Dear Friend and Clients, 

 

Over the past four months, markets continued to rebound from April lows, supported by resilient corporate earnings and two Fed rate cuts. At the same time, soft data remains weak following the prolonged government shutdown, geopolitical tensions, corporate layoff headlines, and concerns about unemployment and inflation.

 

A few key takeaways—largely unchanged from our last update:

We currently believe the market may face increased volatility as economic signals diverge and the Fed navigates its policy challenges.  

 

Please don't hesitate to reach out with any questions or comments, or if you'd like to discuss further. 

 

Best regards,

 

Brad Banken, Investment Advisor Representative

 

Allison Banken, COO

 

We are unable to mention specific companies and or tradable investment products in order to follow compliance guidelines as the content cannot be construed as our individual view or recommendation on any investment product.  Please reach out if you have any questions or would like more specific information on anything below.

All performance metrics are as of date of publication.

 

 

Since our August note, the market has steadily climbed to new all-time highs. The S&P 500 logged its second-longest run above the 50-day moving average—138 trading days—supported by a resilient consumer despite negative headlines. Q2 and Q3 earnings were solid, and GDP is on track for ~3% in both quarters, a contrast to the recession fears in April (keep in mind a recession is considered two consecutive negative GDP reports).

 

As we wrap up Q3 reporting, 82% of S&P 500 companies beat earnings (vs. a 10-year average of 75%), and 77% beat revenues (vs. 66%). It’s remarkable how much has changed in six months.

 

Yet performance remains narrow: through mid-November, the average S&P 500 stock is up only 2%, and even when expanding to the Russell 1000, the average gain is still just 2%. The bull market continues to be driven by only 30–50 names.

 

What a time to be investing!

Seeking Alpha

Source - Seeking Alpha

The grind higher for the past six months did not see a pullback more than ~3%.   

 

  *3% pullback historically happens ~7x a year, 

  *5% pullbacks ~3x a year 

  *10%+ pullbacks occur ~1x a year

  *20% corrections occurring once every 5 years   

 

NOTE: we did get the 19.9% pullback in April but since then we have seen this notorious grind higher.  Every day goes by, do the odds for a pullback increase?  

This is a visual representation of pullbacks and historic occurrences per year since1930. 

 

Below we highlight the market’s top-heavy structure and the elevated valuations often cited by bears.  Then, we will attempt to read between the lines to show why we stay systematic and actively rebalance.  

 

-Seven stocks account for 40% of the total YTD gain in the S&P 500.

The Mag 7 and Technology have been driving the gains while increasing their weights across the board to all time highs. 

 

 

 

Heading into the second half of the year, the Fed had signaled roughly three rate cuts, with most expecting them in September, October, and December. They ultimately delivered two 25 bps cuts in September and October, helping push markets higher. However, the latest Fed minutes suggest the path forward is now less certain.

 

Soft data reflects sentiment-based indicators such as the University of Michigan Survey, the Conference Board, and the Fear & Greed Index. Concerns about tariff-driven inflation, a slightly weaker job market, and the longest government shutdown have all contributed to depressed sentiment and a unique situation.

 

HARD DATA:   

The FED’s dual mandate is to balance inflation and employment.  Inflation dominated the narrative for years until the job market data started to slow down this year.   That said, read between the lines and take a longer term view?

Seeking Alpha

Moving on to inflation - we have been writing for over year about how the CPI is a flawed inflation gauge and has given us confidence that the shelter (~40% of the CPI) is cooling time quicker than the headlines report. 

Alternative inflation measures tell a different story. Using real-time shelter data, Core CPI would be roughly 80 bps to 1% lower than reported. The New Tenant Rent Index shows rents plunging 9.3% year over year in Q2 2025, and CoStar’s October apartment report shows a 0.31% monthly decline—the largest drop in over 15 years.  

 

The takeaway: shelter, the largest component of CPI, is clearly easing. Could this offset any tariff-driven price pressures?

Remember, any uptick in inflation will grab headlines and raise questions about future Fed cuts. Tariffs have also been slow to roll out, and many companies stocked up on inventory ahead of the delays.

 

But step back and read between the lines: as long as wage growth continues to outpace inflation, the consumer remains in a strong position. Hourly earnings have been running above inflation for nearly two years—one reason we keep hearing about the “resilient consumer” despite all the negative headlines.

This chart highlights the widening gap between soft and hard data, and for now.  The hard data continues to come out on top however we will continue to monitor.

 

FedWatch now shows a 30% probability of a December rate cut, with 70% expecting no move. A month ago—before strong Q3 earnings—the odds of a cut were 82%, so expectations have pulled back sharply. Looking ahead to 2026, the market assigns a 30% chance to three cuts, 21% to two cuts, and roughly 10% each to one or five cuts. .

