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“A day may come when” (sic) energy stocks trade up to normal valuations, when banks stop writing down bad loans, when small cap stocks see actual recoveries in their earnings and the entire stock market broadens far beyond the narrow leadership of a few, “but it is not this day.” With full apologies for the butchering of Aragorn’s Battle Speech to his soldiers at the Black Gate in “Lord of the Rings – Return of the King,” our point is that the trends that have dominated the stock market over most of the past eighteen months are not likely to change in the very near term. The tailwinds that we have seen for the growth sector of the market are still in place. Irrespective of the timing of the next move in interest rates in the U.S., the direction will be lower. That will continue to lend support to the elevated valuations of growth stocks. We also expect economic growth trends to slow down further, meaning that cyclical earnings will not increase and that will put a lid on cyclical stock sectors such as financials, energy, basic materials, industrials and consumer cyclicals, despite already low valuations. Moreover, while this continues to be a narrow market advance, with the ‘Magnificent 6’ up +50% year-over-year compared to +24% for the entire S&P500 Index, this has been justified by the fact that over 100% of the earnings growth in the past year has come from these six mega-cap companies. For the other 494 companies in the index, profits have contracted 3% over the year. (more…)