by Scott Martindale
  CEO, Sabrient Systems LLC

Quick note 1: Sabrient’s new Dividend 56 Portfolio just launched on 5/6 as a 24-month portfolio holding 46 dividend-paying stocks across a range of market caps and sectors. It employs a Growth & Income strategy, offering a bond-like current dividend yield of 3.36% while seeking capital appreciation potential. Notably, the next-to-terminate Dividend 48 ends on 5/22 and currently shows a gross total return of +55% vs. +26% for S&P 500 High Dividend ETF (SPYD) and +44% for S&P 500 (SPY), as of 5/15.

Quick note 2: Sabrient employs a variety of fundamental financial factors in our quantitative models and portfolio selection process. Sabrient Scorecards for Stocks and ETFs are investor tools that provide access to several of our proprietary models for idea generation and portfolio monitoring. I invite you as well to visit https://MoonRocksToPowerStocks.com to immediately download founder David Brown’s latest book (an Amazon international bestseller) and 2 bonus reports (on investing in the Future of Energy and Space Exploration)—all in PDF format.

Overview

The market has been in parabolic mode—and it’s all about earnings, pricing power, and ROI (current and forward) rather than multiple expansion (or hope and prayers). As Bespoke Investment Group observed last week, following a 70% gain just since 3/31 the PHLX Semiconductor Index (SOX) was trading 36% above its 50-day moving average for only the third time in the past 30 years, with the other two occurring during the dot-com bubble. Moreover, the Nasdaq 100 (QQQ) was trading 15% above its 50-day moving average for the first time since 2009 (coming out of the GFC). However, today’s enthusiasm differs from prior speculative technology cycles in several ways. For instance, revenue growth tied to AI infrastructure has been tangible and substantial, particularly with datacenter businesses that fulfill the insatiable compute demand by housing high-density servers, GPUs, and networking equipment that act as the infrastructure backbone for cloud computing and AI training workloads. In other words, the rally is not being driven solely by narrative momentum like the dot-com boom—it is also driven by accelerating revenue generation and real cash flow and earnings.

Indeed, Q1 corporate earnings season has been particularly strong, beating even the most optimistic forecasts and providing big increases in forward guidance. Approximately 84% of S&P 500 companies have exceeded analyst profit expectations, representing the highest beat rate since 2021, according to FactSet. Large-cap companies, especially within Technology and Communications Services, continue to demonstrate operating leverage and strong margin resilience despite elevated interest rates and lingering inflationary pressures. According to DataTrek, “US Big Tech (ex-Nvidia) generated $183.4 bn in cash flow in Q1 2026 and spent $183.7 bn on CapEx and strategic investments….” We are entering a productivity boom, which is driving an historic earnings boom. Forward estimates are growing faster than they did in the mid-90s or late dot-com bubble years—and without having economic recovery comps to artificially boost them.

FactSet data shows that for Q1, with 89% of companies having reported, the S&P 500 in aggregate is showing a YoY earnings growth rate of +27.7% (the highest since +32.0% in Q4 2021). The sectors seeing the biggest increases are Information Technology (+50.7%); Communication Services (+48.8%); and Materials (+43.2%), while Healthcare trails with a negative growth rate of -3.1% (the only one negative). As for revenue growth, the aggregate is +11.4% YoY (the highest since +13.9% in Q2 2022), led by InfoTech at +29.2% and Comm Services at +15.0%. Moreover, analysts have increased their S&P 500 earnings estimate for CY2026 to $333.25—implying a P/E of 22.2x based on the closing price on 5/15. Thus the CY2026 EPS forecast suggests +21.3% YoY growth over CY2025 (vs. +17.1% expected as of 3/31, before the latest reports and guidance came out), and Tech is now indicating +38.7% YoY EPS growth (vs. +23.4% expected on 3/31).

Furthermore, according to FactSet, Q1 2026 net profit margin for the S&P 500 (aggregated bottom-up) is tracking toward a record high (since data began publication in 2009) of 13.9% vs. the 5-year average of 12.3%, as illustrated in the chart below from Phil Rosen of Open Bell Daily. Notably, 6 of the 11 sectors are tracking above their 5-year average. And looking ahead, net margin is expected to climb to 14.6% by Q3. According to DataTrek Research, ““Earnings growth drives the narrative around price/earnings ratios, but it is trends in structural profitability that actually change investors' perceptions of underlying value…. Index valuations are increasing as a result, a natural if underappreciated outcome related to these improvements…and supports the argument for a ‘recession proof’ US economy.”

