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Bears’ math problem… why falling valuations point to more upside… the 680% winner to trim… how to position for AI today… 抖阴最新版 on why the Fed won’t hike…
Bears have a math problem.
Perhaps the biggest gripe against this bull market has been overvaluation – stock prices bid up to unsustainable levels by greedy investors who care little for fundamentals.
Sure, some stocks have outrun their fundamentals. But that case gets hard to make across the board once you factor in forward earnings.
In fact, the opposite is happening. Even as stock prices have been climbing, valuations have been falling thanks to one powerful reason.
Earnings are climbing even faster.
Here’s the math the bears keep missing. A valuation multiple is just a fraction – price divided by earnings. The bears fixate on the numerator, rising prices, while ignoring what’s happening beneath it…
The denominator – corporate earnings – is growing even faster. And when the bottom of a fraction grows faster than the top, the fraction itself shrinks. That’s how valuations can fall even as prices climb.
Better yet, that earnings engine appears poised to keep running.
Legendary investor 抖阴最新版 highlighted this in last Friday’s issue of Breakthrough Stocks. After detailing the phenomenal Q2 earnings season we’re wrapping up, he shifted his gaze forward, noting:
Companies across all 11 S&P 500 sectors have increased their outlooks for the second half of 2026.
Bespoke reports that of the companies that have already announced results, more than 15% have increased guidance. Historically, over the past decade, 10% of companies have raised their guidance.
Why is this important? The phenomenal earnings environment will persist through year-end (and likely well into 2027, too).
Keep that “well into 2027” line in mind – it becomes important in a moment.
Now, let’s see what all that earnings power has done to valuations. Let’s go to our hypergrowth expert, Luke Lango, editor of .
From last Friday’s Daily Notes:
FY26 and FY27 EPS estimates are both up roughly 16% since the start of the year, while the index is up about 14%.
At the same time, the S&P 500’s forward P/E has actually fallen from roughly 23.2x to 21.5x.
Luke then makes the key point that strikes at the bear case…
Investors aren’t just paying more for the same earnings stream – basically, the FOMO-driven bidding of a late-stage bull. Instead, the earnings stream itself is getting bigger.
Here’s Luke with the takeaway:
That is the opposite of a speculative, sentiment-driven rally.
In fact, earnings are so strong that Luke makes the case for another 25% of upside in the S&P – without the sentiment multiple budging at all. Returning to Louis’ call that the robust earnings environment will persist well into 2027, Luke’s upside math rests on exactly that:
If the trend continues through year-end, 2027 EPS near $440 at a 22x average multiple – around the market’s average since early 2024 – implies a ~9,680 S&P 500 target, roughly 25% upside from here.
Of course, if the market rises double digits from here, investor sentiment won’t remain static. Higher prices will attract more buyers, likely resulting in a higher sentiment multiple alongside climbing earnings. Put it altogether and Luke’s case for 25% upside could easily become 30%+.
Now, if this plays out, it’s likely to exacerbate a good problem that Luke and Louis have been dealing with recently. And if you’re an AI Revolution Portfolio subscriber, you have it too…
As AI surges, don’t forget the blocking and tackling of portfolio construction
Last August, Luke and Louis, alongside our global macro specialist 抖阴最新版, came together to create the . This is a single portfolio holding our three experts’ highest-conviction AI ideas.
The optical-networking company Lumentum (LITE) was one of their picks. Its lasers and optical components help move data through AI infrastructure using light. As the buildout scales, that technology becomes more essential.
Since our experts put it in front of their readers last year, LITE has surged 680%. And that’s where subscribers run into a nice problem.
Here’s Luke:
Suppose Lumentum started as 5% of a portfolio. After a 680% gain, with every other holding unchanged, it would now account for roughly 29% of the entire portfolio…
One earnings report, customer delay, supply-chain problem, or change in AI infrastructure spending can now have an outsized impact.
So, what’s the action step if you find yourself in this position?
If you followed Luke, Louis and Eric into the AI Revolution Portfolio and own LITE – or you own any other high-flier that now commands a lopsided weighting – consider rebalancing. That means selling part of your winners to add to your laggards.
Selling a stock that’s working this well feels counterintuitive. But it’s the only mathematical way to guarantee you buy low and sell high.
By rebalancing, you achieve two critical goals: one, you turn “paper wealth” into real, permanent gains; and two, you bring your portfolio back to a risk level where you can sleep peacefully at night by addressing concentration risk.
But Jeff, what about the idea that investors underperform by selling their winners too early and holding their losers too long?
A great objection.
