Stock prices and corporate earning expectations have disconnected. Now, no price is too high to pay for access to this new AI playing field. The mega cap stocks primarily involved in the AI buildout trade at a Price to Earning (P/E) ratio of 35x. This means you’re paying for the next 35 years of expected earnings! The remaining stocks trade at a more reasonable 21x, yet investors’ appetite for risk has created a blinder to them. Investors seem focused on increasing future growth potential, and at any price.
Once something comes along to challenge the thesis behind all this spending on the buildout, and one of the large players pulls back, risk appetite will cease and these valuations will no longer be supported. Then we see how many billions of dollars have been wasted betting on A.I. and how many companies tied to that model will die. Once the music stops you don’t want to be left standing with high concentrations of these assets. Everyone playing musical chairs will look for a place to land. This is how manias end. No one knows when this will happen. But we know it ultimately will.
The good news is that markets are heading into their most resilient and consistent quarter for returns.
For almost the last 100 years, the S&P 500 has risen 74% of the time in the fourth quarter. Additionally, when the market is positive for the first nine months, it has increased 88% of the time. So, seasonality is on your side for the remainder of the year.
The resiliency of the US consumer is also a big positive. If employment numbers hold, consumers should be able to absorb the coming pass-thru of tariff costs. These higher prices also set the stage for a resurgence of inflation.
Speaking of tariffs (and the lack of inflation associated with them to date), companies have thus far absorbed most of the impact. Many front-loaded inventories trying to sidestep tariffs. Going forward as inventories need to be restocked, retail prices will go up. If the Federal Reserve continues lowering interest rates into an inflationary cycle, inflation numbers could climb in the coming quarters.
The bottom line is that we are in an A.I. driven asset bubble which may continue for a few more quarters, driving stock prices and associated risks up even further.
If the U.S. consumer is willing to pay more of the tariff costs that companies will be passing along, we will see inflation increase. The Fed may be forced to change course at some point with interest rate increases as opposed to decreases. The entire investment backdrop would then change, along with economic activity and economic growth.
There is still time and seasonality on our side before these issues may come to the surface, causing a reset of just how much risk investors tolerate. The sand is running out of the bottle while the music keeps playing. For now, keep listening while keeping an ever-present eye to anything that could be a threat to your well-being.
We are acutely aware of where markets stand and what is most likely ahead once the music stops. Significant investor losses often come from sitting still while frozen by what’s happening. If you would like some feedback and recommendations on your financial situation, contact us.
In April, the market had a near-death tariff experience, immediately followed by one of the fastest recoveries ever. You may have expected that the 3rd quarter would be fairly benign and allow everyone some time to breathe. Not so! Investors are totally embracing the Artificial Intelligence theme, buying tech stocks in a race for risk unlike anything we have seen since the “meme stock” craze in 2021.
For the 3rd quarter, the S&P 500 Index® (dominated by the nine >$1 trillion market cap companies) was up 8%. Because this index is “market cap-weighted”, the biggest companies have the largest impact. The equal-weighted version of the S&P 500 was only up 4.8%. Mega cap dominance (of both the index and investor enthusiasm) continues. The biggest surprise for the quarter was the performance of the lower quality assets, particularly small caps. Represented by the broad Russell 2000 index (where roughly 40% of its components lose money), this group gained 12%. This move only brings 2025 performance up to 10%, illustrating how risk appetites have broadened to areas that had previously been shunned. The narrower S&P 600 small cap index, where most companies actually do have earnings is up only 6% all year.
So, the quality of a company has lost its role in market behavior and we aren’t seeing any changes so far in October. The bright spots are areas that we have highlighted several times in the past. International markets continue to perform very well in a long awaited catch-up to US markets. The EAFE index was up 4% in Q3 and is now up 25% YTD. Emerging markets did even better with 10% in the quarter and 29% for the year. At Integras Partners, we have maintained our exposure to the international sector for several years knowing that ultimately value gets discovered.
We are now clearly in a time very reminiscent of 1999-2000. This is a classic corporate spending race to dominate a new technology breakthrough. Trillions will be spent building out the assets necessary to produce an A.I. product that thus far no one has been able to profit from. Many parallels with the Dot-Bomb era have arisen, but one thing remains far different – the large companies primarily involved actually earn money this time. Those earnings are from businesses separate from where they are investing it, but they do have earnings to spend on A.I. Therefore, this cycle could last longer but one thing will remain the same. It will end badly.
There is still time and what is usually a strong quarter on our side before tariff risks and inflation come to the surface. Significant Investor losses often come from sitting still while frozen by what’s happening. If you would like some feedback and recommendations on your financial situation, contact us.
While the beginning of the year was promising, US equities ended the first quarter near correction territory (defined as a decline of 10%). Market corrections are an inevitable part of investing and not uncommon, typically occurring about every 18 months. Given how market gains became concentrated in a handful of very expensive stocks, a correction was expected, especially with the prospect of heightened volatility following the new administration’s tariff policies.