The Buffett Indicator (total US stock market cap divided by GDP) has reached 230% of GDP, far beyond even the 2000 dot-com bubble. And yet because of extraordinary earnings reports and optimistic forward guidance, P/E multiples are actually falling. For example, the next-12-months forward P/E for the Technology Select Sector SPDR (XLK) is 27.6x, down from its peak above 31 last October. Meanwhile, the S&P 500 trades at only 22.0x, down from 23.5x in October.

As for inflation and interest rates, I continue to believe the Fed is missing the mark and should be more accommodative. Incoming Fed chair Kevin Warsh will confront an FOMC that largely believes monetary policy should be tighter, with higher fed funds rate in the face of rising inflation readings. However, as I explain in my full commentary below, the latest inflationary surge is an event-driven supply shock—i.e., supply chain disruptions in the Strait of Hormuz and the resulting oil price spike (illustrated by the surging Global Supply Chain Pressure Index)—rather than structural (i.e., an overheated economy and excess consumer demand), many interest-rate-sensitive segments of the economy are still struggling. I believe that the fed funds rate should be 3.0% and that the 10-year Treasury note yield will eventually retreat back down to around 4.0%.

In my full commentary below, I discuss stock patterns and valuations, the AI-driven earnings boom, the 4-layer AI “stack” and its major players, GDP, productivity, inflation, liquidity, and Fed policy. And in my Final Comments section I discuss why the Iran oil supply shock is a reason to better diversify oil supply routes and pursue nuclear energy—not give license to ramp up solar, wind, and batteries. Then I close with my usual update on Sabrient’s sector rankings, positioning of our sector rotation model, and some top-ranked ETF ideas.

Despite narrow market breadth, Big Tech remains a must-own for its amazing growth and safe haven sentiment among investors. Still, 2026 should continue to be a good year for active stock selection, small caps, and bond-alternative dividend payers (particularly since the dividend yield on the S&P 500 is down to just 1.03%). Indeed, Sabrient’s Baker’s Dozen, Forward Looking Value, Small Cap Growth, and Dividend portfolios have been largely outperforming their benchmarks. Each is packaged and distributed as a unit investment trust (UIT) by First Trust Portfolios (https://ftportfolios.com).

By the way, our new Q2 2026 Baker’s Dozen Portfolio just launched on 4/17 as a 15-month portfolio with a mid-cap bias and a diverse group of 13 stocks across 8 business sectors (InfoTech, Financials, Industrials, Healthcare, Consumer, Comm Services, Energy, and Materials). Notably, last year’s Q1 2025 Baker’s Dozen terminated on 4/20 with a gross total return of +46.7% (vs. +20.3% for SPY), and the next-to-terminate Q2 2025 portfolio is up +56% vs +42% for SPY (as of 5/15). And, as a reminder, our Earnings Quality Rank (EQR) is licensed to the actively managed, low-beta First Trust Long-Short ETF (FTLS) as a quality prescreen. It has over $2.3 billion in AUM.

Sabrient’s models and selection process seek high-quality companies with strong growth trends and expectations. Specifically, it identifies stocks that are fundamentally strong with a history of consistent, reliable, resilient, durable, and accelerating sales and earnings growth, positive revisions to Wall Street analysts’ consensus estimates, a history of meeting/beating estimates, rising profit margins and free cash flow, high capital efficiency (e.g., ROI), solid earnings quality and conservative accounting practices, a strong balance sheet, low debt burden, competitive advantage, a wide moat, and a reasonable valuation compared to its peers and its own history.

These are the factors Sabrient employs in our quantitative models and “quantamental” portfolio selection process. You can learn how to access several of our proprietary models for idea generation and portfolio monitoring through Sabrient Scorecards, as well as download Sabrient founder David Brown’s latest book (an Amazon international bestseller), by visiting this link: Moon Rocks to Power Stocks

Here is a link to this post in printable PDF format, where you also can find my latest Baker’s Dozen presentation slide deck. As always, I’d love to hear from you! Please feel free to email me your thoughts on this article or if you’d like me to speak on any of these topics at your event!  Read on….

  by Scott Martindale
  President & CEO, Sabrient Systems LLC

It would be an understatement to say that last week was particularly eventful, what with the elections and FOMC policy decision, plus some impressive earnings announcements. Election Day is finally behind us, and the results sent investors into a fit of stock market FOMO—in one of the greatest post-election rallies ever—while dumping their bonds. Much like the day after President Trump’s win in 2016, the leading sectors were cyclicals: Industrials, Energy, Financials. And then on Fed Day, markets got their locked-in 25-bp rate cut, and the rally kept going across all risk assets, including strengthening the US dollar on the expectation of accelerating capital flight into the US as Trump’s policies, particularly with support from a Republican-led congress, should be quite business-friendly, with lower tax rates and red tape and much less focus on anti-trust lawfare.

