Smurfit Westrock Plc (SW)

The Portfolio Selector features the Argus Focus List, a group of 30 "best idea" stocks generated and regularly updated by Argus' analysts and investment policy committee. It also includes the director of research’s monthly investment strategy column, stock recommendations and sector picks, economic forecasts, and an asset allocation model. This month, the Focus List additions are State Street Corp (STT); Quest Diagnostics Inc (DGX); ServiceNow Inc (NOW); Freeport-McMoRan Inc (FCX) and the Focus List deletions are Smurfit WestRock plc (SW); AbbVie Inc (ABBV); Morgan Stanley (MS); Maplebear Inc (CART).

Despite bursts of outperformance, small- and mid-cap stocks (SMID) have underperformed large-caps year to date -- as they have over the past five years. But they are edging closer to their large-cap rivals with a year-to-date return of 10%, just two percentage points below the S&P 500. As well, SMIDs may be in a better position to generate market-beating returns going forward. For one thing, SMID companies tend to focus on domestic markets, so their businesses could be less disrupted by trade and tariff issues, fallout from unrest in the Middle East, the Russian invasion of Ukraine, issues in China, or other geopolitical developments. As well, the prices of SMID stocks generally are lower than the prices of large-caps, with the P/E ratio on the Russell 2000 SmallCap Index at 17, compared to a trailing P/E of 25 for the S&P 500. Finally, there are long stretches in the record books when SMID stocks have outperformed large-caps. SMID risks do carry risk, but diversified investors look to have exposure to small- and mid-caps based on the long-term performance record.

Smurfit Westrock manufactures and sells paper and packaging solutions for the consumer and corrugated markets in North America, South America, Europe, Asia, and Australia. The company has 97,000 employees. The SW shares are a component of the S&P 500.

Rocky Road to the Midterms: Our Monthly Survey of the Economy, Interest Rates, and Stocks Investors are well aware that the second year of the four-year presidential cycle is the most challenging for stocks. The three months leading up to the midterm elections present a particularly rocky path, based on historical precedent. In other words, a daunting calendar joins the war with Iran, sharply reduced traffic through the Strait of Hormuz, flaring inflation, and rising interest rates as factors challenging the stock market as summer 2026 winds down. The second year of the presidential cycle, the midterm election year, has averaged a gain of 3.3% in the S&P 500 since 1980. Five of the 11 midterm years since 1980 were negative, by far the worst track record of any single year in the cycle. In the most recent midterm year of 2022, the S&P 500 declined 19.4%, as inflation peaked at 40-year highs. In the three months of August through October for all midterm years from 1980 to 2025, the S&P 500 has averaged a decline of 1.1%. Once the midterm election has passed, the market should have room to rally - but, unfortunately, it does so only sporadically after the election. On average, the S&P 500 has declined an additional 1.9% in November and December of the midterm years. In the silver lining department, the third year of the presidential cycle is the best of the bunch, with an average gain of 16.5% in the S&P 500 since 1980. The Economy, Interest Rates, and Earnings The preliminary (second) gross domestic product (GPD) report for 2Q26 reflected muted annualized growth of 1.5%, consistent with the advance (first) report and decelerating from 2.1% in 1Q26. Second-quarter 2026 GDP captures the full three-month effects of the war in the Middle East, whereas 1Q26 GDP included just the initial month of the conflict. In broad strokes, the GDP report shows a resilient consumer economy rebounding from a weak first quarter and a commercial economy pulling back only slightly from 1Q's aggressive spending on artificial intelligence (AI). The need to import semiconductors and servers to support AI build-outs, along with impediments to the president's tariff agenda, contributed to a surge in imports that meaningfully reduced 2Q26 GDP. Second-quarter 2026 Personal Consumption Expenditures (PCE) increased 3.4%, rising sharply from PCE growth of 0.5% in 1Q26. Total spending on goods increased 4.3% in 2Q26, led by a 5.7% rise in durable goods spending. Motor vehicles & parts and home furnishings & durable household equipment contributed to this strong growth. Nondurable goods spending rose a healthy 3.5% in 2Q26, even though spending on gasoline declined. Services spending, the biggest part of GDP, grew 3.1% in 2Q26, up sharply from 0.5% in 1Q26. Altogether, PCE contributed 2.31 percentage points to 2Q26 GDP, after contributing just 0.37 point in 1Q26. Consumer spending on goods contributed 0.89 point to 2Q26 GDP, and spending on services contributed 1.42 points. Nonresidential fixed investment, the proxy for corporate capital spending, rose by 8.5% in 2Q26, down from 10.6% in 1Q26. The AI boom drove 