'PROFITS BOOM': Expert reveals why the market is doing 'so well'

Key Concepts

• Equity Bias: A strategic investment preference for stocks over other asset classes.
• Forward Earnings Estimates: Projections of a company's or index's future profitability.
• Multiple Expansion: An increase in the price-to-earnings (P/E) ratio, indicating investors are willing to pay more for each dollar of earnings.
• Tech-Adjacent Sectors: Industries that benefit directly from the infrastructure build-out of Artificial Intelligence (e.g., Materials, Industrials).
• Capex (Capital Expenditure): Funds used by companies to acquire, upgrade, and maintain physical assets like technology and infrastructure.

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1. The Earnings-Driven Bull Market

Keith Learner, Chief Investment Officer at Truist Wealth, argues that the current bull market is fundamentally supported by a "profits boom."

• Key Statistic: Since the beginning of the year, forward earnings estimates for the S&P 500 have been revised upward by 12%. Learner notes this is the highest upward revision in their database over the last 20 to 30 years.
• Valuation Perspective: Despite the market reaching new highs (approximately 5% above October levels), valuations are actually lower than they were last October. This is attributed to the rapid growth in earnings outpacing price increases, suggesting that the market is not necessarily "overheating" in terms of P/E multiples.

2. Sector Strategy and Portfolio Allocation

Learner maintains an "overweight" position on Technology, viewing it as the dominant theme of the current market cycle due to the AI build-out. However, he advocates for a balanced approach:

• Technology: Remains the primary driver of earnings.
• Tech-Adjacent (Materials & Industrials): These sectors are favored because they provide the physical infrastructure and materials required for the AI revolution.
• Energy: Positioned as a strategic hedge against potential geopolitical volatility.
• Methodology: The firm upgraded these sectors during market pullbacks to ensure portfolio resilience against "curve balls" or geopolitical flare-ups.

3. Macroeconomic Tailwinds

Learner emphasizes that while geopolitical headlines (such as tensions involving Iran) often dominate market sentiment, structural economic factors are providing significant support:

• Tech Spending: As a percentage of the economy, tech spending is at its highest level in 30 years, surpassing the levels seen during the 1990s. Learner characterizes this as a "once-in-a-generation build-out."
• Economic Drivers: Beyond AI, the market is supported by persistent tax incentives, robust capital expenditure (Capex) spending, and steady wage growth—factors he believes are often overlooked by market participants.

4. Risks and Market Oversight

While maintaining a positive outlook, Learner acknowledges specific areas of concern that require monitoring:

• Financing Arrangements: He notes that the complex financing circles between major tech players (e.g., Microsoft, Oracle, Amazon) and AI startups (e.g., OpenAI) "raise an eyebrow."
• Free Cash Flow: There is a watchful eye on the slight decline in free cash flow among some tech giants as they pour capital into infrastructure.
• Conclusion on Risk: Despite these concerns, Learner argues that the "real demand" for compute power and the strength of current earnings trends outweigh the risks, justifying a continued equity bias.

Synthesis

The core takeaway is that the current market rally is not merely speculative but is anchored in record-breaking earnings revisions and a massive, structural shift in capital expenditure toward AI infrastructure. Learner’s framework suggests that as long as earnings growth continues and companies maintain their investment in the AI build-out, the bull market retains its momentum. Investors are advised to look past short-term geopolitical noise and focus on the fundamental strength of tech-adjacent sectors and the sustained economic tailwinds of Capex and wage growth.