Overview of the Financial Markets

12/14/25
S&P 500: 6827
Nasdaq: 23,195
10 Year Treasury: 4.1%

David R. Snyder, CFA

Below is an overview of the financial markets with historical perspectives.  There are many topics covered and this research paper is very long, but I invite the readers to choose the topics that interest them as they scan the paper.

VALUATION OF EQUITIES

All valuation measures (price/cash flows, price/book, etc.) on the S&P 500 are at all-time highs except for P/E’s but we are at 2.5 standard deviations on P/E.  Even median valuations are near all-time highs at a P/E of 19.  The equal weight indices are lower than the median stock valuations because of more individual equity outliers on the low end. But even the equal weighted S&P 500 index is near its all-time valuation highs at a 17 P/E. The equity risk premium is negative, which has only occurred in the 1998-2000 period and right before the 1987 crash. On normalized earnings the 12 month forward P/E is about 25 vs. 30 in March of 2000 as we now have above trend earnings.  

The highest growth in the economy is coming from the Mag 7 which makes up 37% of the S&P 500. That means the rest of the economy must be growing slower than in the past as there is only a finite amount of growth in the economy (earnings growth is correlated with GDP growth over the long term and GDP growth is lower now and will be even more so in the future than the last century due to demographics and less immigration). You can’t have it both ways. The biggest cap stocks have much higher growth than in the past.  So the argument that the other 493 are relatively cheap is flawed.  How are the other 493 cheap historically if they are growing a lot slower than they have in the past. For example, Amazon (AMZN 228) is valued at a 30 P/E while its retail competitors trade at lower relative historical P/E’s (relative to the S&P 500) as AMZN has doubled its retail share of retail spending over the last six years with retail share now over 10%.  AMZN is capturing more than 20% of every incremental retail dollar spent.  Thus, AMZN’s retail competitors are growing slower than before and also facing increased price competition. Why shouldn’t they have historically lower relative P/E’s?

Many investors believe the Mag 7 are going to slow down their growth and the other 493 are going to pick up their growth.  Even if that happens the S&P 500 overall is going to decline  because the Mag 7 dominate the index.  Also the overall index would still be way overvalued as the median stock is near all-time highs at a 19 P/E.  Nobody has discussed these issues and have not heard a good response from any of my peers. But it is so basic!

Some investors argue that P/E’s were higher in the late 1990’s when both short and long interest rates were higher giving the current stock market more room to run. However the core PCE inflation rate averaged 1.5% from 1997-2000, compared to the much higher core PCE inflation rates of the last few years. Also expecting another 3 standard deviation event is not a good investment strategy as it happens only 0.3% of the time. 

The P/E of the S&P 500 advanced from 9 in 2009 to 22 in 2022 (coincides with calendar years!) So one multiple point per year which of course wasn’t linear.  But that is how secular bull markets work.  In 2012 we were at an 11 or 12 P/E and profit margins and P/EBIT were at all-time highs.  The sovereign debt crisis was solved, US banks were securely capitalized, corporate earnings had been growing rapidly since 2009, and interest rates were low.  Job growth was 1.8 million (recovering 42% of jobs lost during the Great Recession) and GDP growth was 2.3%. There was a long runway ahead to get back to full employment. No way anyone could justify an 11 or 12 multiple then vs. 23 today. S&P 500 EBIT margins are only slightly higher today than in 2012. That is how secular bull markets work.  P/E ratios expand slowly over a 15 to 20 year time period.  Can you imagine if someone in 2012 said that the P/E should be 23 or if someone said today’s P/E should be 11 or 12.  They would be laughingstock of the investment community.  But they would be rational arguments. Status quo is so powerful.

If the S&P 500 today had the same P/E as in March of 2009, the S&P 500 would be 2772 instead of 6800. All of the increase above 2772 is just subjective valuation by investors. But subjective valuation has a very wide historical spread and we are at the very high end of that spread.  

Valuations don’t correlate with short term returns, but correlate very highly with 10 year returns. A valuation model I use that has been made better by Cypress Capital shows the highest correlation with future 10 year returns.  Since 1970, the average error for 10 year annual returns has been around 2 to 3%.  Thus, if the model forecasts 5% annualized returns for next 10 years, the actual results with high probability would likely be between 3.5% and 6.5%. It has only been inaccurate during bubbles (the late 1990’s and of course the last couple of years). It has predicted 0% 10 year returns only three times, and that was in 2000, January 2022 and again now. The 2000 forecast was exactly right even though earnings doubled during that period but was completely offset by a halving of the P/E ratio. The correlation is linear, meaning that 7 year returns are more correlated than 4 or 5 year returns. So we are already about to enter year 5 for the 2022 call meaning there is likely to be more correlation with short term returns (over next 6 years) since we have only 6 years left for the 10 year correlation to happen. My expectation is for the S&P 500 with dividends reinvested to only have 0 to 3% compound annual returns and zero to negative low single digit real compound annual returns over the next 10 years. 

The “toxic combo” of a P/E of 18 or above and and an unemployment rate below 4% (other than during wars) was triggered in December of 2019 and again in December of 2021.  Historically the toxic combo has provided the absolute worst 10 year returns over the last 100 years.  It was triggered in 1929, 1966, 1969, and 2000. So far the 12/19 trigger has provided decent returns but we are only in the first five years of that trigger. You make big money in stocks over the intermediate and long term when the unemployment rate goes from 10% to 4% as aggregate hours worked increases at double the rate of a constant unemployment rate, earnings go from below trend to above trend and when the P/E expands from 8 or 9 to 18 or higher if a bubble.  It is that simple.  We are as far away from this scenario as possible. We first dropped below 4% unemployment rate in 12/21 and have stayed at 4.4% or below since then.  If we stay below 4.4% through December, it will break the 2/66-2/70 record for extended low unemployment in peacetime.  We are on borrowed time. No way going to fall for the theory that cycles are obsolete. 

The S&P 500 has never had positive 10 year returns with the Case-Shiller P/E ratio this high. In fact it has been a disaster in the past.  Small sample but…. some argue that return on equity is higher than previous cycles and thus the valuations are justified. However, ROE is distorted as book value is artificially low because of massive buybacks above book value instead of reinvesting earnings.  The result is an artificial boost to ROE.   Also, the argument that book value should be higher because of R&D being expensed vs. capitalized and companies not carrying true brand value on balance sheet is flawed.   First R&D is a very small percentage of book value and second, brand value is more valid with consumer companies (technology companies have risk of becoming obsolete dramatically higher than consumer companies) which are of lesser weighting in S&P 500 now.  Finally, intangibles have been relevant for the last 40 years not just today. Even adjusting for these variables, price/book value is still near all-time highs. 

A big issue is whether or not the higher P/E’s of the last 30 years are here to stay. This is a really big issue.  Do we count the two bubbles (1997-2002 and the last few years) or do we ignore them as extraordinary events when calculating historical average P/E’s.  The bubble years also include the two years after the bubble burst as valuations decline but are still at extremes, extending the number of bubble years in historical valuation measures.  The valuations in 1999-2000 were a 3 standard deviation event (0.3% of the time). The historical median P/E (median for the S&P 500, not for individual components) is lower than the average because of more outliers on the high end. Without the twin bubbles, valuations really haven’t risen from the 20th century. From 3/09 until 2/20 (a full cycle) the average forward P/E was only 14.5. In order to justify higher valuations, higher earnings growth and/or steadier earnings growth is required.  ROE is at historical highs but that is distorted and ROE is always highest at the end of a secular bull market. If ROE returns to its mean, earnings growth will be lower.  Not buying the permanent higher earnings growth story.  And certainly not buying the less volatile earnings growth story.  In fact we have experienced way more extreme events in the last 40 years than the prior 40 years (1945-1985).  

The argument has always been that the US economy was transitioning to a service economy where service companies are less cyclical and deserve higher valuations.  But if that was the case then why did valuations not expand from 1945 until 1995 when the economy had already transitioned to mostly a service economy?

SECULAR CHANGES THAT SHOULD LOWER EQUITY VALUATIONS

There are many reasons that the P/E of the stock market should be lower not higher based on secular changes.  First the US deficit is over 100% of GDP and expected to worsen over the next 10 years.  There is a correlation of equity valuations worldwide with debt/GDP ratios when they exceed 100%.  The lowest P/E for the S&P 500 in the last 100 years was in the late 1940’s when the debt to GDP ratio was similar to today’s ratio.  Although Rogoff was wrong about countries growing significantly slower when their debt/GDP ratios exceed 90%, there is evidence that GDP growth is about 0.5% lower per year when debt/GDP is 90% or higher. Crowding out private spending is one cause of the slower growth.  And the higher the debt/GDP ratio rises above 90%, the slower the growth.  Also there is a risk that vigilantes cause governments to reduce fiscal stimulus for many years as was the case in Europe after the European sovereign debt crisis. This would slow economic and earnings growth. 

