Equities are riding a six-week winning streak, undeterred by a stronger dollar, rising yields, a less dovish Fed outlook, and election uncertainty – not to mention running counter to what has historically been a weak seasonal spot on the calendar.    The S&P 500 and the Dow are notching new record highs while the Nasdaq is closing in on its all-time high posted back in July.  On the week, the S&P 500 gained +0.85% (+23% for the year), the Dow rose +0.98%, the Nasdaq Composite by +0.80%, and the small-cap Russell 2000 ripped by +1.87% (touching a three-year high).  Being bearish when economic growth is firm, the labor market is still growing, and global central banks are in easing mode is akin to swimming against the tide – a strong swimmer can overcome, but the risk outweighs the reward.  

That’s the backdrop propelling equities today, but no matter how constructive the setup, investors need to come up for air and reassess the route at some point.  When working through my capital market signals checklist, nothing is flashing ‘red,’ but I think we are reaching a point where the ‘juice just isn’t worth the squeeze.’  That’s not a warning of an impending crash or that more upside juice can’t be squeezed out of the equity market, but the risk/reward for stocks, even with constructive tailwinds, is becoming skewed enough for me to take some chips off the board in client portfolios.   

The key question for the S&P 500 is what upside is left with a forward P/E multiple of 22x – 15% above the 5-year average (19.5) and nearly 25% above the 10-year average (18.0) – at a time when earnings are good, but consensus EPS revisions have begun to roll over for both Q4 of this year and for all of 2025.  Whether you look at valuations on a P/E, P/S, P/B, the Buffett Indicator or a CAPE basis, they all say the same thing – valuations are pushing historical extremes to the upside.   

In the past five years, the global economy has had a once-in-a-century pandemic, its recovery, and the most intense Fed tightening cycle in four decades, yet the S&P 500 has practically doubled in the past five years.  I’m not complaining, and the reality is what it is, but this rate of levitation isn’t sustainable.  Alternatively, if it is, we have other problems – ones you normally see in sovereign nations where trust and confidence have been lost in their governing ability.  Discipline and resolve are never easy to adhere to at times like this, and such qualities invite hostility from the masses who brush it aside, but successful investing is achieving consistent compounding over time.  Sure, that means maximizing returns when times are good but not giving it all back during the rough times. I’m not saying one has to be able to time the peaks and troughs with precision (very few have been able to do that), but recognition of a price bubble (which is what I think we’re getting into) and proactively reallocating during its formation is necessary for long-term success. 

Goldman Sachs recently put out a report highlighting that the forward annualized return for the S&P 500 over the next 10 years ranges from +7% to -1% with a baseline of +3% based upon current valuations. 

Based on this model, stocks are forecast to underperform bonds, with the 10-year T-note currently yielding 4.10%. The range of returns (stocks vs. bonds) is between +3 % and 5.0%, with a baseline of -1%.

Those thinking that they can hide out in the equal-weighted S&P 500 because the heavy concentration of the Mega-Cap Tech companies is driving the overvaluation and muted forward return profile would be mistaken (see the chart below from the Leuthold Group). 

This is the first of several big weeks on the earnings front, with 15% of the S&P 500 reporting.  The banks have the earnings season off to a good start, but this week will be a better tell with earnings reports from every sector of the S&P 500.  As for positioning and sentiment, it's nearing bullish extremes on some metrics and not quite there yet on other metrics.  Asset managers and hedge funds have gone all-in on the S&P 500, creating a very crowded backdrop in the process.  Per the latest CFTC data, this group is net long just over 700k S&P 500 futures and options contracts on the CME – approximately 25% of the total open interest.  This is near prior peak readings in 2021 (just ahead of the -20% correction in 2022) and just shy of the 2010 all-time high of 27%. Sentiment is also pushing back up to ebullient readings with the latest CNN Fear and Greed Index ticking over into extreme greed territory with a reading of 77.