13.6% growth in equipment spending and 8.8% growth in intellectual property products; corporate spending on structures declined 1.8%. Nonresidential fixed investment contributed 1.16 points to total 2Q26 GDP. Residential investment delivered 1.3% growth in 2Q26 for its best growth since 4Q24. PCE and nonresidential fixed investment normally constitute 80%-85% of GDP. These two categories contributed 3.47 percentage points to 2Q26 GDP growth after contributing 1.79 points to 1Q26 GDP growth. So why wasn't overall 2Q26 GDP growth stronger? Mainly because of negative trends in key categories of net exports-imports, private inventories, and government spending. Net exports-import and private inventories were highly volatile in 2025 as companies sought to optimally position their overseas goods flows around the Liberation Day announcements in April and actual tariff implementation in August. The Supreme Court in February 2026 struck down the use of the International Emergency Economic Powers Act (IEEPA) for tariffs, and the White House responded by using Section 122 of the Trade Act of 1974 to implement blanket 10% tariffs. Beginning in February, companies sued (many successfully) for the return of tariffs levied under the IEEPA. Tariffs levied under Section 122 of the Trade Act of 1974 expired in July after a 150-day window. Congress has elected not to extend this usage, a required step to keep them in effect. Most recently, the White House levied 10% tariffs alleging widespread forced-labor violations. The tariff situation, which seemed settled, remains confusing and is a hindrance to business planning. In addition to tariffs, many semiconductors and other technology hardware products vital to U.S. AI investments are imported. We expect the combination of AI imports and tariff turbulence to keep imports elevated in the intermediate term. Exports rose 4.5% in 2Q26, moderating from 10.9% growth in 1Q26. At least some of that growth was in oil exports after the Strait of Hormuz was closed by Iran. Imports rose 12.5% in 2Q26 after rising 11.8% in 1Q26. Net exports-imports subtracted 1.14 percentage points from 2Q26 GDP after subtracting 0.37 point in 1Q26. The change in private inventories, part of gross private domestic investment, subtracted 0.72 percentage point from 2Q26 GDP. Net exports and change in private inventories combined subtracted 1.86 percentage points from 2Q26 GDP. Government spending declined 1.0% in 2Q6. This formerly stable and now volatile category declined in the second quarter after 4.4% growth in 1Q26, which reflected recovery from a 5.6% decline in shutdown-impacted 4Q25. The decline in government spending subtracted 0.16 point from 2Q26 GDP growth after adding 0.74 percentage point to 1Q26. Argus Chief Economist Christopher Graja, CFA, notes that indicators point to further strengthening in gross domestic investment as companies seek to boost productivity and improve return on investment by spending on AI. Chris continues to model positive GDP growth for 2026 and 2027 but now expects a slightly bigger drag on GDP growth from AI imports. Argus is now forecasting 2026 GDP growth of 2.1%, reduced from 2.3%. The Argus GDP forecast for 2027 is for growth of 2.2%, reduced from 2.4%. Argus expects acceleration in business investment to support AI infrastructure build-outs, including imports of technology hardware that reduce GDP. Outside the GDP accounts, the picture remains mixed. Based on sentiment surveys and diffusion indexes, the business community is guardedly optimistic due to the AI-related business surge, while consumers remain worried about inflation, affordability, and new jobs availability. Concerns about the war appear to be having a moderately negative impact on sentiment, while inflation is directly impacting business and consumer spending. After multiple years of strength, the U.S. employment economy showed signs of slowing in 2H25. Employment growth was better than expected across the first half of 2026 but has been volatile in the second half. The U.S. economy lost 23,000 nonfarm payroll jobs in July 2026, badly missing the consensus call of 91,000 new jobs. Reflecting downward revisions to June and May, nonfarm payrolls averaged a monthly gain of 20,000 for May-July, compared with a previously reported average gain of 108,000 for April-June. The unemployment rate edged down to 4.1% for July from 4.2% for June; the unemployment rate in the preceding three months was 4.3%. The decline in the unemployment rate partly reflects slower population growth due to immigration policy and fewer native-born births, along with baby boomers exiting the workforce. Average hourly earnings for July grew 3.2% annually, down from 3.5% for June; annual wage growth has mainly been in the 3.5%-4.0% range for the past few years. Over that span, hourly workers could at least count on annual wage growth staying ahead of rising prices. Wage growth and inflation are now running at approximately the same pace. The age of AI has moved beyond the first phase of generative AI, characterized by training of