We now have a pandemic risk that wasn’t priced in to stock market before Covid and certainly not priced in today.   With population becoming more dense and world travel increasing, there is more likely to be more pandemics in the future. We won’t be able to stimulate the economy with 8 trillion dollars of fiscal and monetary spending in the next pandemic.   There is no discount for future pandemics. 

Global warming is a real issue. Not being political here just facts.  We are on our way to 2.5 to 3 degrees Celsius higher by the end of the century instead of the 1.5 degree goal, which will be devastating. Both the heat and the rise in sea levels of at least a few feet will hamper economic growth.  30% of the world’s population lives within 100 miles of the coast and most of the US wealth is on the coasts, which will be severely negatively affected by rising sea levels.  There have been 62% more extreme climate events this past decade than in the 1980″s.  60% of the $182 billion of climate related property/casualty losses in 2024 were uninsured and the trend will continue as properties become uninsurable or too expensive to insure. This is going to become a real negative for economic growth in the next 10 years.  The most accepted model forecasts unabated carbon emissions will cause global GDP per capita to be 23% lower by the end of the century then it would be without climate change. 

Trump is reducing public R&D spending significantly.  The 21% reduction in non-defense public R&D spending will reduce GDP by 3.4% in the long run according to one study. R&D increases productivity which increases real wages, return on investment, which then increases investment.  A 25% reduction would make an average American $5000 poorer. 

R&D spending accounted for 20% of productivity growth since 1948.  One dollar of federal R&D spending increases private sector R&D by $.25.  Each additional dollar of non-defense federal R&D spending increases GDP by an average of $11.50 in present value terms over 30 years. The R&D spending reduces the federal deficit over 30 years even if financed by debt. 

The founder of AI recently said that there is a 10 to 20% chance of human extinction within the next 30 years. That means there is probably a 30 to 50% chance of events leading to as much one third of the population dying. The stock market is way underestimating the threat of AGI leading to nefarious activities. There will be a need for a massive amount of regulation that will slow down AI. We will surely have more calamities that will affect economic growth. We have never had this kind of risk before.  There is no discount in the stock market for this risk. 

There have been significantly more volatile economic and financial events in the last 40 years than in the prior 40 years.  We had declines in the S&P 500 of 58%, 50%, two 35%, 26% and five 20% or more at least intra-day in the last 40 years, significantly more than from 1945-85 period.  We also had more extreme events and bubbles, starting with the savings and loan debacle in the late 1980’s. Why would that lead to a higher P/E today? More volatility especially with regard to extreme losses argues for a lower P/E. 

With all of the new technology for investors we are seeing much higher retail participation and trading, creating more volatility and bubbles than in the past. The unprecedented amount of fiscal and monetary stimulus over the last 30 years has also contributed to higher valuations, volatility and bubbles. This is unlikely to last as we have run out of ammunition. 

One of the biggest drivers of economic growth and earnings growth over the last century has been population growth. Last century population growth averaged about 1.3% from 1945 to 2000 and is now growing about 0.6%.  Population growth will continue to decelerate in the future with some estimating that world population growth ends by the middle of next decade. In any case it will slow down significantly over the next 30 years. It is even worse in the US and other developed countries. Deaths are expected to exceed births within the next five years in the US.  And with immigration coming to a halt, there will be very little population growth in the next 20 years.  Demographics (baby boomers retiring) make the labor force future growth even worse.  And the labor force grew at a 1.7% annual growth rate from 1965 until 2000 due to population growth and the dramatic increase in female labor participation.  The prime age participation rate is now near all-time highs and is not likely to go much higher. GDP growth is just hours worked plus productivity.  The US is now going to rely almost solely on productivity growth for GDP growth. Nominal GDP growth is highly correlated with S&P 500 earnings per share (EPS) growth.  Since 1947 EPS has grown 7.7% annually while the economy has grown 6.4% annually. The S&P 500 does get a slight boost from higher international growth as 35% of profits are from foreign countries. GDP growth is going to be lower in the future so why wouldn’t EPS?  Why should the US have its highest historical valuations with this backdrop.

When population growth (labor force growth) drives GDP growth, the logical thinking is that many new business are created that are not in the S&P 500 which would therefore take away some of the potential growth in S&P 500 earnings (i.e. the boost from faster GDP growth is not proportionate to growth in S&P 500 earnings).  But history reveals that this has only a minor negative effect on S&P 500 earnings growth. 

The great transfer of wealth over the next 20 years from baby boomers to Millennials has been cited as a major tailwind for the economy and stocks. The theory is that Millennials will spend more of their inherited wealth than their parents stimulating the economy and/or that they will allocate more of the assets to equities vs. bonds, boosting the stock market.  There is an estimated $80 trillion of baby boomer wealth that will be transferred by 2045 and $19 trillion of that is real estate wealth (mainly personal homes).  Charitable donations will subtract about 15% or $12 trillion. The equity portion of this transfer is about 50% overvalued.  Thus the $52 trillion in baby boomer equity investments are really only $34 trillion using average historic valuations.  Also, most baby boomers have similar equity allocations as Millennials (unlike the silent generation to baby boomer transfer), so there will likely won’t be much net increase in equity flows by Millennials.  The median retirement savings for baby boomers is only $185,000.  The average boomer has only $130,000 of home equity. Two-thirds of baby boomers will face income challenges. Thus the great wealth transfer will be very concentrated in the ultra wealthy whose offspring will invest very similar to them with the exception of possibly more alternatives such as private equity (which eventually becomes public equity). The top 1.5% will transfer 40% of the Baby Boomer  wealth. Thus, this transfer will not be a big tailwind to the economy and the stock market over the next 20 years. 

A big driver of earnings growth and higher margins has been the decreasing share of labor income as a percentage of revenues since the 1990’s.  This has begun to reverse and will no longer be a driver of margin expansion. Labor share has declined from 64% to 57% over the last few decades.  With lower GDP growth and likely higher share of labor of GDP, the only way earnings are going to grow at a higher rate (adjusted for buybacks) is for productivity to grow much faster than historical rates. 

The composition of the S&P 500 also should make the S&P 500 more volatile leading to lower valuations over the long term. Info tech is now 35% of the S&P 500 vs. 6% in 1992. Communication services replaced telecom (about 10% each) but its components are much more cyclical (TTD, PTON, etc.) today. Staples have declined from 14% of S&P 500 to 5% today. Financials are 13% today vs. 10% in 1992.  This has not been fully offset by the decreased percentage of consumer cyclicals (10% vs. 14%), industrials (8% vs. 13%). energy (3% vs. 10%), materials (2%vs. 7%), and utilities (2% vs. 5%).  Theoretically the S&P 500 should be more volatile based on its components.  Yes, technology is still a very cyclical sector.  The Covid recession has falsely led investors to believe it is not as that was not a normal recession.  Fascinating that during the 2022 26% bear market and the 20% intra-day bear market this year, low volatility became even more low beta to offset the higher volatile sectors.  For example, I manage some growth and income portfolios and they were actually up on average low to mid-single digit percentages in 2022 and were fully invested in equities. This is because the healthcare, utilities, staples and other low vol sectors had even lower than historical betas that year. This dynamic also occurred early this year.  But will this change in low vol betas continue in the future, especially in a recession? And of course we haven’t had a normal recession since these more volatile sectors have gained significant weight in the S&P 500. All things equal this should lead to a lower P/E due to higher potential volatility of the overall index. 

The Mag 7 which make up about 35% of the S&P 500 are not more reliable earnings growers than the rest of the S&P 500. In 2022 most of the Mag 7 had negative earnings growth and we didn’t even have a recession. Just wait until there is a recession. Nividia (NVDA 268) saw earnings decline 33% year over year starting in the July 2022 quarter and lasting for four quarters (one year). Alphabet’s (GOOG 279) earnings fell in 2022. Amazon’s (AMZN 244) earnings dropped a whopping 50% in 2022.  Meta’s (META 621) earnings declined by 38%.  Microsoft (MSFT 494) and Apple (AAPL 265) had three or four quarters of flat to down earnings growth beginning in the middle of 2022. The average drawdown of the equities of the Mag 7 from each of their highs in 2021 to their respective lows in 2022-23 was 56%.  Without a recession! Advertising is one of the most cyclical areas of the economy and META and GOOG are highly exposed. 