Countless investors destroy their long-term returns by selling great companies at the first sign of a drawdown after a strong move higher (missing even greater gains to come), while stubbornly holding their dogs all the way to the bottom (waiting for the rebound that never comes). Those are mistakes that are important to avoid.
But there’s a massive difference between panic-selling a winner after, say, a 55% run, and systematically managing your risk after nearly 7Xing your money.
Plus, when a stock like LITE skyrockets from 5% to 29% of your portfolio, rebalancing isn’t foolish – it’s recognizing that the math of your risk has fundamentally changed.
You now have nearly a third of your portfolio riding on one stock. Was that in your original plan? If not, don’t let it become your current plan by default.
Back to Luke:
After a major run, investors need to reassess the stock’s role in the broader account: how much performance now depends on it, which other holdings share its risks, and whether the overall mix still reflects the original plan.
Position size is part of the investment thesis, not an administrative detail worked in after the fact.
If you decide that rebalancing is the right call, the action step is simple – trim your position back to your original target, or to whatever size fits your current thesis and lets you sleep at night.
Meanwhile, keep your eyes open for the next potential 680% winner now that you have a wad of fresh capital
As I write, the stock posts an average gain of 108%. Of course, this reflects outperformance that has already happened – the question is, where will such outperformance happen next?
Well, Luke, Louis, and Eric have ideas.
Back to Luke:
After combing through more than 200 AI recommendations, Louis, Eric, and I narrowed the field to roughly .
We also assigned a recommended allocation to every holding. Subscribers will see which companies made the cut, how we believe the holdings should fit together, and how much of the portfolio we think each idea deserves.
This Wednesday at 10:00 a.m. Eastern, our experts will reveal this “rebuilt” . It contains the next wave of potential AI winners handpicked by our experts. But importantly, it’s a deliberately built, complementary portfolio – not a random pile of AI stocks.
As Luke notes:
Lumentum shows the power of one great pick. Building a complete strategy takes another layer of work: deciding which opportunities belong together and how much capital each one deserves.
To see it when it goes live, as well as where our experts believe the AI Revolution goes next and how to position your portfolios for it,
In the meantime, if you own LITE, congratulations.
Shifting gears, what will the Fed make of glum consumer sentiment and pessimistic inflation expectations?
Last Friday, the University of Michigan’s monthly Consumer Sentiment index reading dropped to 51, from 55.2 in July.
This is above the lows in the mid-40s seen earlier this year, but it still reveals considerable pessimism about the economy – mostly about prices.
Let’s return to Luke’s Daily notes for more color on the inflation angle relative to income:
Just 8% of consumers now expect their income to outpace inflation over the next year, down from 18% in December 2024.
That matches the deterioration in real purchasing power, with real average hourly earnings down 0.2% year over year in July.
To what extent have these inflation expectations and waning hourly earnings been affecting the Fed?
We could get clues this Wednesday. That’s when we get the minutes from the Federal Reserve’s July FOMC meeting. It will be interesting to read how this “family fight,” as Fed Chair Kevin Warsh calls it, will play out.
Three regional Fed presidents – Beth Hammack, Neel Kashkari, and Lorie Logan – have been increasingly vocal about raising interest rates. The minutes should reveal more of their thinking – and how much weight they’re giving consumer sentiment and the Beige Book (a master summary of qualitative, anecdotal information from business leaders across all 12 Fed districts).
But even if this conversation gets greater airtime, Louis believes that September will come and go without a hike for one reason – the hard data.
Let’s jump to his Flash Alert last Friday:
We just had a negative payroll report and downward revisions. We just had very good inflation news. And, of course, now we got declining retail sales.
So, the Fed will not be raising rates in September.
To Louis’ point, the Fed tracks soft data like the sentiment survey, but it prioritizes hard data – actual economic activity over how consumers feel. And for nine of the 12 voting FOMC members, the hard data have not been making an overwhelming case for rate hikes.
Back to Louis for his bottom line:
To me, it looks pretty good for no Fed rate hike.
That’s a pretty encouraging setup for the stock market.
We’ll circle back if the Fed’s minutes on Wednesday shed any new light on this.
Wrapping up
Put it all together, and the bull case is straightforward: earnings are doing the heavy lifting, valuations are actually compressing, and the Fed looks unlikely to stand in the way (at least in September).
That’s a rare combination – and it makes now a smart moment to get your own portfolio in shape, trimming your monster winners and
Do that, and the only ones with a math problem will be the bears.
Have a good evening,
Jeff Remsburg
(Disclosure: I own LITE)