large language models by hyperscalers building AI data centers. The next phase is agentic AI, now rolling out to enterprise and sovereign customers. The U.S. industrial sector is helping to build the necessary infrastructure to support this transition. New orders for durable goods rose a much-better-than-expected 1.1% in July, up from 0.5% in June. Orders excluding the highly volatile transportation component increased 0.4% in June; durable goods orders excluding defense rose 1.3%. Computer and electronic orders were down 1.1% in July after 3.1% growth in June; this series grew in nine of the past 11 months in support of AI build-out. Industrial production grew 0.2% in July after rising by a revised 0.3% month over month in June. Manufacturing output rose 0.2%, while utilities and mining production rose 0.5% and 0.2%, respectively. Industrial production increased 1.1% at an annual rate in July, slowing from year-over-year growth of 4.0% in 2Q26. Capacity utilization rose to 76.3% in July from 76.1% in June. Capacity utilization is more than 3 percentage points below its long-run (1972-2025) average. The purchasing managers' reports from the Institute for Supply Management showed the industrial and services economies clearly in expansion territory and in fact accelerating in July. The Manufacturing Purchasing Managers' Index (PMI) was at 55.6% in July, up 2.3 points from an already robust June trend. The Services PMI was at 54.1% in July, up 0.1% from June. Both PMI reports were comfortably above the 50 demarcation line between expansion and contraction. The Services PMI has spent two years in expansion territory, while the Manufacturing PMI has posted seven straight months of expansion. The Conference Board's Consumer Confidence Index fell to 89.4 in July from 91.2 in June, hitting a seven-month low as the fragile truce with Iran unraveled. The University of Michigan Index of Consumer Sentiment was 51.0% in August 2026, down from 55.2% in July; this series suffered from the war and stubbornly high gas prices. Levels for these consumer surveys are near historical lows and remain well below pre-Iran War levels. Actual and diffusion (sentiment) data reflect inflation anxiety and concerns the ongoing war with Iran will keep gasoline prices high. The memorandum of understanding between the U.S. and Iran has lapsed, and the Strait of Hormuz remains mostly closed. In the U.S., consumers and companies are mainly going about their business amid the ongoing state of war. Consumers are employed, and businesses are investing in the AI opportunity. Kevin Warsh began his tenure as chairman of the Federal Reserve (Fed) in May 2026. At the mid-June 2026 Federal Open Market Committee (FOMC) meeting, his first as chairman, nine members of the 12-member board favored at least a quarter-point rate hike at some point in 2026. The July FOMC meeting revealed a higher level of caution among the board of governors following the unsettling July nonfarm payrolls report. Three members voted for a quarter-point rate hike, while nine members supported no change in policy. There is no FOMC meeting in August. At the post-FOMC news conference in July, Chairman Warsh noted that in the past, commentary from the Fed seemed to drive the fixed-income market. He would like to see the fixed-income market drive the Fed's response. The chairman has established five committees that will give him more insight into economic and market drivers and also provide some cover to keep the Fed on hold at least through the midterm elections in November. Within the preliminary 2Q26 GDP report, the PCE Price Index inched up to 5.3%, compared with 5.1% in the 2Q26 advance report and 4.6% in 1Q26. The Core PCE Price Index, which strips out energy and food, was up 3.6% compared to 4.4% growth in 1Q26. In the Personal Income and Outlays report for July, the annual change of 3.3% in the Core PCE Price Index moderated from 3.7% in June, which was the highest in three years. Core PCE metrics are monitored by the Fed as part of its rate-setting deliberations. The annual change in the all-items Consumer Price Index (CPI) for July was 3.4%, down from an annualized 3.5% increase in June. The chief contributor to the monthly decline in the July CPI was energy prices. The July Core CPI (excluding food and energy) rose 2.5% from a year earlier, compared with 2.6% for June. The all-items Producer Price Index (PPI) in July 2026 gained 4.7% on a year-over-year basis, moderating from an annual change of 5.5% in June and 6.5% in May. On a core basis, which strips out food, energy, and trade services, July PPI rose 4.7% annually, down from 5.1% for June. Energy and gasoline prices flared late in July, and the annual CPI and PPI reports could move higher in August. Interest rates shot higher on inflation fears after the war with Iran began at the end of February 2026. Rates remained elevated across the second quarter, ticked higher in July, and mostly stabilized in August after Treasury Secretary Scott Bessent revealed plans to repurchase Treasuries. The 10-year Treasury yield was 