TARIFFS

Geopolitics and tariffs are also a new major headline that should cause lower valuations.  The increase in tensions internationally, especially between the US and both Russia and China is a deterrent to world economic growth and stability.  Increasing US isolation also dampens world trade. Deglobalization is a major negative factor for world GDP growth. After the Berlin wall fell and world economies adopted free trade, world GDP growth averaged 3.6% from 1994 through 2007. The trade to GDP ratio rose from 20% in 1995 to a peak of 61% in 2008 and has plateaued until declining again in 2023.  It is likely to plummet in the US due to tariffs.  World GDP per capita grew almost 1% per year higher from 1994-2007 then it has since 2010 (to be fair not using 2008 and 2009 since we were in the midst of a major recession) when globalization began to decline.  

Trump’s tariffs are going to permanently cost the US between 0.4-0.8% per year in GDP, or about $8500 in GDP per adult in the US. We do need to bring back some manufacturing for national security reasons, but subsidies are much more efficient than tariffs at achieving that goal. That is because they don’t raise domestic prices, don’t alienate foreign countries as much because there is no direct cost on foreign goods, less supply chain disruption, and are better at targeting specific market shares.  It is not true that US trade deficits mean that other countries are stealing wealth from the US.  Any current account deficit is offset by the capital account to bring balance of payments to zero. Thus, a foreign country that has a trade surplus with the US is offsetting their trade surplus with purchases of US assets including US government debt.  The US finances much of its budget deficits through foreign investments in US debt.  The US is taking advantage of foreign countries just as much as foreign countries are taking advantage of the US. There is nothing inherently wrong with trade deficits other than they are likely caused by budget deficits.  The US grew rapidly in the first 60 years of the 19th century with high trade deficits. All countries benefitted. 

Using tariffs to encourage manufacturers to invest in the US is bad policy and lowers economic growth for the world and the US. Trump wants AAPL to build iPhone’s in the US even though they would cost on average over $2000 per phone vs. $700 in India or China.  Yes it would add jobs for building and then operating the new factory.  However, if we are at full employment it will result in just substituting jobs from other industries. The compensation premium for manufacturing jobs relative to service jobs has declined markedly since the 1980’s to single digit percentages with some studies showing it has disappeared. Because AAPL will either have to sell the iPhones at higher prices or keep prices the same but have lower profit margins due to the higher costs of production, US economic growth will suffer either way.  Higher prices will cause lower demand or if consumers are willing to pay the higher prices (inelastic demand) then they will have less money for other purchases.  APPL’s supply chain will also suffer if demand for iPhones is lower.  Foreign countries that were exporting the cheaper iPhones will then have less money to purchase US exports and assets.  There is a multiplier effect on the US economy leading to lower economic growth and/or higher prices. The additional jobs created initially would likely decrease as price pressures decrease demand. And certainly the new jobs created would not offset the negative wealth effect from the resulting lower economic growth under any economic model.  The AAPL example is a microcosm of what is happening to the US economy.  Comparative advantage is being negated.  

Tariffs also invite cronyism and that certainly has been true under both terms of Trump’s presidency. Tariff exceptions have been highly correlated with campaign contributions to Trump. It was clear that Trump’s carved out exception for smartphones and computers made in China was done to exempt AAPL, as they are the biggest beneficiary of the exemption. The deals and exemptions Trump extracts from corporations to promise to invest in the US are uneconomical.  Most of the promised investments are operating expenses anyway or were already planned. 

US non-tariff barriers are as restrictive as most foreign non-tariff barriers.  The Buy America Act of 1933, Build America Buy America Act of 2021 and the Jones Act are all examples of US favoring domestic contractors. Shipping costs in the US are triple the rate of overseas shipping costs due to the Jones Act.  Also, municipalities favor domestic contractors. The VAT is very similar to the US sales tax. Japan and Europe don’t buy American made cars because they don’t offer cheaper smaller fuel efficient SUV’s (with steering wheels on the right hand side in some countries) not because of non-tariff barriers. The US subsidizes agriculture on average $30 billion per year.  And the IMF calculates that the US fossil fuel industry is subsidized by $758 billion per year in direct and indirect costs. 

The US now has significant higher import tariffs on our 25 biggest trading partners than vice versa. Trump’s tariffs are not reciprocal. They are punitive.  It was a positive development for foreign countries to eliminate their tariffs on US exports, but it was significantly more than offset by the US raising the effective tariff rate to 17% on US imports of foreign goods. Many of these tariffs don’t even further the goal of bringing manufacturing back to the US.  For example Trump placed 20% tariffs on Vietnamese imports. It costs over 100% more to produce shoes in the US than in Vietnam.  Shoe manufacturing is thus not coming back to the US because of a 20% tariff, and the tariff is just a tax on the American consumer. Similar scenario for the new furniture tariffs. 

One of the least discussed bad effects of tariffs is the complacency they create.  The Jones Act that restricts shipments to US vessels in the US causing rates to be multiples higher.  In fact Philly recently had to import oil even though the oil was cheaper in the US because of high US shipping costs. No where is this more evident than in autos.  In 1965 the US enacted a “chicken tax” of 25% on foreign imports of light trucks, vans and some SUV’s. At the time the US manufacturers had close to 85 to 90% market share of all autos sold in the US. Today they have less than 25% of the sedan market but still 85 to 90% of the full size light truck market because of the tariff protection.  Also the incentive to produce light trucks and SUV’s has caused the sedan market to collapse to under 25% of all cars sold in the US from over 75% in 1965 while light trucks have increased their share of autos sold in US to 23% from 5% in same time period. Classic response to trade barriers in a free market economy!  

Tariffs are going to cause the US manufacturers to fall behind the global shift to EV’s.  The 100% tariffs on Chinese EV imports are causing domestic auto companies to focus more on ICE cars as the threat of EV imports dissipates. China is dramatically ahead of the US in EV technology, quality and cost.  Eventually the world is going to reach 100% EV’s and the US auto companies are going to be left behind.

NVDA is a design company.  It is probably the most remarkable success story in corporate history, reaching $5 trillion in market capitalization recently. It is a fabless company that outsources its manufacturing.  Its value now exceeds any semiconductor manufacturer by a wide margin.  Intellectual property and design are the highest value added products in the world! That is our comparative advantage that benefits the US and the entire world. 

The stock market also doesn’t have any discount for our new planned economy. We are moving away from a free market system.  Trump is telling corporations where to invest, what to invest, and what prices to charge. He is bullying companies to comply with his demands.  He even is demanding government stakes in companies without paying for them.  One of the most outrageous demands was requesting a 10% stake in Intel (INTC 35) without consideration as a payback for the government subsidies given to INTC.  The CEO of INTC had no choice. If he had said no there would have been likely negative implications for INTC.  Trump has now jeopardized all future subsidies as companies will have to consider the possibility of paying subsidies back through giving government free stakes in their companies.  This is a big, big deal that wasn’t critiqued enough. It sets a new anti-capitalist precedent.

PRODUCTIVITY

Productivity growth is supposed to be the savior for high valuations and lack of employment growth, but so far that has not been the case. Productivity gains in 2020 and 2021 were attributed to higher capital intensity and labor composition. Coming out of recessions there are fewer workers from an increasing level of output (capital intensity) and fewer workers with less education (labor composition). But once the economy is back to normal total factor productivity (TFT) which represents true innovation takes over as main driver of productivity growth. The data show improved TFP beginning a year after the recession but not much higher than the last decade. We had strong productivity growth in 2024 (2.7%) and 2023 (1.9%) but those figures are overstated as they are merely a rebound from the long period of negative growth in productivity growth from 4Q21 through 2Q23.  For the first half of 2025 annualized productivity growth has been 0.75% and for the year is expected to be About 1.5%.  The biggest productivity gains occur the year after a recession, and then diminish over time (In addition there was a one-time second boost to productivity in 2023-24 when supply chain issues were resolved). That is the case again with this cycle, and overall productivity gains have not broken the lower productivity long term trend from last decade. 

Productivity growth is not a panacea. Productivity growth from 2000 to 2004 averaged 3.2% annually above the rate of 3.0% from 1995-1999. Yet GDP averaged 2.7% annual growth vs. 4.3% from 1995-1999 as aggregate hours worked fell by 0.6% per year. The S&P 500 declined 6% per year in real dollars from 2000 to 2004. Expect productivity to accelerate from 2026 or 2027 to 2032 due to AI but the stock market could still perform poorly just as it did from 2000 to 2004. Big cap technology companies actually held back productivity growth last decade because of their monopolistic practices.  Tech stocks had one of their best decade’s performance, yet productivity was well below historical levels. Unless antitrust laws are enforced more this could be a major problem again in the next ten years.           