So, there was a lot for investors to absorb last week, and this week brings the October CPI and PPI reports. Indeed, the whole world has been pining for clarity from the US—and they got it. And I’m sure no one misses the barrage of political ads and bitter electioneering. Hopefully, it marks the peak in election divisiveness our society will ever see again. Notably, inflation hedges gold and bitcoin have suddenly diverged, with gold pulling back from its all-time high while bitcoin—which can be considered both a dollar hedge and a risk asset for its utility—has continued its surge to new highs (now over $85k as I write!) on the added optimism around Trump’s crypto-friendly stance.

Besides expectations of a highly aggressive 15% earnings growth in the S&P 500 over the next couple of years, venture capital could be entering a boom following four years of difficulty in raising capital. In an interview with Yahoo Finance, Silicon Valley VC Shervin Pishevar opined, “I think there’s going to be a renaissance of innovation in America…It’s going to be exciting to see… AI is going to accelerate so fast we’re going to reach AGI [Artificial General Intelligence, or human-like thinking] within the next 2-3 years. I think there will be ‘Manhattan Projects’ for AI, quantum computing, biotech.”

It all sounds quite appealing, but there’s always a Wall of Worry for investors, and the worry now is whether Trump’s pro-growth policies like reducing tax rates, deregulation, rooting out government waste and inefficiency (i.e., “drain the swamp”) combined with his more controversial intentions like tariffs, mass deportations of cheap migrant labor, and threats to Big Pharma, the food industry, and key trading partners (including Mexico)—in concert with a dovish Fed—will create a resurgence in inflation and unemployment and push the federal debt and budget deficit to new heights before the economy is ready to stand on its own—i.e., without the massive federal deficit spending and hiring we saw under Biden—thus creating a period of stagflation and perhaps a credit crisis. Rising interest rates and a stronger dollar are creating tighter financial conditions and what Michael Howell of CrossBorder Capital calls “a fast-approaching debt maturity wall” that adds to his concerns that 2025 might prove tougher for investors if the Global Liquidity cycle peaks and starts to decline.

But in my view, the end goals of shrinking the size and scope of our federal government and restoring a free, private-sector-driven economy are worthy, and we can weather any short-term pain along the way and perhaps fend off that looming “debt maturity wall.” Nevertheless, given the current speculative fervor (“animal spirits”) and multiple expansion in the face of surging bond yields (i.e., the risk-free discount rate on earnings streams), it might be time to exercise some caution and perhaps put on some downside hedges. Remember the old adage, “Stocks take the stairs up and the elevator down” (be sure to read my recent post with 55 timeless investing proverbs to live by).

In any case, at the moment, I believe the stock market has gotten a bit ahead of itself with frothy valuations and extremely overbought technical conditions (with the major indexes at more than two standard deviations above their 50-day moving averages). But I think any significant pullback or technical consolidation to allow the moving averages to catch up would be a buying opportunity into year-end and through 2025, and perhaps well into 2026—assuming the new administration’s policies go according to plan. As DataTrek Research pointed out, there is plenty of dry powder to buy stocks as cash balances are high (an average of 19.2% of institutional portfolios vs.10-15% during the bull market of the 2010’s).

This presumes that the proverbial “Fed Put” is indeed back in play. Also, I continue to believe that rate normalization means the FOMC ultimately taking the fed funds rate down to a terminal rate of about 3.0-3.5%—although I’m now leaning toward the higher side of that range as new fiscal policy from the “red wave” recharges private-sector growth (so that GDP and jobs are no longer reliant on government deficit spending and hiring) and potentially reignites some inflationary pressures.

This is not necessarily a bad thing. Although inflation combined with stagnant growth creates the dreaded “stagflation,” moderate inflation with robust growth (again, driven by the private sector rather than the government) can be healthy for the economy, business, and workers while also helping to “inflate away” our massive debt. Already, although supply chain pressures remain low, inflation has perked up a bit recently, likely due to rising global liquidity and government spending, as I discuss in detail in today’s post.

