Evaluating the Rally to Record Highs: Fundamentals vs. Technicals

Adam Turnquist (00:00):

Welcome to this week's Market Signals podcast. I'm Adam Turnquist, chief technical strategist at LPL, and happy to introduce our guest today, Tom Shipp, head of equity research here at LPL. Tom, how are you doing today?

Thomas Shipp (00:15):

Doing great. Thanks, Adam. Happy to be here.

Adam Turnquist (00:18):

We're certainly excited to bring you in. I thought what an opportune time to talk a little bit about fundamentals and technicals. We'll compare and contrast where those themes are going in light of this recovery we've had in the equity market. And Tom, I know you're deep in the weeds in good old classic bottom-up analysis, but you also have your pulse on the macro environment as well. So plenty to talk about today. And we will kick things off with the fundamentals and get your take and insight on really the fundamental story for this recovery. Maybe share some insight on the S&P earnings, where they've been, where they're at now, and maybe your outlook for earnings as we move forward.

Thomas Shipp (01:00):

Yeah, I think the interesting way to frame up how we've seen earnings estimate revisions for the S&P is, and when I say revisions, I just mean the change in 2026 estimates from a few different periods. So I thought breaking it up from just the year-to-date period, where we were coming into the year to now, and then slicing that up into the beginning of the year to the end of February, or the start of the Iran War, and then from that point to now. I think there are some interesting things you see when you break it up like that. We're at about 5.1%, so EPS revisions have moved up about 5% year to date.

Thomas Shipp (01:51):

But interestingly, 3.7% growth just since the start of the war, which is almost counterintuitive. We've seen markets trade off and a lot of worries in the market up until ceasefire and peace negotiations started. Prior to the war, we saw estimate revisions growing to about 1.6%. I think there are a few different things going on there. And one of them is obviously energy. So we saw energy sector revisions were slightly down coming into the war, and certain pockets had seen some stuff we'd talked about. Oil field services had kind of perked up a little bit, at least on the price side. But we weren't seeing it wholesale in the estimate revisions. Oil had still just kind of been doing not a whole lot. And since the war started, the energy sector revisions have kind of skyrocketed through 45% up from just the end of February.

Thomas Shipp (02:53):

So a pretty big growth rate there. But remember, the energy sector is 3% of the S&P 500. So even with that level of growth, it's kind of accounted for. Some of my back-of-the-envelope math this morning: on a year-to-date basis, about 20% of the S&P 500's revisions have come from energy. And if you fast forward from the start of the war to now, it's about a third of the market's growth. Where's the rest of it coming from? It is coming from the tech sector. There are a few other sectors that have had subtle positive revisions, but six of the 11 S&P sectors have had negative revisions year to date.

Thomas Shipp (03:41):

So I'd say those non-IT, non-energy positive revisions offset the negatives, and you're really left with energy and IT. And like I said, on a year-to-date basis, about 20% is driven by energy and 80% by tech. Now since the start of the war, call it one-third energy, two-thirds tech. I found that pretty interesting when you think of it right off the bat. But then you start to dig in and think a little further. Oil prices aren't really going to drive that much when it comes to tech demand and earnings. It's really driven by the top line and the growth we're seeing, particularly AI compute and data center CapEx build-out. I'm sure we'll touch on that a little bit more. So that's really just been the big theme here: that growth has continued and tech is driving the earnings growth we're seeing in the market.

Thomas Shipp (04:42):

Energy is actually providing a boost. From there, you can kind of carve out energy and it's basically 100% coming from tech. And the interesting piece is that since the war started, tech earnings revisions have accelerated, which is again kind of surprising at first. But once you start to dig into it, each layer of the onion reveals more. It's really driven by the semiconductor complex within tech, and there were a few big earnings reports that happened after March. So you start to get into a little bit more idiosyncratic pieces of information, but driven by semiconductors, i.e., compute, and the AI compute build-out, data centers, et cetera. So surprised? No, maybe a little surprised that given the way the timing worked out, in such a negative tape, you had actually such accelerating earnings revisions in tech, which really, like I said, drives the entire S&P. So interesting kind of setup we've had year to date on a fundamental basis.