Mega cap stocks, along with the growth-oriented companies associated with AI that carried the market higher over the last two years saw an outsized decline. The long-awaited participation by lower priced stocks and international markets was finally taking hold, right up until the upsized tariff announcement on April 2nd, which sent global stock markets into tailspin. The risk of the correction turning into a bear market (a 20% decline) increased significantly, especially when alarm bells in the bond markets sounded.
We experienced a temporary relief rally after the 90-day tariff pause was announced (which we attribute to upset credit markets), then uncertainty again took hold as investors digest how a possible trade war with China and other countries may play out.
The direction markets go from here directly hinges upon how trade policy ultimately settles. We view this as a 50/50 scenario – and therefore mostly uninvestable.
That does not mean that we have not taken action. Helping our clients achieve long-term financial success is a primary mission. We take action to avoid normal temporary downturns and corrections that could evolve into full-fledged bear markets. Learn more about how Integras Partners is navigating today’s markets.
Call us today to learn how we can help. 404-941-2800
Today, U.S. stocks are relatively concentrated. An investor in the S&P 500 is putting 40% of their money in the 10 largest companies. Historically, such concentration doesn’t work out well. The S&P 500 is also expensive. Such a concentrated and expensive market requires corporate earnings to continue growing unabated (to support the prices).
There is rarely economic certainty but until new government policy and the resulting economic impacts are understood, you should expect fairly big market swings. It’s been an unusually long time without a market correction (a 10% decline). One or more market corrections this year would not be surprising, so you should be thoughtful about how your portfolio is invested.
Market corrections can come and go in short order. More protracted declines take longer to develop and recover from. It isn’t so much the loss of value that has the most impact on your portfolio, and your well-being. It is the loss of time. Value will rebuild itself. The question is, do the growth assets in your portfolio have that time?
Integras Partners’ Time Horizon Investment Process can help. You can sustain your lifestyle with the money we set aside in Income Strategies, which provides the time needed for our Growth Strategies to capture the growth rewarded by volatile markets. You’re always welcome to speak with us about how we might guide you. The greatest value we can provide clients is the ability to not worry about money, and to go live life!
Call us today to learn how we can help. 404-941-2800
You’re on your financial journey and we can help people pave their own path. This quarter’s commentary blogs start with a recap of 2024 and our views of economic conditions. Then we share some of our ideas for timely investing. You’re always welcome to speak with us about how we might guide you.
2024 was a year of Artificial Intelligence and the biggest company stocks. Despite December weakness, the S&P 500 Index (a common barometer of the U.S. stock market) gained 25% for the year. However, most of this gain was isolated in the largest and most growth-oriented stocks (most of which are heavy into AI), which investors paid more and more for. Smaller companies showed some strength but faltered as concerns about Inflation prospects and continued economic growth kept coming up. Still, small cap stocks finished the year up 11%. Our robust gains were not shared by the rest of the world. And bonds provided a mild 1.3% return.
Our economy is growing at a healthy rate with low unemployment and inflation around 3%. This supports continued corporate earnings growth and possibly the quite high stock prices we have today. The near future appears primed for further growth as many U.S. consumers are getting raises, have little debt, lots of credit available and job security, all of which encourages more spending. While this all sounds supportive of another good year for markets, you must also consider risks to this view, specifically the relatively high stock prices and how further economic growth impacts inflation and interest rates.
The more an economy grows, the more demand there is for money, which increases long-term interest rates. Also, some policy initiatives voiced by the new administration (i.e. tariffs and deportation) are likely to result in higher costs for US companies. Regulatory reform and a more relaxed tax regime should boost earnings growth. Over the last 3 months, long-term interest rates have risen at almost the fastest pace ever because of these possibilities, and they could potentially go higher. Higher interest rates put downward pressure on stock prices, especially when they are already high.
August through October are historically the weakest and most volatile period for stocks and bonds alike. This year appears to be exceptional. Few expected the strength and resilience demonstrated by financial markets in the third quarter. The S&P 500 Index® posted a stellar 5.77% gain, posting year-to-date gains of 22%. Unlike recent years, the gain was not due to only a few large tech and communications stocks. We’re seeing overdue and much preferable broadening of stocks showing positive returns, and not just from the largest U.S. companies, but in small-caps and foreign markets as well.
The economy remains strong as the Fed begins its interest rate cutting cycle. Not too hot, and not too cold. Just like the story of a lost girl, everything is now “just right”. The Fed is done raising rates, employment strength continues, and economic growth is solid. These conditions amount to a “Goldilocks Scenario”, just about perfect to sustain corporate earnings growth and stock gains. Earnings growth should accrue to the value and small cap sectors, which until recently have lagged the large tech-dominated themes that were driving the market. At Integras Partners, we have been increasing our client allocations to these undervalued areas of the market for several months.
With lower relative prices, small-caps in particular should become even more attractive to investors, given that this Goldilocks scenario lasts for a while. We saw some confirmation of this in the third quarter as the lower P/E stocks began to outperform.
Integras Partners makes it easier to stay invested by actively managing client portfolios across our time-horizon strategies. We do this by keeping low-risk investments to provide for near term goals, allowing you more comfort with keeping longer-term investments intact through market swings. We can help you capture the long-term gains that volatile markets generate over time with less stress.
