Despite all the doom and gloom scenarios, the US stock market remains very strong. The Nasdaq reached an all-time high last week. The S&P 500 is very close there. Despite geopolitical uncertainties, tariff disputes, and periodic economic data shocks, the stock market is constantly pushing for new highs. I believe there are three main factors fueling this rally, and as long as these factors remain in place, I believe the upward trend will continue, even if there are corrections from time to time—a correction I've been anticipating for a long time. Therefore, my year-end S&P 500 target is still 7500.
So, what are these three factors, and what are the risks? There is always risk in the stock markets. The first, and perhaps the most important, factor is the rampant stock buybacks by companies. This is greatly supporting the market. US companies are buying back their shares at an unprecedented pace. Nearly $1 trillion in stock buybacks have been announced so far in 2025. This is the strongest start to a year since 1982. Buybacks are expected to exceed $1.2 trillion by the end of the year, setting an all-time record. So, who is making the biggest buybacks?
Apple, of course, tops the list with $100 billion in stock buybacks. I wish Apple would allocate that money to technology. Alphabet is buying back $70 billion. Its stock has seen a slight increase recently. This may be one reason. Banks are buying. JP Morgan is buying back $50 billion. Bank of America is buying back $40 billion. Morgan Stanley is buying back $20 billion. Many other companies, both large and small, are also buying back stock. All these buybacks reduce the number of shares outstanding, which in turn supports the price upwards. Of course, these types of buybacks also instill confidence in investors. People say that if companies are buying back their own shares, it means they don't find them too expensive. Will this trend continue? It probably will. Because technology companies, in particular, are incredibly profitable. They have huge cash flows. They will undoubtedly use some of this cash flow for buybacks.
The second factor is perhaps even more important. There's a new breed of individual investor. This type of individual investor consistently likes to buy dips. They have a completely different perspective on the market. For example, when weak employment data came out in early August and the decline began, individual investors quickly jumped into buying. During the Independence Day sell-off in April, the S&P 500 fell by approximately 10% in the first two days. I'm talking about the day Trump announced tariffs. $31 billion in inflows into the market in a single week on Liberation Day. In 2022, the S&P 500 had its worst year since 2008, falling 18%. Even then, there was a net inflow of $27 billion into US equity mutual funds (VTFs).
Young investors have only experienced bull markets so far. They didn't experience the sharp pullbacks of 2000 or 2008. It took years for stock markets to recover there. But young investors have always experienced markets that fall quickly and rebound quickly. In an environment of abundance, many people have become wealthy. Stories like this abound. By the end of 2024, the number of retirement accounts in the US, which had become dollar millionaires, had surpassed 537,000. This is an all-time record. Meanwhile, households are investing heavily in stocks. The share of household wealth in stocks has reached 36%. This is also a record high. It's hard to know if this will continue indefinitely, but individuals are pushing hard.
The third factor is fundamentals. Things are looking up in the US. There are significant increases in corporate profits. For example, 83% of the 445 companies that have released earnings in the S&P 500 so far this year have exceeded estimates and surprised with a 7.1% increase in profitability. On the other hand, there aren't many alternatives to US stocks. For example, the total share of US stocks in developed markets has reached 72.5%, while Europe's share is only 16.1%. If you recall, at the beginning of the year, it was predicted that Europe would surpass America. And it has made such a move. But then the surge faded. The Chinese stock market, however, has always been problematic. That's why investor demand for the US markets is so strong. For example, in July, ETFs investing in stocks saw an all-time high inflow.
Another factor is the decline in the purchasing power of the US dollar. This is triggering two things simultaneously. Americans don't want to keep their money on the sidelines. They want to invest in stocks and protect themselves against inflation. The decline of the US dollar also benefits export-oriented American technology companies, allowing them to display higher revenues. These three factors continue to keep stock markets up: extensive corporate buybacks, the inability to deter individual investors, and, on the other hand, the fact that companies are showing truly high profits. Of course, this story can't last forever. Every happy story has an ending. As this kind of enthusiasm in the stock market increases, it usually means you're approaching a crash. What risks are there? Will inflation rise? Will the Fed postpone interest rate hikes because of this? Will this halt economic growth? Will a recession follow? Will stagflation follow? All of these are fears. There are many uncertainties created by tariffs. Will they slow down the economy?
Another thing I don't particularly like is that corporate profit growth is high, but a large portion of this growth comes from technology companies. Other companies aren't performing as well. And yes, companies are buying back shares, but company executives and employees aren't buying much. They're more likely to sell. These are some of the risks of the stock market. Without risk, there's no profit. However, as of now, I still view the strength of the three factors I just mentioned as outweighing the risks. Therefore, I think the stock market is trending upward. I expect a correction, but that's because we've entered the worst seasonally for stock markets. The second half of August and September are generally very weak. A correction could occur, but unless something drastically goes wrong, especially in the last quarter of the year, I think the stock markets will rise even more strongly.
Trump's deregulation, or reduction of regulation, will have a significant impact here. I believe financial markets will experience significant easing and relaxation. Meanwhile, the likelihood of the Fed cutting interest rates is also increasing significantly. Even if Trump doesn't, I believe the market will consider this as soon as he announces an alternative presidential candidate to Powell. Even if he doesn't, if that president also supports lowering interest rates, the moment he announces them, I believe the market will consider this. Of course, there are risks. One should never invest blindly. What I've just described doesn't mean that all stocks will rise. You need to choose the right stocks and enter with the right timing.
The information, comments and recommendations contained herein are not within the scope of investment consultancy. Investment consultancy services are provided within the framework of the investment consultancy agreement to be signed between brokerage firms, portfolio management companies, banks that do not accept deposits and customers. The comments in this article are only my personal comments and these comments may not be appropriate for your financial situation and risk return. For this reason, investments should not be made based on the information and comments in my articles.