Adam Turnquist (06:01):

Yeah, certainly when you think about the earnings backdrop collectively, although there's some nuance to those numbers as you outlined, improving since the start of the war in a pretty big way. Seems like the market itself is getting back to the fundamental case and looking through the conflict in Iran, looking at those earnings numbers with some durability, especially when you think about the AI spend story. Tom, any thoughts on that alone? Just where are we at on the spending cycle? Has that really slowed down? And then maybe from a market's perspective, we've gone from "how much are we spending on AI" to this year being more of a question mark on the return on investment, what's the quality of that spending? Where are we at in that cycle in terms of the return on investment and some of that spending?

Thomas Shipp (06:55):

Yeah, I feel like there was a moment earlier this year where that scrutiny showed up. We've had some pretty big debt issuances that were all oversubscribed, I believe, from a few of the hyperscalers and big spenders. There was a moment earlier this year, but it seems to have passed. We're really just back on spending. And the demand levels are there from the hyperscalers. So these are your Microsofts and Amazons and Googles, who are responsible for building these massive data centers. They then rent out compute to other companies. The demand remains very strong. There's not enough supply of compute to keep up with the demand. And I think right now that is the narrative driving everything, are we going to see a high return on investment on this?

Thomas Shipp (07:54):

I think right now the benefit of the doubt is given, and the demand is there. They're not going to sell something that they can't make a return on. [Laughs] That's where consensus seems to be on this. And folks just aren't generally worried too much about it, or maybe in the back of their head they're looking at this as a cycle, but they know we're nowhere near the end of that cycle. I think there are a few things to start thinking about if this is going to play out in any kind of capital cycle way. One would be: when does that spending slow down for reasons other than demand? So bottlenecks, hey, we thought we were going to spend $600 billion this year on a selected basis, but due to power supply and other real-world, hard-asset, real-economy type bottlenecks, they're not able to spend that. Does the market signal that as, "Okay, now they're not going to be able to spend as much, so you just kind of stretch it out?"

Thomas Shipp (09:04):

Or does the market ignore it? I think that's one piece to look at. And the second piece is just the overall demand. From studying prior cycles, by the time that demand starts to slow down, by the time you would see it explicitly in numbers, the market will have sniffed that out, and I think we'll be on our way. So neither of those things have shown up just yet. So I think it's still kind of in this "pedal to the metal" middle innings, if you will. From that cycle, and in terms of just thinking about this from the customer perspective: large enterprises, I think we're just really starting to scratch the surface on that. And larger enterprises are slower to implement new technologies.

Thomas Shipp (09:54):

So we've seen a lot of, call it maybe anecdotal, or the market seems enamored with a new capability that's come out, whether it's from Anthropic, Claude, Cowork, and some of these agentic capabilities. Right now, that's all the market is really focused on, these productivity gains are going to come because "I've seen this amazing demo." But I think it's going to take time for that to flow into enterprises and for us to actually see productivity numbers really inflect from the broader economy.

Adam Turnquist (10:29):

So sort of a "show me" story, I think, still for AI. The adoption rate is relatively low when you look at it industry-wide. Of course, the tech sector has much higher adoption rates, but there's a lot of runway when you look at areas like healthcare, which has pretty low adoption rates. So that's probably going to fuel spending. And from your take, it sounds like the secular spending theme is likely to continue for now, at least in terms of the supply and demand dynamics playing out in that space. All right, so we talked about the importance of tech. Curious about your thoughts on valuations right now in the market. We've gone from near correction levels on the S&P, getting down to about a 9% drawdown. Earnings improved, as you highlighted, remarkably over this period. Where are we at on valuations? Does it make sense from your fundamental perspective?

Thomas Shipp (11:24):

Yeah, I'll set aside the "making sense" part for now. [Laughs] I think just to frame it up, we started the year at about 22 times 2026 earnings. That level came into the year, and we stayed there throughout to about the beginning of the war. And the multiple started to retrace and compress to about the end of March. So all of March was multiple compression, going from 22 times to about 19.5 times 2026 earnings estimates. And what's interesting is that during that time period, the S&P 2026 earnings estimate actually went up about 3%. So we'd gone up maybe 1.5% from the beginning of the year to the start of the war, to use that same breakup in the calendar. And then earnings growing 1.5% from the start of the war to the end of March.