HOUSING BUBBLE

The housing bubble is significantly understated. From 12/19 to 7/22 the average housing prices increased 43% or 29% after inflation using a housing price model that combines median and average like for like property sales from Zillow, Redfin, HUD, FHFA and Case-Shiller and National Association of Realtors. Housing prices compound annual rate of appreciation for 2 1/2 years was 15.1% or an 11% real annual compound rate.  Nothing in the early 2000’s housing bubble came close to these annual compound rates for the same time period.  From 7/22 to 8/25 my model shows housing prices rose 7% while the CPI increased 9%, thus increasing at a rate below inflation. HUD data shows housing prices actually dropped during this time frame by 7%, and in real terms declined over 15%.  But HUD data tracks lower income housing buyers. Overall, from 12/19 through 8/25 housing prices increased 51% with real annual compound appreciation of 4.6%.  To put it in perspective from 12/99 to 12/05 housing prices increased 43% with a real compound annual returns of 5.9%. Last century housing prices rose on average about 1% per year above the inflation rate, thus the 4.6% real annual returns of the last six years are well above historical appreciation. Still significantly overpriced.

The big difference between the current housing bubble and the bubble in the early 2000’s is the lack of leverage today.  Bubbles can burst in different ways.  There can be a sudden burst as in the 2007-08 period or just a slow deflating of the bubble over many years.  When housing prices became overheated in the late 1980’s they proceeded to increase at a 2.2% annual compound rate from 12/89 to 12/97 vs. a 3% CPI annual compound rate.  Eight years of negative real annual returns in housing prices allowed housing prices to revert to their mean in real terms. That is what has been happening for the last three years. 

The average mortgage rate in 12/19 was 3.8% vs. 6.4% today.  The median priced house today is about $365,000.  With 20% down payment that leaves a mortgage of close to $300,000 (rounded for simplicity). The average payment for a 30 year mortgage of $300,000 would be $1896.  In 12/19 the median price of a house was about $245,000.  With 20% down payment that leaves around a $200,000 mortgage.  At a 3.9% 30 year mortgage rate back on 12/19 would yield a monthly payment of $944.  Thus for the same median priced house a home buyer is paying double the monthly mortgage payment today vs. the end of 2019! But median household income has only increased 22% from $68,700 in 2019 to $83,730 in August of 2025. It is surreal. Affordability is worse than in the early 2000’s. 75% of US homes are unaffordable for the typical US household.  And rent is not much better as over 50% of renters are paying more than 30% of their income for rent. 

The demographics for housing are very negative. I don’t believe that we are short five million homes.  The proponents of that theory use 2012 instead of 2000 as then starting point for household formation, overstating the need for new homes.   Much of the growth in the population has been from immigration who have low house ownership rates. Only 27% of                                                                                                                                                                                                                    undocumented immigrants own a home, with still only 45% owning a home after being here 10 years or more. Even legal immigrants have lower home ownership rates at 56%.  It takes 5 to 10 years for immigrants to buy a home.  Baby boomers who own most of the houses are eventually going to go to retirement or nursing homes, or die.  They are not going to live forever. That will unleash a huge amount of supply on the market.  With birthrates dropping significantly after 2007, we know that the native population of 18 to 40 year olds will decline over the next 20 years, leaving fewer potential new home buyers. There will be a catch-up trade for millennials at some point but it won’t change the long term picture. There is only one real solution for the current overpriced market and that is to let prices fall or grow below the inflation rate. Lower mortgage rates are not helping the housing market now because it barely makes a dent in affordability. A recession would certainly provide a reset.  But without rising housing prices consumer spending based on wealth effect will no longer be a positive catalyst. It has clearly helped increase high end consumer spending. 

2020-21 HYPERGROWTH BUBBLE

One of the most underrated and significant events was the hypergrowth and “work from home” stocks as well as crypto bubble in 2020-21.  The EV/EBITDA and price/sales ratios for the median or equal weighted internet and software/cloud stocks reached levels very similar to the levels in 1999-2000.  Snowflake (SNOW 268), for example was trading at over 100 times forward sales in 2021!  The only difference was that the largest growth stocks were trading at much lower valuations than in 1999-2000. I wrote over and over about this bubble from November of 2020 through February of 2021, predicting it would burst within a couple of months which it did. I predicted that the hypergrowth stocks with the ARK Innovation ETF (ARK 76) being the best proxy, would be the Nasdaq of 2000, Which was correct, as both fell about 80%.  The “work from home” stocks also were trading at their highest historical valuations boosted by the unprecedented $8 trillion of monetary and fiscal stimuli.  Anything tied to “stay at home” including ecommerce of course went into bubble territory.  Consumer goods were 31.5% pre-Covid but increased to 34.1% in first quarter of 2021. It is now back to 31%. I argued repeatedly that it was pull forward, a contrarian call, which again proved correct. Home Depot (HD 362), for example had eight consecutive quarters of negative same store sales from 2023-24.  Most of these stocks still have not recovered and probably won’t recover until after the next recession. I wrote in 2020-2021 that SPAC’s were one of the worst structured product investments ever and have only invested in Draftkings (DKNG 35) and Sofi (SOFI 26).

Crypto was also part of this bubble as the total value of all crypto declined 80% from $3.2 trillion to $650 billion from October of 2021 through January of 2023. It now has the same value as four years ago, underperforming the stock market significantly with much more risk. The metaverse and NFT craze also came undone in late 2021. Metaverse properties and NFT prices declined 98 to 99% from their peaks with 95% of NFT’s now worthless.  I wrote in 2021 about the coming crash in these speculative so called assets and was told that I couldn’t see the future.  I actually believe in the metaverse but not at the prices of 2021, especially for virtual land. As for NFT’s just never understood the concept of paying to own something digital when copies are available online. There will be some case uses for NFT’s such as gaming and ticketing, but just about everything will be tokenized, thus everything linear will be digital.  Why should something be worth more in digital form?

SPAC’s were the most speculative of these hypergrowth stocks. There were 861 SPAC IPO’s in the 2020-22 time period, raising $250 billion. There were 488 SPAC business combinations from 2021-23 totaling $470 billion.  In 2022 the de-SPAC index fell 75%. More than 90% of them trade below their $10 IPO price. 

SPAC’s were about 50% of all IPO’s from 2020-21. The number of IPO’s in 2020-21 was almost double the number of IPO’s in 1999-2000 (1522 to 819). Total capital raised was $505 billion in 2020-21 vs. $177 billion in 1999-2000. Adjusting for the increased value of the stock market in 2020-21 vs. 1999-2000, the total value raised was similar between the two periods.  However, if we add in the additional $700 billion in de-SPAC transactions which were essentially IPO’s, the total value of IPO’s in 2020-21 dwarfed the IPO’s from 1999-2000. Even if the $250 billion of SPAC IPO’s is subtracted from the $700 billion in de-SPAC transactions because most of that money was used to buy the private companies, the 2020-21 period still is much higher in terms of capital raised for new public companies. 

The average IPO first day performance in 1999 was 90% and 170% for the year. In 2020 the average first day IPO performance excluding SPAC’s was 38%, and 41% for the first six months of 2021. Also many of the de-SPAC deals caused spikes of 50% or more on the day they were announced.  Not as strong as 1999-2000 but still very speculative.  I was one of the few who wrote negative reports on SPAC’s and hypergrowth stocks in 2020-21 before the bubble burst. 

The aftermath of the hypergrowth/SPAC bubble was a disaster.  Between the hypergrowth/SPAC stocks and the “work from home” stocks, there were almost 1000 stocks that lost at least two-thirds of their value from their highs in 2021 to their lows in 2022-23. Most of them have not recovered their losses four years later. It is significantly under-discussed.  This was a tremendous bubble that burst.  Affirm (AFRM, 70) for example, as well as it has done the last couple of years is still 60% below its 2021 high. Ditto SNOW.  It is relevant today because those kind of bubbles only happen once in a generation as I wrote back in 2021.  We are unlikely to have another hypergrowth and IPO bubble on the same scale as 2020-21 before this secular bull market ends.  

2000 VS. TODAY COMPARISON

Another big myth is that today is different than the late 1990’s because most of the late 1990’s tech companies were not profitable, unlike today.  Everybody uses Pets.com as the proxy. That is not true. I kept my Value Line reports from 2000-2003, which featured 2250 individual equity reviews.  Those are real time reports so there is no retroactive analysis or survivor bias.   Of the 272 tech related equities covered by Value Line back in that period, 243 or 89.3% of them were profitable in the 1999-2000 period. Not only were they profitable but a vast majority of them were growing sales and earnings at an accelerated pace.  They were the best performing stocks as well.  The following are each Value Line tech subsector and in parenthesis are the number of companies profitable in the 1999-2000 period.

