Investment Review №353. In Search of New Landmarks

Global Outlook

Index and Sector Returns Over the Review Period.
Sources: FactSet, Freedom Broker analysis

During the review period, U.S. equities advanced, but gains were concentrated in mega-cap tech names. The S&P 500 added 0.86% and the Nasdaq-100 rose 1.80%, while the S&P 500 Equal Weight Index fell 1.32%. This divergence points to a renewed stall in market breadth. Among the 15 largest S&P 500 constituents, 66.7% posted positive returns, versus just 33.7% across the index—further evidence that performance was driven by a narrow group of the largest companies rather than broad participation.

Amid geopolitical and macroeconomic uncertainty, investors showed interest in the small- and mid-cap value segment. Positive returns were recorded by 54.7% of small-cap value issuers and 46.3% of mid-cap value names, reflecting a preference for steadier cash flows and valuations less sensitive to changes in Fed policy.

Percentage of Companies with Gains Across Indices Over the Review Period.
Sources: FactSet, Freedom Broker analysis

Within sectors, IT led with a 4.02% gain, though strength was concentrated in semiconductors. Results and updated outlooks from NVIDIA (NVDA), Broadcom (AVGO), and Marvell (MRVL) reaffirmed robust demand for AI accelerators. Broadcom raised its AI revenue guidance, indicating it expects AI revenue to roughly double in fiscal 2027 and expand further in 2028—implying growth well ahead of its legacy semiconductor business over the next two years.

Marvell also lifted its outlook amid strong hyperscaler demand for data-center solutions and custom chips. It increased current fiscal-year revenue guidance by 3.8% versus its prior forecast and raised its fiscal 2028 outlook by $1.5bn to $18bn (about +9.1%). The data-center segment remains the main driver, with Q2 revenue up 46% YoY, fueled by accelerating demand for custom AI silicon Marvell develops for major cloud customers such as Amazon (AMZN) and Alphabet (GOOGL).

In this context, Nvidia’s report mattered less as another proof of demand and more for shifting the market’s focus. The company issued an annual outlook for the first time, framing it as a supply cap rather than a demand estimate. As a result, the key investor question shifts from whether the AI cycle will persist to whether Nvidia can meet its stated supply targets.

Sentiment in semiconductors was further boosted by OpenAI’s new Astra model. The company positioned the model as a step toward the next stage of AI development and characterized its capabilities as AGI (artificial general intelligence). Regardless of definitional debates, the launch reinforced the view that advancing models will require ever-greater compute—further supporting demand for Nvidia and other suppliers of accelerators, networking equipment, and custom semiconductors.

Semiconductor Industry: 2026–2027 Forward Valuation Multiples.
Sources: FactSet, Freedom Broker analysis

Notably, semiconductor valuations already embed high expectations. The 2026e P/E is 23.5x versus a three-year average of 22.4x—i.e., 2026 earnings are priced at a premium to recent history. By contrast, the 2027e P/E is 15.1x versus a long-term average of 19.8x, implying a relatively more attractive valuation if the projected earnings growth is delivered.

On the macro side, market expectations for the Fed’s decision at the September 16 meeting were highly volatile over the period. At Jackson Hole on August 28, Fed Chair Kevin Warsh struck a hawkish tone, prompting a negative market reaction. The emphasis was on persistent inflation risks and the Fed’s commitment to returning inflation to 2%, which intensified concerns about further tightening. By contrast, Governor Christopher Waller later sounded more reassuring, citing ongoing disinflation and the limited pass-through from higher energy prices and tariffs, and indicating he would support keeping rates unchanged absent fresh upside inflation surprises.

Markets read the August labor report (released September 4) as tilting the odds toward a rate hike. Nonfarm payrolls rose by 162k versus a 55k consensus, while the unemployment rate printed 4.14%, essentially in line with expectations (4.1%). Much of the upside surprise was technical. Roughly 84k of the jobs gain reflects seasonal adjustment effects, concentrated in leisure & hospitality, health care, and social assistance. Another ~40k came from a rebound in local government payrolls after a decline the prior month. Taken together, the report does not signal a meaningful improvement in underlying labor-market momentum, which remains soft.

