Fund manager resets forecast for what happens to stocks next

The big debate raging right now is whether stocks can continue marching higher despite sky-high valuations.

The doubters correctly point out that the S&P 500's breakneck 35% return since the April low has lifted its forward price to earnings ratio—a standard valuation measure—to stratospheric levels. According to FactSet, the S&P 500's forward one-year P/E ratio, which divides the S&P 500's price by the collective earnings anticipated over the coming year, stands at 22.8, handily above the 10-year average ratio of 18.6.

Those who say stocks can keep climbing point toward a friendly Fed likely to lower interest rates again in October, money on the sidelines parked in money market accounts, and the profit-friendly impact of artificial intelligence on corporate bottom lines.

The debaters make solid points on both sides, leaving investors scratching their head, wondering if we're due for a pullback or not.

Dan Niles, a veteran fund manager, has been navigating the markets since the 1990s. He's well aware of the situation and he updated his outlook for what's next for stocks this week. Given his career spans some of big boom and bust periods, including the Internet bubble and Great Recession, investors ought to consider his opinion.The stock market rally may continue to grind higher thanks to earnigns growth and a friendly Fed, according to fund manager Dan Niles of Niles Investment Management.Image source: TheStreet

Stocks' rally can continue to 'grind higher'

Niles is in the bullish camp, recently writing on X, formerly Twitter, that stocks can grind higher as investors reposition portfolios toward ignored stocks.

The catalyst? Look no further than a friendly Federal Reserve, which, after much dallying, finally cut rates by a quarter-percentage point in September. It's widely believed Fed Chair Powell will cut by another quarter-point when it meets next on Oct. 29.

More Wall Street:

These S&P 500 Stocks Stood Out in Q3 2025 The Russell 2000 Stocks That Dominated In Q3 2025 Here's How the S&P 500, Nasdaq, and Dow Jones Did In Q3 2025

The CME's popular FedWatch tool, which uses the futures market to create probabilities for future interest rate changes, pegs the likelihood of another quarter-point cut in October at 94%.

The odds are high because the jobs market has given the Fed little reason to hold off.

The government shutdown in D.C. delayed the September unemployment report, but payroll giant ADP said the economy lost 32,000 jobs last month. According to a Dow Jones economist survey, analysts predicted it would create 45,000.

The Fed's job is to foster low inflation and employment, and while inflation is climbing again because of tariffs, the deteriorating jobs picture requires more immediate action.

Story Continues

"I continue to believe being diversified is the best way to be “prudently irrational” as a Fed spiking the punchbowl again on 10/29," wrote Niles on X.

Niles suggests broadening out and focusing on less-loved stocks. That makes sense, given that a friendly Fed boosting economic growth (and corporate profit) with lower rates is a solid recipe for market gains.

Related: Jeff Bezos shares 'profound insight' that helped Amazon flourish

"From 9/19 (day before rate cut) to 10/3/25, S&P [S&P 500] +1.7% but R2K [Russell 2000] +3.0% while Mag7 +0.3%," pointed out Niles.

For a long time, market gains have been driven by the biggest of the big, the so-called Mag 7, comprising Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla.

However, Niles points out that the Russell 2000, a small-cap index that has largely underperformed them, has been playing catch-up recently. Small-cap stocks are more sensitive to rates than big-cap stocks, so Fed cuts arguably help them more.

Niles also thinks that earnings growth will offer support, writing that,

Solid Q3 earnings drives a slow grind higher in equities.

FactSet reports that Wall Street expects the S&P 500 to post earnings growth of 8% in the third quarter. If so, it would represent the benchmark's ninth consecutive quarter of earnings growth.

The S&P 500 faces risks, but the shutdown may not be one of them

The shutdown in D.C. isn't great news for the economy. Treasury Secretary Bessent said as much on CNBC this week, acknowledging that the impasse is a GDP drag.

Nevertheless, this is far from the first shutdown the markets have seen. There have been 20 shutdowns since 1976, and stocks have looked mainly beyond them, trading flat during them and producing an average 12.7% return 12 months after they've ended, according to Carson Group.

Niles similarly appears unfazed by the shutdown, despite his belief that it could be one of the longer-lasting freezes. He wrote:

My belief is this shutdown could last even longer than in 2018 but that other factors will ultimately matter more such as 1) upcoming Q3 earnings being solid, 2) AI euphoria continuing with the Mag7 reporting solid qtrs and 3) the next Fed mtg on 10/29 where I expect the Fed to stay on its course to cut rates three times this year.

Ultimately, Niles thinks that earnings, ongoing AI optimism, and Fed cuts will trump the headwinds associated with Washington's impasse.

It also doesn't hurt stocks that a whopping $7.5 trillion was parked in money market funds in the second quarter—a record level that may suggest that any pullback is bought by those on the sidelines.

Of course, anything can happen (and often it does), but from Niles' perspective, the rally in stocks isn't over.

Key Takeaways

Valuation Debate: Investors are debating between high valuations (S&P 500 P/E ratio of 22.8 vs. 10-year average of 18.6) and bullish catalysts like an interest-rate-cutting Federal Reserve, earnings growth, and the ongoing impact of AI. Bullish Outlook: Veteran fund manager Dan Niles believes the stock rally can continue to "grind higher," driven primarily by an expected second-quarter rate cut from the Fed in October, which has a 94% probability according to the CME FedWatch tool. Shifting Focus: Niles suggests investors diversify toward less-loved stocks, noting recent outperformance by the small-cap Russell 2000 over the "Mag 7" large-cap tech stocks, as lower rates typically benefit small-caps more. Solid S&P 500 Q3 earnings growth is also seen as a supporting factor.

Related: Best Vanguard ETFs for the rest of 2025

This story was originally reported by TheStreet on Oct 7, 2025, where it first appeared in the Stock Market News & Data section. Add TheStreet as a Preferred Source by clicking here.

View Comments