Thomas Shipp (12:24):

Earnings estimates grew 3%, so growing faster, but multiples compressed. That's that risk premium, that war premium, whatever you want to call it, in the market. But on a PEG basis, or a growth-adjusted PE basis, the market had ostensibly gotten cheaper. The interesting piece was the snapback that we all saw, and I'd love to hear your thoughts on that, maybe from a historical framework, but the snapback we saw brought us right back to 22 times. So we're right there. If you were just looking at the PE on the market from end of the year, fell asleep for three and a half months, woke up and said, "Hey, we're right at 22 times, what happened?"

Adam Turnquist (13:08):

And I guess valuations reset pretty quickly. Tech sector looked cheap briefly. I don't know if it still looks relatively cheap on a forward PE multiple, but it was below its long-term average for a brief period and has subsequently reset. But when you take the fundamental story and look at the technicals here on the S&P, we've kind of done the same in terms of the snapback, of course, the price component there. But this V-shape recovery has been not unprecedented from a historical perspective, but certainly remarkable. We've gapped above the 200-day moving average and really never looked back on the S&P 500. That alone, when you're not filling a price gap over the subsequent trading days, is usually a pretty good sign of durable buying pressure. Of course, we've seen that in a big way.

Adam Turnquist (13:58):

You look at the S&P, it's been up 12 of the last 13 sessions. Big tech making a big comeback as well. Tech sector not far from record high territory. Semiconductors breaking out on not only an absolute price basis, but also on a relative basis when you stack it up versus the S&P 500. So certainly a constructive backdrop for that group, for the sector. And I think for the S&P 500, it's the biggest sub-industry group. A lot of technical repair has been done underneath the surface of the market. That's been important, something we've watched carefully. We call it market breadth. You look at how many stocks have recaptured their shorter-term 20-day moving average. We were down to mid-single-teens at the lows at the end of March. We've gone back to about 80% of stocks now above their 20-day, and over half the index posted a new four-week high last week.

Adam Turnquist (14:52):

So it has been broad and, of course, tech-driven. When you look at the contributions to returns off the March low, six stocks drove about half the gains in the S&P 500, but those are importantly the same six stocks, or most of them, that dragged the index lower. When you look at returns year to date through the March low, about two-thirds of those losses were driven by those mega-cap names. So big tech starting to make a comeback here. I think that speaks to the durability of this breakout and something technicians have been watching for: the S&P to clear that 7,000-point barrier. We tried several times earlier this year, and clearly without big tech participating, we could not get through that level. That was part of our thesis: we're not going to see a durable breakout until those names start to work.

Adam Turnquist (15:40):

And for now, they're starting to work. And it was one of many reasons why we upgraded the sector last week, that is, our Strategic and Tactical Asset Allocation Committee here at LPL. So tech got an upgrade to overweight, and we upgraded our views on U.S. equities to overweight. So I think it's a pretty constructive setup technically. And Tom, I think you can make the case that the macro backdrop looks better as well. When you look at Brent Crude, there were really three things that we were watching for technically to check the box for peak oil likely being in the rearview mirror. One of them: Brent below key support at $98. We checked that box. Implied oil market volatility has also come down, and that's been moving lower absent today's price action. Just for a reference point, it's Monday afternoon here about 1:30 p.m. Eastern, and oil markets are up 5-6% on some of the headlines around uncertainty with a ceasefire.

Adam Turnquist (16:43):

But the Brent forward curve is not reacting to the headlines over the weekend, so still trading lower. When you look out at the November and December contracts, they have not inflected higher, and those have been slowly moving lower. And that's the market telling us that the pricing of a higher-for-longer oil regime is likely not in play. And this is more, do I dare say the word, a transitory type of oil spike. We'll see what happens with the Strait of Hormuz and what happens with this ceasefire agreement that is set to expire tomorrow. Certainly a lot of headlines driving it. But Tom, just going back to the fundamentals here, we've had banks report, about a third of the sector, with some more reports this week. Any insight or takeaways from the banking space from your perspective?

