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, Sabrient Systems LLC

From the standpoint of the performance of the broad market indexes, US stocks held up okay over the past four weeks, including a good portion of a volatile June. However, all was not well for cyclicals, emerging markets (including China), and valuation-driven active selection in general, including Sabrient’s GARP (growth at reasonable price) portfolios. Top-scoring cyclical sectors in our models like Financial, Industrial, and Materials took a hit, while defensive sectors (and dividend-paying “bond proxies”) Utilities, Real Estate, Consumer Staples, and Telecom showed relative strength. According to BofA’s Savita Subramanian, “June was a setback for what might have been a record year for active managers.” The culprit? Macro worries in a dreaded news-driven trading environment, given escalating trade tensions, increasing protectionism, diverging monetary policy among central banks, and a strong dollar. But let’s not throw in the towel on active selection just yet. At the end of the day, stock prices are driven by interest rates and earnings, and both remain favorable for higher equity prices and fundamentals-based stock-picking.

Some investors transitioned from a “fear of missing out” at the beginning of the year to a worry that things are now “as good as it gets” … and that it might be all downhill from here. Many bearish commentators expound on how we are in the latter stages of the economic cycle while the bull market in stocks has become “long in the tooth.” But in spite of it all, little has changed with the fundamentally strong outlook underlying our bottom-up quant model, characterized by synchronized global economic growth (albeit a little lower than previously expected), strong US corporate earnings, modest inflation, low global real interest rates, a stable global banking system, and of course historic fiscal stimulus in the US (tax cuts and deregulation), with the US displaying relative favorability for investments. Sabrient’s fundamentals-based GARP model still suggests solid tailwinds for cyclicals, and indeed the start of this week showed some strong comebacks in several of our top picks – not surprising given their lower valuations, e.g., forward P/E and PEG (P/E to EPS growth ratio).

Looking ahead, expectations are high for a big-league 2Q18 earnings reporting season. But the impressive 20% year-over-year EPS growth rate for the S&P 500 is already baked into expectations, so investor focus will be on forward guidance and how much the trade rhetoric will impact corporate investment plans, including capex and hiring. I still don’t think the trade wars will escalate sufficiently to derail the broad economic growth trajectory; there is just too much pain that China and the EU would have to endure at a time when they are both seeking to deleverage without stunting growth. So, we will soon see what the corporate chieftains decide to do, hopefully creating the virtuous circle of supply begetting demand begetting more supply, and so on. Furthermore, the compelling valuations on the underappreciated market segments may be simply too juicy to pass up – unless you believe there’s an imminent recession coming. For my money, I still prefer the good ol’ USA for investing, and I think there is sufficient domestic and global demand for both US fixed income and equities, especially small caps.

In this periodic update, I provide a market commentary, offer my technical analysis of the S&P 500, review Sabrient’s latest fundamentals-based SectorCast rankings of the ten US business sectors, and serve up some actionable ETF trading ideas. In summary, our sector rankings still look bullish, while the sector rotation model has returned to a bullish posture as investors position for a robust Q2 earnings season. Read on....

After a brief pullback to retest support levels, it appears that bulls may be preparing to take the market higher. Although retail investors are still hesitant, risk-taking among institutions is apparent. Cheap cash from abundant global liquidity is hungry for higher returns. Margin debt is high. Credit spreads are low. Subprime loans are back in vogue. Small caps and the banking sector in particular look ready to resume a leadership role.

Was that really a breakout? With the S&P 500 struggling around the 2,000 level for the past two weeks, Friday’s strong finish might seem like a bullish breakout. But the market has already given us a couple of false breakouts at this level, and although I see higher prices ahead, I’m still not convinced that we have seen all the near-term downside that Mr.

Gradient Senior Analyst Nicholas Yee reports on six companies that are using a variety of techniques to shift pretax profits to lower-tax areas. Featured in this USA Today, article, the companies include CELG, ALTR, VMW, NVDA, LRCX, and SNPS. Read more

The Market Gives Back . . .

By David Brown, Chief Market Strategist, Sabrient Systems