• Wireless equipment (12 of 15)
• Electronics (27 of 27)
• Semiconductor (37 of 38)
• Semi Equipment (14 of 14)
• Computer & Peripherals (27 of 29)
• Ecommerce (15 of 19)
• Foreign Electronics (8 of 8)
• Computer Software & Services (48 of 53)
• Telecom Services (11 of 18)
• Internet (8 of 15)
• Information Services (14 of 15)

Many of these companies did become unprofitable in the 2001-2003 period but up until 2000 they experienced surging sales and profits.  So they were really just overvalued stocks in 2000 not profitless. 42% of Russell 2000 stocks are unprofitable today vs. only 24% in 2000. And many of the fiber-optic companies that were building out the internet were profitable such as AT&T (T 26), Sprint, Quest, and Verizon (VZ 42).  Even MCI Worldcom initially reported big profits in 2000. The cable companies who also built out the fiber-optic networks were operating cash flow positive. Only the CLEC’s were mostly unprofitable and cash flow negative. 

There are plenty of unprofitable companies today in sectors related to AI. C3.ai (AI 15), Applied Digital (APLD 31), Coreweave (CRWV 85), Nebius (NBIS 103), Super Micro (SMCI 33), Nuscale Power (23 SMR), and Oklo (OKLO 103) are just a few of the AI stocks that are not making money.  And some of the hyperscalers will be cash flow negative next year. 

Also it is another myth that breadth was so bad in the late 1990’s that nothing else appreciated. Merck (MRK 101), Citigroup (C 108), General Electric (GE 292), and Exxon (XOM 117) each outperformed the S&P 500 until the last few months of that bull market despite having nothing to do with the internet. These were four of the largest companies in the S&P 500 (4 of the top 10 S&P 500 market capitalizations in 2000).

SECULAR BULL AND BEAR MARKETS

This secular bull market which began on 3/9/09, is now 16 years and 8 months long.  The last two secular bull markets lasted 17 years and 7 months (8/82-3/2000) and 16 years and 7 months (6/49-1/66).  There has been a consistent pattern of alternating secular bull and bear markets since 1815 with most lasting between 15 and 20 years.  The secular bull markets usually have average real compound annual returns of 12 to 16% vs. the long term average of 6.5%. The current secular bull market which began in March of 2009 has so far produced real compound annual returns of 13.7% vs.15.1% from 1949-66 and 15.5% from 1982-2000. Secular bear markets have also mostly lasted between 15 and 20 years and have produced flat or slightly negative real compound annual returns. The lowest real annual compound returns were negative 7.6%, from March of 2000 to March of 2009. Although these were the worst bear market real returns, the bear market only lasted 9 years. My thesis has always been that the current secular bull market would not be quite as strong as in the past as we only experienced a 9 year bear market (despite the more negative annual returns) but it has been almost as strong. Interesting that the short eight year secular bull market from 1921-29 produced almost double the real annual compound returns of other secular bull markets at 28%, almost making up for the shorter time period.

There also have been very consistent major 25 to 33 year cycles where the stock market makes a major decades low in valuation and negative returns. These occurred in 1861, 1896, 1921, 1949, 1982 and 2009. That would mean the next major secular low is scheduled to occur between 2034 and 2041.  That is relevant today because it takes many years for the low to develop with the top usually occurring at least a decade before the secular bottom. Expect the S&P 500 P/E to fall below 10 sometime during that time period wiping out at least a whole decade of earnings.  

All of these secular market patterns point to a likely end to the current secular bull market within the next two to three years and more likely sooner, with next year being my best estimate. 

FIXED INCOME AND GOVERNMENT DEBT

According to the consensus one of the biggest risks to the stock and bond markets is the 100% US debt to GDP. Many have been arguing that 10 year Treasury bonds will trade down as the Fed lowers interest rates.  They cite the fall of 2024 as an example as the yield fell from 4.74% in April to 3.6% right before the Fed made its first cut in September.  The yield then rose to 4.45% by February of 2025. But that was a case of the bond market anticipating the Fed cut.  Also both economic and inflation data spiked at the end of 2024, limiting further Fed rate cuts in 2025.  A very unique case.  It had nothing to do with rising US Treasury debt. The US Treasury 10 year yield is currently 4.1% which is about 160 basis points above the expected inflation rate.  This is in line with the average since the early 1950’s of 165 basis points (although it has been highly variable with the highest real rate of 8% in 1982 and the lowest real rate of -5% in 2022).  Everybody has got this trade wrong as the 10 year yield has fallen this year.  Over most time frames of the last couple of years, the 10 year Treasury has been a better investment than shorter term bonds.  I have been bullish on the 10 year Treasury for the last couple of years especially when it rose to the mid to high 4’s which has been the right contrarian call.  At the 4.1% level I am neutral but expect rates to move up next year. 

The biggest risk for the consensus is for inflation and long term bond yields to rise due to the increasing government debt over the next decade.  The projected tariff revenue to reduce the future deficits will be much lower than projections as companies relocate to lower tariff countries or back to the US.  If the bond vigilantes take longer term bond yields higher because of higher debt levels, the US government will simply finally reduce deficits, which will slow economic growth and keep inflation lower. Developed countries react differently than emerging markets when responding to big budget deficits.  They have the economic and political wherewithal to take action to reduce deficits when pressed. We know what will happen because it already played out in the European sovereign debt crisis in 2010-12.  Spain and Italian 10 year sovereign debt yields spiked to 6 to 7%.  But European countries in response cut their budget deficits which resulted in a second recession and a very slow economy for the rest of the decade. Inflation remained low and bond yields retreated back to normal levels.  That is exactly what is likely to happen in the US if yields surge. The bad news is that it took SpaIn and Italy until 2024 to reach 2008 GDP levels, a lost 15 years. Even in Euros it took until 2018 to reach 2008 GDP levels.  

However, in the last few years both Spain and Portugal have been able to reduce their budget deficit/GDP ratios significantly through public spending reductions and increased immigration. Immigrants pay more in to the system than they take out and are very positive for GDP growth. Spain has reduced their debt/GDP ratio from 134% in 2020 to 100% in 2024 while Portugal has reduced the same ratio from 138% in 2020 to 98% in 2024 with low rates of inflation.  However, both ratios are only back to their 2016 levels.

There is a big myth that the only way out of higher debt to GDP ratios is to inflate and grow nominal GDP faster than the increase in annual federal budget deficit.  This is not true as just shown in the cases of Spain and Portugal over the last few years. Government debt held by the public in the US went from 104% in 1945 to 34% in 1967. During that time period US government debt increased 27%, an average annual compound rate of 1.3% while inflation compounded at a 3.4% annual rate (slightly above the long term average of 3%).  We actually reduced the deficit dramatically with high real GDP growth, fiscal discipline, and average inflation, not with high rates of inflation.  The US debt to GDP ratio bottomed in 1973 at 27% but then flatlined until the early 1980’s despite hyperinflation. 

The debt to GDP ratio is back to over 100%, but this time the US will stay in a real rut as immigration levels stay low over the next couple of years and substantial annual budget deficits continue to increase the debt to GDP ratio. However, even in a worst case scenario of debt rising to 128% of GDP, the US would only have the same ratio as that of Italy. Currently Italy’s sovereign 10 year debt is yielding 3.5%, 60 basis points below the US 10 Treasury bond. Thus, no credit concerns at 128% debt to GDP ratio. 

Global debt to GDP ratio has risen from 292% in 2008 to 324% in 2025.  Non-financial global corporate debt has risen from 79% to 92% of global GDP since 2008.  In the US, debt has grown from 290% to 335%.  Household debt was transferred to government debt while the corporate debt to GDP ratio only increased moderately. These historically high debt levels are not at stress levels because interest rates have been so low since the financial crisis. However, interest rates and especially real interest rates have been rising since 2022.  About 38% of corporate debt will be refinanced by 2030, with rates averaging about 200 basis points higher, which will be a headwind to corporate earnings especially when spreads widen.  

The higher rate refinancing will be a real issue in the future as the median company in the S&P 500 has a net debt/EBITDA of 1.9, which is in the 93rd percentile since 1980. Lower interest rates have hidden this potential problem as interest coverage is high. Another issue is that BBB corporate bonds now make up over 50% of investment grade bonds, an increase from 38% in the early 2000’s. Many institutions have to sell corporate bonds when they are downgraded to junk status, thus a downgrade of the lowest grade investment bonds can set off panic selling. But the most vulnerable part of the debt market is the $2.1 trillion private credit market.  This sector of the market has not been tested in downturns.  We have not had a true downturn in the credit cycle since 2008, which is unusually long. There are many excesses in this sector. 