Thomas Shipp (17:33):

Yeah, what we saw is we didn't learn as much as I would've hoped, particularly from the big banks on maybe the Main Street economy. The quarters came in good from an expectations perspective, broadly better than expected. The profit quality, I'd say, was skewed toward more capital markets. So trading, obviously a lot of volatility in the first quarter brings trading revenue and capital markets activity. We've seen M&A pick up and the IPO window opening up. But as far as core spread banking, making loans to small businesses, consumers, et cetera, not a super clean story on a reacceleration there, but broadly good, nothing super concerning there. No big red flags, capital markets open for business. Credit hasn't really cracked, and commercial activity looks healthy. Of course you get your CEOs expressing caution, being risk averse, saying, "Hey, look, there are macro uncertainties out there." Feels like we get one from the big bank CEOs every quarter, worried about clouds or the weather or insects, whatever it may be. [Laughs]

Adam Turnquist (19:16):

Cockroaches, I guess.

Thomas Shipp (19:18):

Yes. And we did see a bit higher credit card provisions at one of the large banks. But again, all in, nothing too concerning, a bit better than expected and driven by capital market activity rather than core banking and lending.

Adam Turnquist (19:38):

All right, so bank earnings, we'll call it good enough, with some cautious outlooks given the macro environment.

Thomas Shipp (19:46):

I'd also note that five of the 11 sectors have had positive revisions, and financials have been in that group. It seemed like that trade kind of faded a bit from last year. And the stocks definitely took a hit with some of the interest rate moves we had. But from an earnings perspective, it is one of the positive stories here to date.

Adam Turnquist (20:16):

Yeah, technically as well, I would say the broader banking space held up very well, had a pretty sharp pullback along with the rest of the market in March. And importantly found support right off the prior highs, and that's where buyers stepped up. And we've had a nice rebound in the banking space. I think that speaks to this rotation we've had back to more cyclical leadership. That's one of the puzzle pieces we were looking for to really assess how sustainable this buying pressure is. Speaking of the sustainability of the buying pressure, we'll switch gears a little bit and talk about sentiment and positioning in the market. A lot of people have attributed this rally to being more mechanical or forced buying. Tom, what are your thoughts there? Got any color?

Thomas Shipp (21:04):

Well, I think we're all seeing a lot of the same things, but we definitely have a lot of different circuit breakers, if you will, when it comes to the mechanics of the market. You've got your trend followers, your CTAs, and we've seen them switch, with the buy switch flipped on. We've seen your risk parity funds and strategies that will look at the volatility of the market and readjust accordingly. Those are just now, I think, starting to buy. So I think there's still some buying there. And then retail, there's been back and forth on whether tax returns are done, maybe they're coming back into the market, or had they sat on the sidelines.

Thomas Shipp (21:57):

I don't recall exactly what the latest from some of the sources we look at here at LPL Research on the retail crowd. One interesting note was the level of hedge funds that had kind of taken risk off the table and then piled right back in. And also the long-only community, how they kind of sat out a lot of this entire move and did what they should do, in my opinion, from a long-term investment perspective: just sitting out and waiting. So from the sentiment and positioning broadly, I think there's definitely an underlying bid to the market with passive flows to retirement accounts, and as long as jobs are holding up, there's that mechanical bid underneath the market.

Thomas Shipp (22:56):

But I haven't seen from just the positioning side anything beyond that to suggest this has been anything more than mechanical. Nothing has shocked me too much. I'd say on the sentiment side, it does seem that beta was where everybody was chasing. We saw lots of things, whether it be quantum computing or space and satellite companies, really go parabolic as soon as the all-clear was sounded, whether it's truly an all-clear or not. But once the all-clear was read by the market as an all-clear, these stocks have really led out of the gate in April.

