-emerge, given volatile global economic, political, geopolitical, and currency conditions. That said, international stocks offer favorable near-term valuations, and we target 15%-20% of equity exposure to the group. In terms of growth and value, value got off to a good start in 2025 and looks likely to outperform if the market returns to a risk-off environment. Over the long term, we anticipate that growth, led by the IT sector, will top returns from value, led by Energy, Real Estate and Materials, due to favorable secular and demographic trends.

Stock indices saw nice gains again on Monday, as the technology road grader (AI) keeps grinding along. Monday it was tech and only tech, as the sector ETF (XLK) popped 1.5%. Other than the very low-weighted Utilities sector, which rose 1%, there were minor gains in Real Estate and Industrials and losses or no movement in the seven other S&P 500 sectors. NYSE breadth was flat and NYSE advancing volume versus declining volume also was even. Yet the S&P 500 gained 0.4%, the S&P 100 added 0.5%, the Nasdaq rose 0.7%, and the Nasdaq 100 was up 0.6%. We did see some continued participation by the small-cap indices and even the Russell 2000 crept into all-time high territory last week. The mega-cap dominance continues and the daily moves in these behemoths remains jaw dropping. Computer hardware popped 4%, led by AAPL's 4.3% surge. Semiconductors climbed about 2% (depending on which index you use), aided by NVDA's 4% spike as well as a 3% gain by TSM. Semi equipment names remain on fire, with LRCX, AMAT, and KLAC all adding between 2.5% and 5.5%. Components of the computer services and electrical components industries also had a big day. It certainly feels like we are in the melt-up stage of the rally that started back in April, as the major indices have once again reached overbought conditions on the daily charts and have cycled into overbought territory on a weekly basis. The price action has been steep since early September, and the angle of ascent is starting to accelerate on the Nasdaq and the QQQ. While this can go on for some time, it is a warning. (Mark Arbeter, CMT)