STOCK BUYBACKS

Stock buybacks have been a major feature of this secular bull market, especially last decade when they contributed to over 20% of S&P 500 earnings growth. However, the accretion to earnings growth is much less today because of the extremely high valuations of equities. Over the last decade S&P 500 buybacks were about 60% of net income while dividends were 40% of income.  The combined dividend and buyback yield has been on average 4.5%. In some recent years buybacks have exceeded capital expenditures. Just because buybacks are accretive does not necessarily make it the best use of capital.  AAPL buying back their stock at a 35 P/E does not enhance shareholder value.  Allocation of capital depends on cost of capital and projected returns on alternate uses of capital, including dividends.  But buying back stock when the equity is overvalued is not enhancing shareholder value, even if it is accretive to earnings.  Thus, current buybacks for the S&P 500 are less accretive and also decrease long term shareholder value. Yet investors are ignoring this dynamic. There are very few CEO’s similar to Warren Buffet who wisely only buys Berkshire stock back when it is undervalued. 

CRYPTO AND GOLD

October marked the end of the fourth year of the Bitcoin cycle and a likely intermediate top based on past cycles, which would also be the beginning of a down cycle for the rest of crypto.  This will have a major negative effect on the stock market as the $3.2 trillion crypto market is made up of the marginal buyers of stocks.  If crypto declines significantly, crypto investors will be forced to liquidate their stock holdings, especially their speculative stocks. This is a major new risk for the stock market that first showed its impact in 2022.  Bitcoin has been a leading indicator of the stock market with the last lag on the downside in 2021 being three months or nine months if the peaks in 4/21 and 10/21 are considered a double top.  In 2018 it’s lead time was 10 months.  

Bitcoin began trading in 2009 and was a response to the massive monetary and fiscal stimuli during and after the financial crisis. The thesis was that the massive stimuli would cause high inflation, doubts concerning US ability to repay debt and dollar depreciation, with resulting loss of purchasing power. Thus, Bitcoin would be a secure alternative store of value with its blockchain technology and fixed supply.  The Bitcoin bulls often cite the purchasing power of one dollar in 1918 being worth only five cents today (adjusted for inflation) and thus investors have lost money in real terms just holding cash.  However, that is an absurd argument as that assumes investors kept their dollars under their mattresses since1918.  If an investor just rolled over risk-free liquid short term Treasury Bills (T-Bills) since 1925, they would have earned 3.4% compounded annually and 60 basis points annually more than inflation. According to a Morningstar study, since 1954 (the Fed became more aggressive with monetary policy starting in the early 1950’s), T-Bills earned 64 basis points annually more than the inflation rate with outperformance in two-thirds of rolling 3 year periods.  The average marginal tax rate in the US is about 25%.  Thus, after tax returns would be about 20 basis points below the inflation rate in the US.  But 35% of investments in the US are in tax deferred vehicles.  Therefore, the after tax return of combined taxable and tax deferred assets invested in T-Bills equals the exact annual inflation rate.  And remember more risky assets that have higher returns than T-Bills still are subject to capital gains tax when sold. 

Despite continuous federal deficits over the last 25 years causing the federal debt held by the public to reach 100% of GDP, the annual inflation rate has only averaged 2.5% since 1995 with only three years above 3.4%.  This 30 year period is one of the most stable inflation rate periods in the history of the US.  Yet Bitcoin bulls believe the US dollar has been somehow debased. 

Michael Saylor, chairman of Microstrategy (MSTR 171), a Bitcoin Treasury company, recently said that his house was worth $100,000 in 1930 and is now valued at $46,000,000.  He argued that the 1930 dollar lost 99.9% of its value.  But of course higher risks investments are on average going to return more than risk free investments such as T-Bills. Basic finance theory and common sense.  He failed to mention that his house probably lost 70 to 80% of its value during the Depression while T-Bills held their value.  Much higher returns are required for much higher volatility.   Stocks, which are more risky investments than residential housing, returned even more than his house since 1930.  In fact, $100,000 invested in stocks in 1930 would be worth about $1.2 trillion dollars today. 

Bitcoin bulls contend that the US dollar will depreciate and lose its status as the world reserve currency.  Nothing could be further from the truth. First the US dollar has been a very stable currency over the last 70 years. The broad price-adjusted US dollar Index published by the Fed (adjusted for the aggregated home inflation rates of all included currencies) has been in a 20% band between 85 and 105 90% of the time over the last 65 years. The dollar index is about the same level as it was in 1969!

Global trading in foreign exchange markets is 89% in US dollars vs. 90% in 1989, barely a blip. And that is with daily exchange turnover volume of $10 trillion. The US dollar share of foreign reserves has dropped to 58% but that tends to be correlated with the value of the US dollar which declined over the last year. The 58% share is higher than the early 1990’s when it fell below 50%. There is little sign of US dollar erosion in trade invoicing with the share of USD and EUR holding firm at 40-50%. Also, foreign holdings of US Treasury debt has declined form 50% in 2008 to under 39% today.  And as discussed earlier, the US deficit issues are overblown with regards to ability to pay and outweighed by US exceptionalism. 

The proponents of bitcoin argued it is a store of value, a means of exchange, and a non-correlated asset.  They have been wrong on all three accounts as I have repeatedly forecast.  Even though Bitcoin has increased dramatically since its inception, it has traded similar to high beta speculative stocks, especially speculative tech stocks.  High beta assets are not stores of value. The analogy would be buying Sirius XM Holdings (SIRI 20) at the end of the financial crisis (2/09) at $.50 and as of today making fortyfold on the investment and as high as eightyfold at its peak.  SIRI managed to make a remarkable recovery.  Does that make it a store of value? Speculative stocks that end up being big winners are not stores of value. 

Bitcoin has not been a non-correlated asset, at least since 2018. It has been highly correlated with speculative stocks at least in recent years, with a beta over 2. Thus, it has been both high beta and correlated.  As it has become a more mature asset, its returns have not provided any alpha since 2018.  And this year Bitcoin beta was approaching one with returns similar to the S&P 500 until the recent sharp decline.  As far as a medium of exchange, it has failed because of its volatility as well as not having any real value.  The share of US consumers who use crypto for payments has not increased from 2021’s 1%.  Bitcoin used for transfers has actually declined from 0.7% in 2022 to 0.5% in 2024. El Salvador adopted Bitcoin as legal tender in 2021 and it has been a disaster.  Despite a myriad of incentives including giving each citizen a $30 Bitcoin bonus, only 8% use Bitcoin and almost no businesses accept it even though the government mandated businesses to accept it as legal tender. It even caused the major credit agencies to downgrade their credit ratings. They still prefer to hold and use dollars. 

I never believed in crypto and specifically Bitcoin until 2020 when it became apparent that enough people believed in Bitcoin it will have some staying power.  Even though Bitcoin has no economic value, if enough people believe in it then it can have staying power. When Coinbase (COIN) went public in 4/21 I wrote that Bitcoin had reached its top for the cycle at $63,104.  The price of Bitcoin only slightly exceeded the April price (double top) in October, before collapsing. I then recommended closing out half of Bitcoin shorts at about $19,000 and then the rest later at $28,000. 

I have argued endlessly with crypto bulls since 2020 that the real value of crypto was in the blockchain technology that would be adopted by traditional finance companies. My strong view has always been that the blockchain technology would be the layer 1 and 2 for stablecoins and tokens, which would be the real use case and growth sector.  But the bulls always argued that would never happen because stablecoins were still backed by the US dollar. With stablecoins and token use skyrocketing, the crypto bulls now have conceded that point. Their hope is that some of the crypto’s currently traded will be the layer 1 blockchain of many of these stablecoins. But Bitcoin is not being considered as a layer1 blockchain for most stablecoins and is being left behind on real use cases. 

Other cryptos such as Ethereum and Solano appear to have some clear economic value as platforms for stablecoin but the race is early.  Also, it is my view that the traditional finance companies are going to adopt their own blockchain technologies, especially layer1 blockchain, to control the whole payment process and not pay out fees to third parties. The two biggest issuers of stablecoin, Circle (USDC) and Tether (USDT), have developed or backed their own layer 1 blockchains, Arc and Plasma (XPL). Stripe, an innovative payments company, is also developing its own layer 1 blockchain, called Tempo.  Stripe wants to own the full technology stack and control the economics and user experience for stablecoin-based finance. JPM coin (JPMD) operates on multiple blockchains, including JP Morgan’s own private permissioned blockchain. 

