Client Memo: Are You Holding Enough Stocks in Your Portfolio?

The S&P 500 has hit numerous record highs this year, overcoming a couple of hurdles where we saw a not insignificant drawdown. In my last memo to clients, I wrote about how the drawdown in stocks in July was structural, not fundamental, and how structural declines in the market tend to be shallow and short.  

The chart below shows the rebound in the major global equity indices from the end of July. Some indices, such as the Emerging Market Index and the Nasdaq, both focused squarely on the AI trade and tech industry, remain below record levels.

Why are we bullish on stocks?  

The markets shrugged off the Iranian conflict. They have fully recovered from a brief 9% peak-to-trough decline at the war’s outset. Volatility is relatively low by historic standards. Markets reached all-time highs 24 times in the first half of the year. 

When it is all said and done, stocks are priced on earnings. An influential book that I read long ago was called It’s Earnings That Count by Hewitt Heiserman. In it, he makes the argument that stock prices ultimately track profits and that extended disconnects usually correct back toward earnings.  

Since the launch of ChatGPT in November 2022, corporate earnings have climbed rapidly. In the most recent quarter, the second quarter of 2026, we are on track for blended earnings growth of more than 50%. That is the highest since Q2 2021 coming out of Covid. 

Since 2022, cumulative S&P 500 EPS growth has been a very strong 62%, or about 13% annualized over four years. That’s a significant acceleration versus the pre-ChatGPT decade when EPS grew 8.6% annualized. And the most recent data shows the fastest growth of all: that EPS growth rate has been accelerating, not slowing.  

What also makes this time period unique is that the growth was accomplished during an expansion, not coming out of a recession. In fact, this has never happened outside of a recovery from recession.  

For all of 2026, EPS estimates are now slated to be up about 32%. Even when taking out the private asset growth (for example, Microsoft’s position in OpenAI), EPS estimates are looking up about 24%. That is TREMENDOUS growth for an economy NOT coming out of a recession. Those are strong ‘snapback’ earnings growth figures, except that this time they are occurring during a normal expansion. 

The great thing is that it is broadening out. We have moved on from a concentration story, in which nothing but the Mag 7 was working, to one in which small caps, international developed, and now emerging markets ex-South Korea and Taiwan are breaking out.  

Our thesis at the start of the year was a weaker US dollar driving international returns and small caps. In our 2026 outlook, I wrote: 

The AI boom appears to be broadening beyond the handful of players that have led it so far. AI is now a genuine macro driver, not just a tech-sector story… The early winners have been the Magnificent 7. These are the early adopters, akin to the first miners in the California Gold Rush. But as happened during the gold rush, the winners broadened from a handful to many. The ‘picks and shovels’ of the gold rush started to see huge profits. 

Later on, I wrote: 

What does this mean for portfolios? 

It means that the S&P 500 is unlikely to be the leader of indices again. As the markets and gains broaden to smaller, value-oriented, and international names, the contribution from a diversified portfolio will be more meaningful.  

It doesn’t mean we won’t hold US large cap, but it does mean we will reduce the weight in our baseline models to it, in favor of US midcaps and small caps, as well as international stocks (both developed and emerging markets). 

This was clearly spot on – not to toot my own horn. While the S&P 500 has done well, the rest of the market has caught up. International is working for just the second time since 2012, and small caps for the first time since 2019. We went big into both in the equity sleeves of client portfolios.  

Today, close to the reverse looks attractive. The Mag 7 stocks haven’t taken a dive, but they haven’t done much either, with only Nvidia up more than the S&P 500. However, as we discussed above, earnings are still going gangbusters even when removing the bump they are getting from private assets that they own. 

Circling back to the Heiserman book mentioned in the introduction of this memo, if one charts the log of earnings against a stock price, the correlation between the two should, over long periods of time, be very strong. This was the basis for one of the earliest stock-picking software tools called Baseline, developed by Rob Patterson. 

The premise was to select stocks whose price had developed a large gap below the earnings line. Those were the most undervalued and offered the best risk-reward. Today, that gap is clearest in the hyperscalers and Mag 7 names, as well as the closest periphery of the AI trade.  

Thanks to Mag 7 earnings growing faster than their stock prices, the valuation of these stocks is now at the lowest level of the last year and in the lowest 4% of observations going back five years. Implicitly, the market is saying it doesn’t believe the investments these companies are making will pay off. 

We believe they will, and to a large extent they already have. The cloud revenue and the growth in Anthropic, OpenAI, and Google revenue has been nothing short of amazing. And it is only accelerating. While the ultimate winners and losers, and how everything shakes out over the next few years, are up for debate, the notion that these hyperscalers are not going to see a return on their investment is almost absurd. In fact, most of them already are, and they are just getting started. 

Suffice it to say, we are bullish on stocks and are concerned that some investors are too conservative or too bearish. If you think you are one of them, please reach out to us. For those with a long-term view, I would not hesitate to be invested more aggressively in stocks. 

As always, we appreciate the trust you place in us and are always here to answer any questions you may have. 

Sincerely, 

Mark Asaro, CFA 

Noble Wealth Management