By Daniel McGarvey, CFA on behalf of Stonebridge Financial Group advisors
The U.S. stock market has been practically unstoppable in the years since the Global Financial Crisis (GFC), as evidenced by the S&P 500’s total cumulative return of over 1,200% since the lows in March of 2009. The returns during this period were significantly higher than the decade before the GFC, but with only marginal increases in earnings growth. The main driver of returns in the recent era has been valuation expansion, meaning that investors have been willing to pay progressively more for a dollar of profit. The market’s price-to-earnings (PE) multiple averaged 17.2x over the last 30 years and dipped below 10x during the height of the GFC, but now it stands around 21x.
Why have investors been willing to pay so much more for stocks since the GFC? A major reason is that for most of that time the Federal Reserve (Fed) kept short-term rates historically low, even near zero for many years. This inflated the present value of stocks since the discount rate used to value their future earnings dropped. Perhaps even more significantly, the GFC prompted the Fed to begin their campaign of Quantitative Easing (QE), a monetary policy strategy where the central bank dramatically increased the size of its balance sheet, leading to a surge in money supply and liquidity (see chart below showing the increase in Fed assets compared with its pre-GFC trajectory).
Source: Strategas Research Partners, LLC
With unpalatable bond yields and a flood of liquidity, investors were practically forced into buying equities. This led to an overreliance on the Fed as the backstop of Wall Street, and it likely led to a misallocation of capital as true price discovery became less important.
The degree of influence from Fed policy on equity price returns is impossible to quantify exactly, but it appears to be extremely significant. The chart below compares S&P price returns with the cumulative level of monetary “looseness” from rate policy and balance sheet expansion. The increase in liquidity since the GFC tracks quite closely to price returns.
Source: Strategas Research Partners, LLC
This subject is particularly pertinent today because one of the primary goals of Kevin Warsh, the incoming Fed chair, is to shrink the balance sheet. Although he also has a leaning towards cutting rates, his primary priority appears to be a slow and steady unwinding of Fed assets and, consequently, decreased interference in financial markets. Doing so should in theory lead to a “healthier” system with more prudent allocation of capital and a renewed focus on fundamentals, but it could also take away a key support for passive equity returns going forward.
Fortunately, the current equity market is supported by remarkably strong earnings, with the vast majority of companies reporting this quarter exceeding expectations. As shown in the chart below, the seven largest names (Magnificent 7) have been responsible for most of the earnings (EPS) growth in recent years, and their earnings are expected to continue growing in coming quarters, but forward estimates imply that this earnings growth should broaden out to the rest of the market as well.
Source: Strategas Research Partners, LLC
The high bar should be achievable as long as we can avoid an economic slowdown and as long as the massive capital expenditures of hyperscalers prove worthwhile.
The S&P 500 returned 10.5% in April, its best month in over five years, despite WTI Crude oil ending over $100/barrel with the continued closure of the Strait of Hormuz. The Bloomberg US Aggregate Bond Index returned 0.1% as the 10-Year Treasury Rate rose from 4.3% to 4.4% and credit spreads tightened. The Federal Open Market Committee chose to keep short-term rates in the 3.5-3.75% range and expects to remain on hold for the foreseeable future.
Material discussed is meant for general/informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions.
Source of three charts below: YCharts, Inc.
May 2026 Commentary: Effects of the Fed Balance Sheet
By Daniel McGarvey, CFA on behalf of Stonebridge Financial Group advisors
The U.S. stock market has been practically unstoppable in the years since the Global Financial Crisis (GFC), as evidenced by the S&P 500’s total cumulative return of over 1,200% since the lows in March of 2009. The returns during this period were significantly higher than the decade before the GFC, but with only marginal increases in earnings growth. The main driver of returns in the recent era has been valuation expansion, meaning that investors have been willing to pay progressively more for a dollar of profit. The market’s price-to-earnings (PE) multiple averaged 17.2x over the last 30 years and dipped below 10x during the height of the GFC, but now it stands around 21x.
Why have investors been willing to pay so much more for stocks since the GFC? A major reason is that for most of that time the Federal Reserve (Fed) kept short-term rates historically low, even near zero for many years. This inflated the present value of stocks since the discount rate used to value their future earnings dropped. Perhaps even more significantly, the GFC prompted the Fed to begin their campaign of Quantitative Easing (QE), a monetary policy strategy where the central bank dramatically increased the size of its balance sheet, leading to a surge in money supply and liquidity (see chart below showing the increase in Fed assets compared with its pre-GFC trajectory).
Source: Strategas Research Partners, LLC
With unpalatable bond yields and a flood of liquidity, investors were practically forced into buying equities. This led to an overreliance on the Fed as the backstop of Wall Street, and it likely led to a misallocation of capital as true price discovery became less important.
The degree of influence from Fed policy on equity price returns is impossible to quantify exactly, but it appears to be extremely significant. The chart below compares S&P price returns with the cumulative level of monetary “looseness” from rate policy and balance sheet expansion. The increase in liquidity since the GFC tracks quite closely to price returns.
Source: Strategas Research Partners, LLC
This subject is particularly pertinent today because one of the primary goals of Kevin Warsh, the incoming Fed chair, is to shrink the balance sheet. Although he also has a leaning towards cutting rates, his primary priority appears to be a slow and steady unwinding of Fed assets and, consequently, decreased interference in financial markets. Doing so should in theory lead to a “healthier” system with more prudent allocation of capital and a renewed focus on fundamentals, but it could also take away a key support for passive equity returns going forward.
Fortunately, the current equity market is supported by remarkably strong earnings, with the vast majority of companies reporting this quarter exceeding expectations. As shown in the chart below, the seven largest names (Magnificent 7) have been responsible for most of the earnings (EPS) growth in recent years, and their earnings are expected to continue growing in coming quarters, but forward estimates imply that this earnings growth should broaden out to the rest of the market as well.
Source: Strategas Research Partners, LLC
The high bar should be achievable as long as we can avoid an economic slowdown and as long as the massive capital expenditures of hyperscalers prove worthwhile.
The S&P 500 returned 10.5% in April, its best month in over five years, despite WTI Crude oil ending over $100/barrel with the continued closure of the Strait of Hormuz. The Bloomberg US Aggregate Bond Index returned 0.1% as the 10-Year Treasury Rate rose from 4.3% to 4.4% and credit spreads tightened. The Federal Open Market Committee chose to keep short-term rates in the 3.5-3.75% range and expects to remain on hold for the foreseeable future.
Material discussed is meant for general/informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions.
Source of three charts below: YCharts, Inc.
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