How Much Longer Can the Good Times Roll?

Matt Freund, CFA, Michael Kassab, CFA, Jake Hyatt

Summary points

• The US economy remains resilient and has managed to grow despite shocks that would have historically derailed expansion.
• Although markets have already climbed a formidable wall of worry, growth opportunities and reasonable valuations justify continued participation in the equity market.
• AI is in its early stages of adoption and presents significant growth opportunities for long-term investors.

There sure seems to be a long list of potential trouble spots for a market near all-time highs, from renewed pain at the pump, to interest rates headed in the wrong direction, to doubts about whether the massive AI infrastructure spending will pay off. As if that weren’t enough, now we not only have to worry about AI replacing our jobs but possibly wiping out humanity. If “pacing the frontier” (i.e., slowing the release of powerful AI models) is the answer, the implications could be meaningful across a full range of growth stocks.

Against that backdrop, it may be tempting to move to the sidelines after four years of a nearly uninterrupted bull market. We believe that would be premature. Prevailing concerns deserve close monitoring, but we believe the market is properly weighing them, and that the positives still outweigh the risks.

Energy prices have swung wildly since the start of the Iran conflict, but equities are justified in mostly looking through this as a geopolitical spike rather than a structural issue. The same goes for inflation and, by extension, interest rates. All three are intricately linked, and we suspect a favorable resolution in the Persian Gulf could come soon after the midterm elections. That would ease each pain point, let consumers catch their breath, and arguably reduce the odds of further Fed rate hikes.

The debate on AI regulation is still in the early innings. The Trump administration has been clear that winning the AI race against China, not slowing the industry, is its top priority. The White House just hosted a large group of big tech leaders who signed a voluntary accord to “self-police” development. Future federal regulation remains possible, but for now an industry-led framework is a far friendlier outcome for investors worried about what a more burdensome regulatory environment might do to AI spending plans.

As we have learned over time, stock prices ultimately follow earnings, and there has been more than enough growth this year to justify the gains in broad indexes. Technology and energy have done much of the heavy lifting, but overall S&P 500 earnings growth is on pace to top 30%. With profits outpacing prices, the index has become more reasonably valued, with a forward price-to-earnings multiple near 19x versus 23x a year ago.

There are other reasons to stay constructive. Consumers have been resilient despite cost pressures, thanks largely to a healthy labor market. Corporate AI adoption continues to expand sharply, even as companies strive to contain costs. And the economy keeps delivering steady GDP growth, powered by consumer spending and robust AI infrastructure investment.

None of this means investors should let their guard down. The Calamos Growth Fund remains selective, strongly favoring businesses with rising earnings estimates and real operating leverage, particularly in the AI supply chain, where we believe companies should benefit no matter which frontier labs prevail. We continue to invest across the full range of market capitalizations, pairing established leaders with smaller companies whose improving fundamentals are not yet reflected in expectations.

We see compelling opportunities in electrical equipment firms addressing data center power needs, in cybersecurity and other software that benefits from AI rather than competing with it, in semiconductors with demand visibility well into next year, and in media platforms turning AI investment into advertising growth. There is more than enough reason to conclude the good times can roll through at least the next several months, and likely much longer.