4.70% as of the end of August 2026, compared with 4.75% as of the end of July and 4.14% at year-end 2025. The two-year Treasury yield was 4.24% as of the end of August 2026, versus 4.28% as of the end of July and 3.45% as of year-end 2025. The two-10 slope in the yield curve tightened to 42 basis points (bps) at the end of August 2026 from 47 bps at the end of July. The year-end 2025 two-10 slope of 69 bps was the steepest since 2021, before the Fed began its fight against inflation. Argus Fixed Income Strategist Kevin Heal continues to forecast no cuts in the Fed Funds rates in 2026. The monetary policy outlook for 2027 is uncertain, but he sees the potential for one rate cut next year assuming the war is fully resolved. In the days preceding the Jackson Hole conclave, the CME FedWatch tool indicated just a 38% probability that the Fed would raise the Fed Funds rate at the September 2026 FOMC meeting; that was down from a 65% probability prior to the decline in July nonfarm payrolls. By year-end 2026, the CME FedWatch tool shows a 28% probability that the Fed Funds rate will remain at the current 3.50%-3.75% tendency and a 72% probability that the Fed funds rate will be higher; the latter probability is down from 87% prior to the decline in July nonfarm payrolls. Given the pending midterm elections, we see little chance of any change in monetary policy either up or down before the December 9, 2026, FOMC meeting. The calendar 2Q26 earnings season, like the 1Q26 earnings season, delivered exceptional annual EPS growth that is allaying fears of excess valuations even with stocks near all-time highs. With just a few outlier companies yet to report results, S&P 500 earnings from continuing operations for calendar 2Q26 are up 50%-52% from 2Q25, according to the tracking firms Bloomberg, FactSet, and Refinitiv. The 50% growth rate includes onetime gains from two GAAP-only reporting companies. Alphabet Inc. (GOOGL) recognized a $98 billion onetime gain due to net unrealized gains on equity securities. And Amazon.com Inc. (AMZN) recognized a $53 billion gain from investments in Anthropic PBC. Excluding those gains, the blended 2Q26 EPS growth rate is closer to 28% - still the second-best growth since 2Q21. Among companies reporting earnings growth, 86% have surpassed prereporting consensus expectations - well above the 75%-80% range prevailing for the past 10 years. After backing out the AMZN and GOOGL onetime gains, the 11% EPS beat against expectations is well above the typical EPS beat range of 5%-8%. AI is driving technology earnings growth, but it is not all Magnificent 7. The best AI-driven growth has been coming not from the hyperscalers, but from the companies whose hardware -- semiconductors, memory & data storage, and networking -- supports the transition from generative AI to agentic AI. While AI captures the headlines, an equally important story for the reporting quarter was across-the-board earnings strength, with sectors such as Materials, Energy, Industrial, Financial, and Utilities delivering strong double-digit EPS growth. In June 2026, we raised our 2026 forecast for S&P 500 earnings from continuing operations to $340 per share from a prior $315. Our 2026 estimate assumes 24.8% growth in continuing operations earnings from 2025. At that time, we also raised our 2027 forecast for S&P 500 earnings from continuing operations to $390 per share from a prior $363. Our 2027 estimate assumes 14.5% growth in continuing operations earnings from our 2026 estimate. Domestic and Global Markets The performance discussed herein captures the market status as of the end of August 2026. This data does not reflect what has happened in the market in recent days. The major indices have vacillated between growth leadership and everything else -- defensive, cyclical, commodity, and rate sensitive -- for much of 2025 and all of 2026 to date. After a risk-off and down first quarter, growth leadership reasserted itself in 2Q26. The market overall is up modestly in 3Q26 to date, which has included both sharp rallies and profit taking in AI names and bouts of leadership rotation. As of the end of August 2026, the three major indices were in a fairly close horse race. On a total return basis (including hypothetical dividends), the S&P 500 was up 13.0% year-to-date as of the end of August. The Nasdaq Composite, which was way ahead of the S&P 500 at midyear, was up 12.9% year-to-date. And the Dow Jones Industrial Average was up 12.6% as of the end of August. Although value and growth had been vying for leadership as of midyear, value is clearly in charge with one month remaining in the third quarter. The FT Wilshire US Large Cap Value index was up 19.1% year-to-date at the end of August, versus an increase of 5.8% for the FT Wilshire US Large Cap Growth index. Small caps continue to relatively outperform, and the Russell 2000 Index was up 22.3% at the end of August. Stock performance has been headline driven. While awaiting reduced pressure on inflation from the decline in oil prices, stocks remain positive for the year. Sector