Adam Turnquist (23:40):

It looks like most have flipped the book from pretty short positioning on the institutional side going into this event and throughout, where you have CTAs, or commodity trading advisors, really stepping up and buying the market. I think Goldman Sachs noted in their research that if the market stays relatively flat, there's around $70 billion to buy over the next few sessions, this week's sessions, just given the systematic nature of their buying. And then the retail crowd, when you look at where they were going into February, very long U.S. equities to the tune of over two standard deviations in terms of their exposure, they're down to just over one standard deviation below their long-term average. So there's scope for some buying there as well. Tom, you mentioned this beta chase. Curious about your thoughts, has that changed the factor narrative where you're seeing leadership? We've started the year more value-oriented; there was this big great rotation to value. Are you seeing a lot of changes there in the factors that you watch?

Thomas Shipp (24:47):

Yeah, so beta, momentum, and earnings revision have been the leaders year to date, and looking at this on more of a long-only basis, we kind of look at the long-short side of factors, or just taking the long side of the factors where I tend to look at it. Those three factors you would generally put into a risk-on positioning, given where we've been with the momentum factor, and we've been pretty risk-on for the past 12 months. And then beta, really. And what we can see there is just that beta, when it takes off, really takes off. And so you kind of bump the entire factor up because these factor composites are generally equally weighted.

Thomas Shipp (25:36):

So every stock in it is getting kind of the same weight. Interesting ones have been value and dividend as a factor, still working. Year to date it's still positive and you can attribute that to that great rotation. Also, energy and materials have been huge outperformers year to date, and those are highly represented in those value and dividend factors. And where's that coming from? What are the laggards? It's your low-volatility, the opposite of big, effectively, and then quality and growth have lagged. And the growth part might seem counterintuitive to some, but when we're talking about a factor, we're really just isolating to that characteristic of earnings and sales growth, and what makes up quality and what makes up growth? A lot of software. And software has lagged recently, kind of got caught and got bid back into it, but year to date, due to AI disruption fears, et cetera, it's really dragged those factors down.

Adam Turnquist (26:44):

Certainly people kicking the tires on software. I think the broader software index is up 16%, technically there at a major support level. I don't think you can quite wave the all-clear yet in terms of this being a bottom in software, but I think an important step in the right direction. And there has been this beta chase, Tom, as you mentioned. Any concerns when you look at, we'll call it, a meme stock type rally? [Laughs] You had Allbirds last week rally 600%. Does that give you reservations about maybe where things are at on this AI cycle when you have names going from making shoes to now playing in the AI infrastructure space?

Thomas Shipp (27:29):

Yeah, that was an interesting one. I think it was kind of built for a lot of headlines. The company had kind of already shut down their shoemaking operation, and this seemed to be like a way to, almost like a re-listing of a company that had intended to do this. So I don't know if that one is the best example, but it sure made for some good headlines. Broadly, to be honest, I think a lot of the meme stock stuff gets a little bit overblown in terms of giving us any real signal. Yes, it'll give a signal that there's risk-taking in the market. I think it's just going to be a part of the market these days.

Thomas Shipp (28:09):

We've got a lot of cheap liquidity for just trading stocks. We've got cheap avenues to do that built right onto your phone, and I think it's just going to be here with us. I don't think there's any systemic risk to these things. I think people who are playing in these stocks know what they're getting into. And so I don't go there. I don't generally look there, even if something does look interesting. If it's got too much of that going on, I'm generally turned away from it. But I think it's definitely a blip when you think about the AI trade or bubble fears or whatnot, when you start to see some of these companies where all they have to do is put "AI" in their name. Well, I don't think Allbirds is the right example for that yet. We'll start to see some IPOs coming and other things to maybe tell us, "Hey, is there excessive, more than maybe assumed, excessive risk-taking in the market?"

Adam Turnquist (29:15):

Certainly seems to be a signal that risk appetite is back in a big way, and I view it as almost a positive for sentiment in the market. Maybe not Allbirds specifically, but just some of those names catching a bid. We'll switch gears a little bit because I've had a lot of questions on energy. Clearly, WTI/Brent well off their highs last month, signs that, as I mentioned earlier, peak oil is likely in the rearview. We're not really concerned about $140 or $200 oil prices right now. So I've had questions, is the energy trade over? It was working all year. It accelerated. We've had almost a parabolic move since December in energy, and now it's clearly a laggard, though there's been some technical damage there as well, not severe. When you look at the energy sector broadly, it looks like your classic pullback from overbought conditions. There's a little bit of a bid coming in, late Friday and in today's session with oil up. Tom, I know you worked in the energy space on the sell side, so I thought it'd be great to get your feedback on the energy space, kind of where the cycle is and where maybe there's some risk or opportunity.