Even so, the strong headline nudged market-implied odds of a September hike to about 58%. In other words, a rate hike is the base case but not a lock. This leaves the market weighing two divergent scenarios: a hike would prompt a sell-off in risk assets, while a hold would be a positive catalyst for equities and could support further gains.

Market Focus

In the coming weeks, investor attention will center on geopolitics and the end of corporate earnings. The Fed’s September 16 policy decision could also add to volatility.

During the review period, WTI rose about 7% to $93/bbl, supported by an escalation of the Middle East conflict. Reciprocal strikes have disrupted oil logistics and energy infrastructure. Market focus remains on attacks against tankers transiting the Strait of Hormuz and facilities in Saudi Arabia, with spillover to the UAE, Bahrain, Kuwait, and Jordan, where U.S. and allied assets have been targeted.

WTI and ETF PDBC.
Sources: FactSet, Freedom Broker analysis

Markets quickly absorbed March’s spike in oil and its aftereffects, as the conflict was initially viewed as short‑lived amid peace talks and a signed memorandum of understanding. The recent renewal and geographic widening of hostilities is shifting that view: investors are gradually pricing in a longer spell of elevated energy prices. The lack of a public U.S. plan for resolving the conflict or clear de‑escalation parameters increases the probability of a protracted confrontation, raising the risk that inflationary pressures will broaden beyond oil and result in higher fuel, logistics, and fertilizer costs. The strong performance of PDBC—an ETF tracking a diversified commodity basket spanning energy, industrial and precious metals, and agriculture—underscores this broader move. Rising prices suggest investors are discounting both potential oil‑supply disruptions and a wider, conflict‑driven upswing across the commodity complex.

Earnings season is coming to an end, with 493 index constituents having reported. Analysts highlight several releases likely to draw heightened investor interest.

Carnival (CCL) will report for Q3’26 on September 17. It heads into the print after a record second quarter: revenue rose 5% YoY to $6.7bn, adjusted net income increased over 20% to $569m, and adjusted EPS added more than 15% to $0.41—despite nearly 30% growth in fuel prices and FX headwinds. Momentum is supported by robust cruise demand, record booking prices, and high fleet utilization. The company has already booked 93% of 2026 capacity, and customer deposits reached a record $9.0 billion. For Q3, management guides to adjusted income of about $1.86bn and EPS of approximately $1.35. Key watch items include booking trends, pricing discipline, geopolitical impacts on European itineraries, and fuel costs. The consensus price target for Carnival’s stock is $34.70.

Costco (COST) is scheduled to report fiscal Q4’26 results on September 24. The company’s third quarter was strong: net sales rose 11.6% YoY to $69.2bn, net income increased 15.2% to $2.19bn, and EPS grew 15.2% to $4.93, supported by traffic, sales, and membership-fee growth. Excluding gasoline and FX, comparable sales increased 6.6%, driven by a 2.4% rise in traffic and a 4.2% expansion in average purchase amount. Digital sales rose 21.5%, and membership revenue grew 10.7%, lending additional support. The global renewal rate reached 89.7%, and paying members increased 4.1% to 82.9 million. Investors will focus on comparable sales, traffic, margins, and warehouse expansion. The consensus price target for the stock is $1,086.

Technical Broad-Market Set-up

The S&P 500 is currently consolidating and trading near 7,690. The index is slightly below its 20-day moving average but still above the 50-day MA (~7,600) and a rising trendline. The RSI suggests a parity, with neither bulls nor bears holding a clear advantage. However, market breadth has weakened: only 47% of constituents are above their 50-day averages, below the neutral 50% threshold. Near term, the setup becomes neutral as price compresses between the downtrend from the August high and the rising trendline. Key support sits at 7,580–7,600, where the 50-day MA and horizontal support converge; a break below would increase the risk of a deeper pullback. On the upside, the first target is a retest of the high near 7,820.

Expected Trading Range

In our view, the S&P 500 will trade between 7,580 and 7,820.