So, my suggestions remain: Buy high-quality businesses at reasonable prices, hold inflation hedges like gold and bitcoin, and be prepared to exploit any market correction—both as stocks sell off (such as by buying out-of-the-money put options, while VIX is low) and as they begin to rebound (by buying stocks and options when share prices are down). A high-quality company is one that is fundamentally strong (across any market cap) in that it displays consistent, reliable, and accelerating sales and earnings growth, positive revisions to Wall Street analysts’ consensus estimates, rising profit margins and free cash flow, solid earnings quality, and low debt burden. These are the factors Sabrient employs in selecting the growth-oriented Baker’s Dozen (our “Top 13” stocks), the value-oriented Forward Looking Value, the growth & income-oriented Dividend portfolio, and Small Cap Growth. We also use many of those factors in our SectorCast ETF ranking model. And notably, our Earnings Quality Rank (EQR) is a key factor in each of these models, and it is also licensed to the actively managed, absolute-return-oriented First Trust Long-Short ETF (FTLS).

Each of our key alpha factors and their usage within Sabrient’s Growth, Value, Dividend, and Small Cap investing strategies (which underly those aforementioned portfolios) is discussed in detail in Sabrient founder David Brown’s new book, How to Build High Performance Stock Portfolios, which is now available to buy in both paperback and eBook formats on Amazon.com.

And in conjunction with David’s new book, we are also offering a subscription to our next-generation Sabrient Scorecard for Stocks, which is a downloadable spreadsheet displaying our Top 30 highest-ranked stock picks for each of those 4 investing strategies. And as a bonus, we also provide our Scorecard for ETFs that scores and ranks roughly 1,400 US-listed equity ETFs. Both Scorecards are posted weekly in Excel format and allow you to see how your stocks and ETFs rank in our system…or for identifying the top-ranked stocks and ETFs (or for weighted combinations of our alpha factors). You can learn more about both the book and the next-gen Scorecards (and download a free sample scorecard) at http://DavidBrownInvestingBook.com.

In today’s post, I dissect in greater detail GDP, jobs, federal debt, inflation, corporate earnings, stock valuations, technological trends, and what might lie ahead for the stock market with the incoming administration. I also discuss Sabrient’s latest fundamental-based SectorCast quantitative rankings of the ten U.S. business sectors, current positioning of our sector rotation model, and several top-ranked ETF ideas. And be sure to check out my Final Thoughts section in which I offer my post-mortem on the election.

Click HERE to continue reading my full commentary or to sign up for email delivery of this monthly market letter. Also, here is a link to this post in printable PDF format. I invite you to share it as appropriate (to the extent your compliance allows).

  by Ian Striplin
  Equity Analyst, Gradient Analytics LLC (a Sabrient Systems company)

Here at Gradient Analytics, where we specialize in forensic accounting research and consulting, it may seem to the outsider that we are just a bunch of pessimistic short researchers, sniffing out aggressive accounting practices that might soon cause a given company to miss earnings expectations and reduce forward guidance, for the benefit of our clientele of long/short hedge funds. To be honest, we are jaded in our belief that most companies will, from time to time, take liberties with their accrual accounting in order to achieve short-term reporting objectives. But most only do it sparingly and temporarily, and only those that become overly extended in employing aggressive practices – while facing fundamental headwinds that make it likely certain metrics will persist or worsen – make good short candidates. But that doesn’t automatically make all the others good long candidates.

Thus, our expertise is also useful for identifying solid earnings quality for the vetting of long candidates. Earnings quality analysis can reveal accounting benefits to future earnings potential and help ensure that a quant model or fundamental analysis that created a positive equity profile for a given company is indeed based on the underlying economics of the business rather than an aberration of accrual accounting. In other words, it can serve to add conviction or a confirmation signal to a long thesis.

In this article, we will describe several positive earnings quality factors that can act as a tailwind to sustainable future earnings growth, with four real-life examples. In forming a stock universe for this article, we screened the output file of our proprietary Earnings Quality Rank (EQR), which assigns a quintile score of 1-5 (with 5 being the “best” earnings quality relative to peers), and limited the population to companies in the top quintile and a market capitalization greater than $500 million, to avoid liquidity constraints. (Note: On the other hand, when seeking short candidates, we look to the bottom quintile of the EQR model.)  Read on….