None of these variables are reliable timing tools on their own, but collectively, they point to a one-sided backdrop that suggests the short—and long-term risk/reward profile is becoming increasingly challenged.    

Let me say this in the interest of being forthright.  While I’m souring on the investment setup going forward, I’m not tactically negative on equities for the balance of 2024 and into the first half of January.  I do think the S&P 500 is likely to push above 6,000 in the next several months, and while I’ll position capital for that expectation, I’ll also be reallocating along the way for what I expect to be a more challenging environment in 2025.  Asset bubbles typically only end when central banks tighten monetary policy enough to create a reversal.  While valuations look rich by all measures, it will be tough to get a meaningful reversal while the Fed and other global central banks are easing. 

It's not just the equity market, broadly speaking, that is richly priced.  So is corporate credit, with investment grade spreads at a razor-thin 86 basis points – the lowest in nearly 20 years.  High-yield spreads are now below 280 basis points – the tightest they have been since mid-2007.  Are you seeing the theme yet?  One does not have to have the perception that things are bad, because they are not, but a different way of looking at it could have you wondering how things could get better.  And if they did get better, how much upside would that drive for asset prices already priced for ‘everything is awesome”?   

One new development that I think is helping boost stocks is the rising prospect of a Trump victory on November 5th.  Don’t shoot the messenger, as I’m merely describing what the betting markets and recent polls reflect.  Still, all indications suggest this race is super-tight, but it’s the Electoral College vote that matters, and the most recent polls I was reviewing show Trump to be leading in five of the seven key battleground states.  Moreover, the price action in capital markets show investors positioning accordingly: gold, regional banks, small caps, and higher interest rates are all moving higher, which is what you would expect to be winners with a Trump victory – a sentiment shared by Stan Drunkenmiller in his Bloomberg interview last week.

No matter which candidate prevails in this election, the victor will have to contend with a tsunami of debt refinancing that will take place in the first 24 months of their administration.  We know neither is campaigning on fiscal prudence, but the fiscal irresponsibility of past administrations will become an obstacle for him or her.  From 2024-2026, nearly $15.5 trillion of U.S. debt is maturing and must be refinanced.  Janet Yellen and the current administration chose to lean heavily on Treasury bill issuance over the past year, which sucked a lot of volatility out of the bond market, but the next Treasury secretary will most likely have to term out some of this debt with longer-dated bonds.  Earlier this year, the average weighted coupon on the U.S. debt touched 2.3%, but is now closer to 2.6% and, without question set to rise further given where yields along the entire Treasury yield curve:    

The Curve — U.S. Treasuries

• 3-Month: 4.62%

• 6-Month: 4.43%

• 12-Month: 4.18%

• 2-Year: 3.94%

• 5-Year: 3.87%

• 10-Year: 4.08%

• 30-Year: 4.40%

This is one of several variables I attribute to the run gold is having en route to its +31% YTD gain to an all-time high at $2,750/oz. Investors need to recognize that we have entered an era of fiscal dominance, which is likely to put a floor under inflation, rather than the 2010 – 2020 era, which was led by monetary dominance and inflation had a ceiling. Globally, government debt loads are set to surpass $100 trillion this year for the very first time and fast approaching 100% of GDP – the case for gold from this unstable position condition could scarcely be stronger (and that goes for real assets in general).    

Speaking of real assets, the nuclear renaissance theme we’ve been focused on for the last five years got another shot in the arm last week when both Amazon and Google announced they were putting capital into deploying small modular reactors to power the energy needed to operate their data centers.  Admittedly, the demand for uranium, which is the raw material needed to operate nuclear reactors, was not in any analyst's model coming into 2024, and this only makes the math more constructive for uranium miners over the next 3-5 years.  I still think there is meat on the bone of this thesis, but a bit of near-term caution is warranted.  Most of the miners we hold in client portfolios or that I track have appreciated +40% – 100% over the past three months.  A bit of consolidation is likely in order before the next leg higher.    

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