I have asked many of my clients and peers what they desire in a payment system.  They want security, speed and permissionless transactions.  However, they still want some very limited central authority overseeing the transaction to protect them.  So they really want a permissionless system except for the added limited central oversight.  It is likely that the result will be a consortium of private blockchains run by financial institutions that are compatible with each other. Ethereum’s role may be limited as their best case scenario is that banks integrate their private networks with public blockchains or that banks develop  Layer 2 networks on top of Ethereum layer 1 networks, but then Ethereum’s fees would be significantly reduced. 

Bitcoin though has no value because other cryptos are faster, better and more efficient as payment and transfer platforms.  The analogy would be that if a company sells pens at $1 each and costs $.90 to manufacture, and another company sells a better pen at $.80 with manufacturing costs of $.70, then the economic value of the $1 pen company would be zero. Even though the pen has a utility, it has no economic value.  Likewise, even though Bitcoin has a utility, its economic value is zero because other blockchains are better overall at secure and fast transactions at lower costs.  Limiting supply of something that has no economic value does not give it value. 

Many call Bitcoin “digital gold” which it is not.  First, only about 38% of gold’s value is from investment demand.  Second there is already digital gold without blockchain.  It can be bought digitally with a third party custodian or it can be purchased as an ETF online.  Yes, there is one day settlement but that will soon be same day settlement.  Third some investors prefer to be able to see and feel gold which can’t be done with Bitcoin. Fourth there will soon be tokenized gold ETF’s thus there will be no need for Bitcoin as digital gold will be available through blockchain technology.  

Bitcoin bulls in the past believed that Bitcoin would replace gold as a store of value.  However now that the price of gold has appreciated significantly for the past two years, they argue that Bitcoin should trade at the same value as gold and not take away from gold’s valuation. How convenient. But why should there now be double the amount of investments in gold by way of its digital proxy?

Investors also argue that gold is not used as a medium of exchange, but it is still used as a store of value, thus Bitcoin can still be a store of value.  However, 62% of demand for gold are from real uses such as jewelry and industrial, unlike Bitcoin. Investors buy gold as an inflation hedge as the price of producing gold increases when there is inflation translating to higher prices for gold. Gold is part of the real economy and has fundamental value other than investor demand.   

Bitcoin bulls admit there is no real valid metric to value Bitcoin so they fall back on the idea that Bitcoin should trade at the same value as gold even though that theory was debunked above. The total value of gold is $29 trillion and proven reserves are another $9 trillion.  Bitcoin bulls argue that crypto including Bitcoin should trade at the combined gold and reserve valuation of $37 trillion. First, Bitcoin bulls argue that Bitcoin is not an operating company.  Only operating companies get credit for proven gold reserves. The price of gold already accounts for proven reserves.  Second, only 38% of gold is held for investment purposes with half of that held by Central banks.  So private investment holdings are only a little over 20% of gold’s value (net of numismatic gold coins). Jewelry is 50% and industrial is 12%. These are averages for the last 10 years. Thus, at today’s gold value, the investment holdings of gold are $11 trillion not $29 trillion. Private investment holdings are about $6 trillion.  

Gold jewelry is not an investment in gold. Most jewelry is 14 karat gold (58% gold) and the value of the gold is only on average about 20 to 30% of the value of the jewelry.  There are other costs such as materials, labor, design, overhead (rent, etc.), and design. Then the final price at retail includes on average a 100% mark up at both the manufacturer and retail level.  Jewelry with 24 karat gold (pure gold) is usually luxury jewelry with higher brand value and bigger mark ups, offsetting the higher gold content. A typical $30,000 Rolex watch, for example, has about $6000 of gold in the watch using average gold prices over the last decade. Also much of gold jewelry has sentimental value that is worth more to the owner than the value of the jewelry.   

The average melting value of the gold in jewelry is only about 50 to 60%. Thus typical gold jewelry has about 25% of the value of the jewelry in gold, which if melted brings the value of gold to only 15% of the original purchase price. Clearly buying gold jewelry is not an investment in gold. 

Today’s gold price is extremely overvalued. Gold has historically averaged about a 50% premium to production costs which today are about $1700 per ounce. That would result in a price of about $2550 per ounce. At that price the total value of gold would be about $17 trillion and the investment holdings would be $6.6 trillion, while private investment holdings would be only $3.4 trillion. The $6.6 trillion investment demand assumes that Central banks are going to invest in Bitcoin.  So far there is only a minuscule $47 billion of Central bank holdings of Bitcoin and most of that is confiscated from criminals and sold soon thereafter. Don’t believe that Central Banks will ever build big reserves of Bitcoin.  

Thus, the argument that Bitcoin should trade at the same value as gold as a store of value is just wrong.  The investment holdings of gold are currently $11 trillion not $37 trillion. Private investment holdings are $6 trillion, compared to $3.4 trillion for crypto and $1.8 trillion for Bitcoin.  At gold’s fair value price of $2550, the private investment holdings would only be $3.4 trillion, the same as crypto today.  It is absolutely surreal that some prominent investors are using gold’s $29 trillion or $37 trillion value including reserves as a price objective for gold instead of private investment holdings of gold of $6 trillion.  Yet hundreds of billions of dollars are being invested on this flawed analysis! 

As for gold as an investment, it is a non-correlated asset but there are better ways to hedge a portfolio. Gold produces nothing and the marginal investor demand which controls the price of gold is based on the mood of the investor. I am not in the business of predicting how investors will subjectively feel about the economy and inflation.  That is artificial demand.  There is very little historical correlation of gold’s price movements with economic variables.  Inflation has been the best correlation but the gold price declined form the spring of 2021 until October of 2022 when the core inflation rate spiked from under 2% to 5.8% year over year in September of 2022. Thus, during the biggest spike in inflation in over 40 years the price of gold declined and actually bottomed and began a three year surge the month after core inflation peaked! Some argue that the gold price is correlated with real interest rates but then why did gold prices not do well last decade when we had the lowest real rates ever.  And why did gold prices spike in 2007-8 period when real rates were historically high? If an investor believes a lower dollar or higher inflation is somewhat correlated with higher gold prices, then isn’t shorting the dollar or shorting Treasury bonds a better hedge because there is still a possibility that gold many not rise if the dollar declines or inflation rises?

The best correlation for short and intermediate term gold prices is actually just price momentum.  For the long term it is the premium or discount to the cost of gold production.  But that can take many years or even over a decade to revert to the mean premium.  

Gold is going to face the same problem as diamonds.  Man made diamonds have caused the price of all diamonds to decline since 2012. In real terms diamond prices have declined over 40%. There is a private company, Marathon Fusion, which claims it can create gold by using the high energy neutrons from a nuclear fusion reactor.  Although it is many years away, remember man made diamonds progressed much faster than expected.  Technology always defeats commodity inflation.  From 1800 to 2000 only three commodities outpaced inflation and they weren’t oil and gold.  Now with AI and quantum computing, expect even lower commodity inflation. 

Crypto and specifically Bitcoin faces a major risk of quantum computing breaking the encryption that secures the network within the next five years.  The crypto industry is developing quantum-resistant algorithms but it is a race against time.  Even if crypto wins this race there will be future threats and vulnerabilities as public ledgers. 

Even if the other crypto’s have some intrinsic value, their price mechanisms are absurd.  An investor in one crypto doesn’t own shares in the network, but owns the private key that allows the investor to control, transfer and transact with a specific amount of digital value.  A crypto owner has the right to transact for goods and services and to sell it to another person or entity, as well as secure it using encryption and private key management. But the crypto owner doesn’t have any legal rights to a share of the network.  Crypto has created “smart contracts” but their enforceability is still unclear.  There is very little legal precedent for interpreting and enforcing these contracts.  With traditional equities and bonds there are 200 years of legal precedent and contract law developed. 

The protocol and strategy of crypto networks are decided by consensus, but the node runners, miners, Proof of Stake (POS) token holders as well as core developers and founders have more influence than other Crypto holders. And node runners and miners constitute only a very small fraction of crypto holders. There isn’t any real developed contract law for crypto as there is for financial instruments.  For example, there are centuries of developed laws and procedures to protect minority shareholders of equities in contrast to small minority Bitcoin owners.  There are thousands of statutes, regulations and legal precedent developed for disclosure obligations for traditional financial products. Ditto for marketing, public relations, and specific decisions such as elections of officers.  Very little for crypto.  There are standard hierarchies for managing businesses (such as CEO, CFO, COO) for public equities, none for crypto. Public companies also give detailed financial projections to be able to analyze and track the company. Just projecting the specific crypto network is going to expand in the future is not a reason to invest in the crypto blindly. 