leadership in 2Q26 diverged sharply from leadership in 1Q26. The third quarter has been more like the first quarter than it was like the second, but sector momentum remains in flux. In the first quarter, Energy was the clear leader, with a 36% gain. Materials, which like Energy is seen as an inflation hedge, rose 14% in 1Q26. Also winning in 1Q was the high-yielding Utilities sector, up 7%, and the defensive Consumer Staples sector, up 6%. First-quarter laggards included Information Technology, Consumer Discretionary, and Communication Services; the three growth sectors dropped 6%-12%. Investors flipped the script in 2Q26, with growth leadership reasserting itself and defensive, income, and inflation hedging stepping to the rear. Information Technology rose over 32% in 2Q26 as agentic AI drove a new round of AI fever. Consumer Discretionary, Industrial, and Financial all rose in mid-single-digit percentages for 2Q26 on signs of acceleration in economic activity. Many of 1Q's winners were in the loss column for 2Q26, with Energy most notably falling after a strong 1Q26. In 3Q26 to date, Energy is back in front, with an 18% gain. Other top-tier sectors in 3Q include Healthcare (up 10.2%), Materials (up 8.7%), Financial (up 7.7%), and Consumer Staples (up 5.3%). Sectors in the up 1%-5% category for 3Q26 include Real Estate, Communication Services, and Consumer Discretionary. Utilities, Industrial, and Information Technology are all down less than 5% in 3Q26 to date. Eight months of volatile trading have led to a balanced advance for the market heading into September 2026. Energy leads with a low-40% gain for 2026 year-to-date. Information Technology and Materials are up in the high teens for 2026 to date. Four sectors - Healthcare, Industrial, Real Estate, and Consumer Staples - are up in the low-to-mid-double-digit percentages. Communication Services, Consumer Discretionary, and Utilities are up less than 5% for the year. August, like July, was a turbulent month at the sector level. Information Technology was subject to some profit taking in July and August despite multiple industry leaders reporting terrific earnings. Other sectors that lost ground in August included Industrial and Utilities. Sectors that benefited from rotation included Healthcare and Financial. At about 37% of total S&P 500 weight, Information Technology is down from its peak but more than 200 bps higher than it was in August 2025. That did not leave much room for other sectors to gain weight. Healthcare continues to add to its sector weight but remains toward the low end of its five-year range. The worst decline year over year was in Consumer Discretionary. High prices and high financing costs signal little relief for discretionary spending by consumers in the intermediate term. We have always believed that rotation away from growth and toward more diversity in sector leadership is positive for sustaining the health and length of the bull market. A balanced advance lessens the risk of a thin, toppy market and can help a shaky bull get steadier on its hooves. As of the end of August, seven of nine global bourses in our tally were positive for 2026. Global stocks overall did better than the U.S. market in 2025. The U.S. is mainly energy independent, and the war in Iran has kept the S&P 500 at least in the middle of the pack since April. India and China, which are huge consumers of Middle Eastern oil, remain negative. In broad strokes, developed-world economies are gaining ground, and the lag in developing economies is worsening. On a theme basis, mature economies are up 17.8% year-to-date in 2026 on safe-haven demand. Americas markets are up 11.1% in 2026, as double-digit gains from Canada and the U.S. offset more modest gains from Brazil and Mexico. Resources economies are up 10.5%. On signs of improved oil flows through the Strait of Hormuz, Asian markets are up 5.4% in 2026 to date; most of that gain is attributable to Japan. BRICs-minus-Russia are down 1.8% for the year to date. Conclusion The shooting war with Iran has now evolved mainly into an economic war. There are risks that the shooting could resume, but both sides are incented to choose diplomacy: the U.S.by depletion of its most advanced missiles and Iran by its collapsing economy. Traffic is still well below the prewar average in the Strait of Hormuz. Energy inflation has triggered a resurgence in broader inflation, bond yields remain near multiyear highs, and the Fed may be forced to raise short-term rates. These are not the only factors in the equation, of course. Stocks are up in low-double-digit percentages heading into September, a bit higher than where they were heading into August and much better than usual in a midterm year. We continue to model GDP advancing in the 2% range, unemployment remaining in the low-4% range, and corporate earnings growing at mid-to-high-20% rates in 2026. Amid swirling geopolitical and economic developments, we believe moderate but steady GDP growth, corporate earnings growth, and still favorable valuations can support a positive 2026 for stocks.