Analysts Turn Bullish as S&P 500 Makes Record Highs

Here’s The Truth

The stock market is hitting all-time highs while Washington can’t even pay its bills—classic D.C. vs. Wall Street dissonance. Despite the government shutdown forcing the Federal Reserve to fly blind on inflation and jobs data, momentum continues to rule the day. This week, we check in on the AI mega-cap story, explore why analysts are suddenly feeling optimistic about corporate profits, and map out the strategic risks lurking beneath the surface.

Key Insights & Concepts

• FactSet: Analysts increased aggregate S&P 500 EPS estimates slightly (0.1%) for Q3 2025, marking the first aggregate quarterly increase since Q4 2021.

• FactSet (Energy): Asia-Pacific (APAC) and Europe are leading regions in advancing mature green hydrogen projects, driven primarily by demand in India's fertilizer sector and Europe’s existing refinery/chemical complexes.

• Carson Group: The SEC granted Dimensional Fund Advisors (DFA) 'relief' to offer an ETF share class of their mutual funds, a development expected to benefit end investors and expand access to active managers in the efficient ETF wrapper.

• Morgan Stanley: The AI capex boom, which has powered the three-year U.S. equity bull market, may be entering its "seventh inning," raising questions about market durability.

• J.P. Morgan (Treasury): Effective inventory management, utilizing methods like Just-in-Time (JIT) and Economic Order Quantity (EOQ), is now a core treasury management strategy for improving capital efficiency and cash flow.

• J.P. Morgan (Investment Banking): J.P. Morgan advised on the Boston Celtics' record-breaking $6.1 billion sale, underscoring the emergence of top sports franchises as a substantial institutional asset class.

Strategic Memo (Recommended Actions/Views)

• Prioritize Quality Equities: Investors should actively select U.S. large-cap quality stocks while selling small-cap stocks and unprofitable tech companies. (Morgan Stanley)

• Government Shutdown: Historically, government shutdowns have generally had a minimal or non-material impact on the financial markets and broader economy. Investors have typically treated shutdowns as "non-events," meaning the S&P 500 has continued its normal trends, and U.S. Treasury yields and the U.S. dollar have generally followed similar patterns. (J.P. Morgan)

• Look for Defensive Sectors: Historically, the defense and healthcare sectors have performed well during shutdowns; the full nature of the current shutdown could create attractive entry points for defense exposure. (Morgan Stanley)

• Hedge Against Benchmark: If your portfolio passively tracks the U.S. equity benchmark, consider diversifying into real assets such as gold, real estate investment trusts (REITs), and energy infrastructure. (Morgan Stanley)

• Strengthen Digital Defenses: Families, especially those with increased profiles and finances, must collaboratively create a social media policy focused on securing devices, using Multi-Factor Authentication (MFA), and maintaining skepticism about unexpected communications to counter social engineering. (J.P. Morgan)

Risk Analysis

• Threat of Permanent Layoffs: The administration’s suggestion of using the shutdown to consider permanent job cuts departs from historical practice, posing a "wild card" risk to the labor market and consumer spending. (Morgan Stanley)

• Hyperscaler Cash Flow Deterioration: Free cash flow growth for major AI cloud providers is reportedly turning "decidedly negative," with estimates suggesting a potential 16% shrink over the next 12 months, raising valuation concerns. (Morgan Stanley)

• Speculative AI Deals: Recent deal-making in generative AI reminds analysts of risky, speculative "vendor-financing" schemes of past eras, particularly involving technologies with fledgling revenue models. (Morgan Stanley)

• Inflation Market Uncertainty: If the shutdown persists and the September CPI report is delayed, the TIPS market will rely on a fallback provision linked to the 12-month CPI trend, creating "distinctly different" and more challenging pricing conditions. (J.P. Morgan)

Final Thoughts

We just closed the books on the best September in 15 years, and now the S&P 500 is stacking new all-time highs while politicians bicker over healthcare credits and appropriations.

The market is effectively ignoring Washington’s noise, supported by powerful Q4 seasonality, analyst EPS upgrades, and the strong expectation of further Fed rate cuts. We’re watching the durability of that AI capex boom, though, because if the cash flow issues Morgan Stanley flagged start impacting the Magnificent Seven, the market's current bulletproof attitude might finally catch a scratch.

Until next time,

Investment Intelligence

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