Thomas Shipp (30:33):

Yeah, I think that's funny. We saw the grand opening of the Strait of Hormuz lasting all 36 hours. I think it's going to be choppy when it comes to the oil price. I think I sit between the "nothing ever happens, oil's reverting right back to $60" crowd and the commodity doomsayer perma-bears who think these supply chain snarls are going to drive oil to $200. [Laughs] I think there's a new risk premium baked in that probably won't go away anytime soon. Like you said, even on the curve out, still very backwardated, but we're not at levels that we were at earlier, before the war.

Thomas Shipp (31:30):

We've got some risk premium baked in, and I think the easy re-rating gains, particularly within the energy stocks, have probably been done. You'll probably need to look a little bit deeper for value, do a little bit of work. And as we wrote about earlier this year, you can kind of see this between the different kinds of returns on oil stocks and energy stocks. It's like pure commodity beta, oil beta, as I call it. And those things will rip with the commodity, and that's what we saw. And depending on how sustained the market believes the oil rally to be, that's going to be the source of a lot of your oil beta and a lot of your oil returns.

Thomas Shipp (32:22):

The next group is ones where you think about, "Is this going to last long enough for pricing pressure to come through to the system and bottlenecks to come through?" And I kind of lump this part of the cycle we're moving into now in with that. So you start to look at different parts of oil field services, do we think offshore is going to work, versus North American shale and pressure pumping or hydraulic fracturing, et cetera. Where do you think those bottlenecks and pricing pressure will come up? I think that's kind of where we have to get into it. Disclosure: I was an oil field services analyst. [Laughs] And so that's really where I tend to go. But we look at everything here, and then finally you have your third piece, where it's a very long drawn-out cycle and you start to look for your tollways, your pipes, your refineries, et cetera.

Thomas Shipp (33:19):

So I think there's still value here, and that's mainly because I don't see oil going back down to $60. Sometimes they can trade that way, but I think it's going to be a little bit more idiosyncratic, getting positioned or waiting for pullbacks in certain areas. I continue to think that the capital efficiency and the quality of management on the E&P side, particularly for your independent E&Ps, they're not going to chase growth just because we had a few months of this going on. I think they're going to continue to be pretty resilient, pretty conservative, and focus on shareholder returns and value-accretive projects. If we start to see that data and we start to see production grow and rigs coming online, then I fully expect that it's a cycle. And if we did get to that point, the E&Ps can't help themselves, and they would just absolutely, someone, if the high-quality ones aren't going to grow, then somebody will. And so the oil cycle tends to cure itself. But I think the broader bid to oil and just folks wanting to diversify oil supplies, that's here to stay for at least the next 12 to 24 months.

Adam Turnquist (34:44):

And we've heard from some companies talking about their drilling capacity and really not increasing or chasing this, much different, maybe, from 10 to 15 years ago where they would start spending and increase production. They've been more disciplined. To your point, I think we've highlighted before on our calls: this isn't your father's oil market anymore when it comes to capital discipline and being focused on their balance sheet and return to shareholders. So it might look a little bit different. This cycle is something I know you've written a lot about, and I think that's still your thesis as far as the latest from your research. But oil field services, when you look at it technically, I think 3.5% below record highs, held up very well despite oil coming lower. That's really where we see relative strength in the energy sector. The E&Ps were working; that trade has slowed down in terms of relative strength. They're obviously, to your point, Tom, more exposed to price than the services side. So certainly an interesting spot on the services sub-sector within the energy space. Tom, I think we are at time, so we'll wrap it up there. Certainly loved having your insights today in breaking things down on the fundamentals. So we'll be back next week for another edition of LPL Market Signals. Tune in then. Thanks, everyone.