Earnings resilience:   EPS and Revenue Surprises 

 

We’ve outlined the major bear concerns—valuations, concentration, inflation, jobs, and sentiment. Now let’s turn to what truly drives stocks over the long run: earnings. Q3 results were strong, with roughly 70% of companies beating revenue estimates—the highest level in four years.

 

We’ll continue to watch the risks, but until earnings weaken meaningfully in revenue, margins, or guidance, we’ll stay the course with our systematic, long-term strategy.

One final illustration about how earnings is ultimately the driver of performance, the chart below shows how Q3 expectations evolved from 10/10 to 11/07, when about 80% of the S&P 500 had reported. Estimated growth was 7.4% on 10/10; four weeks later, it had risen to 14.2%. In April, recession fears dominated, sentiment was terrible, and tariff and inflation worries were everywhere—yet earnings expectations have doubled. Read between the lines.

 

Also, many companies provided guidance for Q4 and nearly one-third of companies also raised Q4 guidance, the highest share since Q2 2021.  This is while only 19% lowered guidance—the third lowest on record.  This does not sound like the worst consumer sentiment environment in 50 years.

Source - chartkidmatt.com

 

It’s always easy to argue the bear case—stretched consumers, a cooling job market, AI uncertainty, and a housing slowdown driven by high rates. Bears often sound louder than bulls. But if you read between the lines, focus on hard data, and stick to a long-term, systematic plan, the picture becomes more balanced.

 

AI’s impact on the broader economy remains unclear, and mega-cap tech is increasingly competing with—and relying on—itself. That dynamic could eventually open the door to disruption. Today’s market strength rests heavily on a handful of corporate superstars, and ideally, we want broader participation before those leader's tire.

 

Now for the bull case: U.S. real GDP grew 3.8% in Q2, with Q3 tracking near 2.8%. Unemployment has inched up but remains low at 4.3%. Inflation is manageable around 3%, real wages are rising 0.7%, and 2026 earnings are projected to grow ~11%. Any additional rate cuts could lift sentiment and support demand—particularly for small caps.

We’re operating in truly uncharted territory: all-time-low sentiment, all-time-high valuations, elevated geopolitical risk, minimal housing turnover, and an uncertain Fed path. The answer is simple: have a plan, stay the course, manage volatility, and remain systematic.

As we look to 2026, several questions matter:
– Can unemployment stay stable even if it ticks higher?
– Will tariff-related inflation be offset by falling shelter costs?
– Will tax refunds and wage gains continue to outpace inflation?
– Will the Fed maintain an easing stance?
– Can corporate America keep delivering earnings beats?

Remember: roughly 70% of U.S. GDP is consumer spending.

 

 

 

We wouldn’t be surprised to see a 5–10% pullback in the near term. The Fed delivered two cuts as expected, but there is now uncertainty around a possible 25 bps cut in December and additional easing in 2026—both dependent on inflation and jobs. The government shutdown and very weak soft data add to the near-term noise.

 

Sentiment is already extremely low. Tariff risks remain but appear mostly behind us. Inflation seems to be settling into the 2–3% range, which generally favors small caps and real estate. 

 

As a result, you should expect—and will likely continue to see—trimming in mega-caps, large caps, and tech, with reallocations toward equal-weight, mid-cap, small-cap, and real estate positions.  

 

What worked: the AI theme has started to trickle down to other aspects of the economy. Nuclear and copper themes performed very well.  Legacy clients may have seen some trimming while newer clients were still seeing opportunistic adds to build positions.  We continue to like this long-term theme.  You might have, or could see, additions to natural resources, rare earth metals, or themes specific to geographical (strategic) locations.  

 

What did not work: business development companies (BDCs) and consumer discretionary both underperformed.  Consumer discretionary weakness could be explained by the very low consumer confidence and government shut down. BDC weakness is explained by a few headline bankruptcies that scared the sector on concerns there could be more to come.  This is part of the reason we use ETFs to mitigate specific types of risk.  We will likely buy the dip in both of these themes; retail companies are typically in the growth accounts while BDCs are in the income portfolios.  Legacy clients have seen this, but newer clients can expect to see a rotation out of mega caps/technology and into equal weight small/midcap.  We feel it is prudent from a risk/reward standpoint to continue to reallocate to lower cap and greater market breadth.  

Questions? Feedback?  Drop us a line at info@oakstreaminvestments.com

 

(908) 271-8788

The opinions and forecasts expressed are strictly those of Brad Banken's and may not actually come to pass.  

Investment advisory services offered through Investment Advisor Representatives of Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Each company is independently responsible for the products and services they provide. Representatives of Cambridge Investment Research, Inc. do not provide tax or legal advice in their roles as registered representatives. Oak Stream Investment Advisors LLC and Cambridge are separate entities.

 

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