Why would I invest in a network that I can’t have an ownership stake, not have the information I need to really analyze the network, not be protected by established laws and regulations, and have no valid metric to value the network? No thanks!

Crypto and Bitcoin are supposed to democratize the world and allow access to finance for everyone.   But the top 2% of Bitcoin holders control 73% of Bitcoin.  The top 10% of miners control 90% of Bitcoin capacity and the top 0.1% control 50% of mining capacity.  Most small investors have lost money in Bitcoin and other crypto. 

Many cryptos have restrictions on supply.  Bitcoin for example, halves about every four years, reducing the rewards for mining new blocks by 50%.  That is not a free market, but a contrived manipulated market attempting to create artificial scarcity.  At least gold prices are determined by a free market.  No the US dollar is not a manipulated market.  The US government increases the money supply over the long run in line with nominal GDP growth with a goal of 2 to 3% inflation.  And even though it is a fiat currency, can’t think of anything more secure than being backed by the US government and its taxing authority. 

The dramatic increase of crypto treasury companies this year is a clear sign of the top. There are over 100 Bitcoin treasury companies and over 60 Ethereum treasury companies. Of course, these crypto treasury companies can only raise capital when crypto prices are really high and near the end of their up cycle. It is a failed business model and now MSTR was forced to raise capital to fund their preferred stock dividends after the price of Bitcoin declined 30% in two months.  Most of these crypto treasury companies were failed crypto mining companies that were desperate to find a way to boost their stocks. Some of them such as Bitmine Immersion Tech (BMNR 37), soared 1000% or more when they announced they would become crypto treasury companies. BMNR ‘s claim to fame is that it will acquire enough Ethereum to be able to receive staking rewards of between 3 and 5%.  And that makes BMNR increase 1000% in value? Seriously? Never seen a 4% dividend so valuable?  BMNR bulls also tout their 5% Ethereum stake goal, giving them more influence. Never saw a stock go up 1000% because an activist investor revealed a 5% stake in a traditional stock giving the investor more influence.  Usually around 5 to 10%. The BMNR stock reactions have been insane until recently.  

Some of these crypto treasury companies have been trading at a premium to their net assets of the underlying crypto holdings such as Microstrategy (MSTR 215).  That is partly because investors don’t like the pricing mechanism of crypto and feel more comfortable buying it through traditional equity holdings. But the stock market really doesn’t like manipulation (issuing stock above NAV and then buying more crypto) and eventually investors revolt.  This will continue for the next couple of years with these crypto treasury companies trading at discounts to NAV eventually likely causing liquidations. 

Harvard University recently invested in Bitcoin and has already lost 20%, or more than $90 million.  Classic buying at the top as a new asset is established.  Reminds me so much of when CalPERS decided to increase significantly their investments in commodities to as high as 7 or 8 billion dollars as a new asset class in the 2007-08 period, right at the multi-year top. From October of 2007 to June of 2011 CalPERS commodity investments decreased at a 6.9% annual rate and didn’t perform well for the rest of the decade.  A disaster.  I actually wrote about this gaffe in real time back then, describing how CalPERS was buying at the top. 

Stablecoins may not grow as fast as expected as they threaten to pull deposits from US banks which hold over $18 trillion in deposits.  Banks account for over 50% of all loans in the US and siphoning bank deposits (which they leverage to make loans) for stablecoins could negatively affect the US economy. Regulations are still in flux as to whether stablecoins can offer yields, but exchange stablecoin products are already offering yields.  But now that dollar deposits can be tokenized, the market for stablecoins may not be as big as the consensus believes. Also this week Tether was downgraded by Standard & Poor’s because their stablecoin, USDT, has weak coverage as only 72% of its assets backing USDT are cash and T-Bills, with significant Bitcoin and gold assets.  According to one analysis, If both Bitcoin and gold decline by 30%, Tethers equity buffer would disappear and USDT would be technically insolvent, which would cause panic selling of USDT, Bitcoin and gold. This could be a major problem for stablecoins in the future that would reverberate throughout the financial markets. Only stablecoins that are 100% backed by US Treasury T-Bills will grow assets over the long term.    

DON’T FIGHT THE FED NO LONGER VALID?

One of the biggest changes in correlations in the stock market occurred in January 2001 and it went unnoticed.  From the early 1950’s when the Fed became more active with monetary policy, until January of 2001, the stock market followed certain patterns and was relatively easy to forecast. Whenever the Fed was lowering rates the stock market rose. The stock market continued to rise when the Fed would raise rates until the yield curve (3 month to 10 year Treasury bond rates) became inverted.  Then within 13 months the stock market would enter a bear market (in the 1956-57 bear market only the 1 and 2 year vs. 10 year Treasury inverted).  It was easier to forecast bull markets as the stock market would advance within three months after the first Fed rate cut after a series of Fed rate hikes and continue until the yield curve inverted.  In 2000 the yield curve inverted three months after the bear market began, a little late but still saved a lot of the decline if sold when it inverted. The only exceptions were the 1962 bear market caused by the highest historical ever valuations at that time, and the stock market crash of 1987, which wasn’t preceded by an inverted yield curve. However, in 1987 the 10 year Treasury yield rose to 10% with a P/E of 17, an extreme event and easy to forecast a resulting bear market (not the crash but the bear market).

That playbook completely changed in January of 2001.  The Fed lowered the Fed funds rate twice by 50 basis points each in January after a long series of hikes, causing the stock market to advance strongly.  But by February the stock market resumed its bear market.  The Fed then lowered the Fed funds rate 12 times over the next 22 months but the S&P 500 declined 42% during that period. In September of 2007 the Fed cut the Fed funds rate by 50 basis points after a multi-year series of Fed rate hikes.  They cut rates 10 more times to 0% over the following 15 months and the S&P 500 declined 49% until March of 2009. The problem for the future is that instead of the stock market immediately responding positively to lower interest rates as occurred before 2001, there now is a threshold that must be met with rate cuts and we don’t know what that number will be in the future.  This has been caused by a significant decline in the velocity of money, falling from a peak of 2.2 in 1998 to the current level of 1.2.  Don’t fight the Fed is no longer a foolproof strategy.  A much more difficult stock market to forecast. 

OIL AND NATURAL GAS

Back in 2022 most investors believed we were in a new oil and natural gas bull market with many years to run. The thesis was that there had been very little investment in oil and gas exploration and services over the prior decade, thus there would be a shortage of supply.  I had been very bullish on oil beginning in late 2020, predicting it would outperform in 2021.  However, by late spring of 2022 I turned bearish on oil (turned negative on other commodities in April) when oil prices soared above $100 as I thought the higher prices would crimp demand and supply would be better than expected.  A very contrarian call ( also became bearish on natural gas in September of 2008). I did extensive research and concluded that Russia’s export of 3.3 million barrels of oil per day to Europe (2.2 million barrels of oil and 1.2 million barrels of refined products) could be rerouted to China and India by sea.  Most analysts said Russia did not have enough storage capacity and pipeline spare capacity to transport the rerouted oil to China.  But they were able to use shipping routes to transport the extra oil, using “shadow” fleets and bypassing traditional shipping lanes. And they had shipped substantially more oil to these countries at times before the war, giving me confidence that they could do it again. Also, I predicted that non-OPEC oil supply would grow faster than expected. 

Russia was able to reroute the European oil exports to India and China with Indian exports increasing the most. In the summer of 2022 when everyone was bullish on oil and natural gas, I recommended shorting the oil price and oil stocks (other than refining), especially the oil service stocks. They have dramatically underperfomed the S&P 500 since then. Early this fall I closed out my oil shorts for the rest of the year.  I have been neutral natural gas since the fall of 2024.

My problem with oil is that the long term picture is bleak.  According to the EIA global annual oil demand growth grew 1.5 million barrels a day in the last decade, or at a 1.6% annual rate.  This decade annual growth has slowed to a 1% rate and the IEA expects it to slow to about 0.4- 0.5% through 2050. Meanwhile supply growth especially non-OPEC is growing faster than expected. In the near-term oil supply is estimated to grow by almost three million barrels per day in 2025 and over 2.5 million barrels per day in 2026 driven by Canada, Guyana, Brazil and the higher quotas for OPEC. Demand is only expected to increase at 1 million barrels per day or slightly more for 2025 and 2026, resulting in a big surplus. Renewable energy will continue to erode demand for fossil fuels.  Despite OPEC reversing all of the over three million barrels per day of oil it withdrew from the market since Covid, global spare capacity is still over four million barrels per day.

The OPEC oil cartel is in shambles. Their market share has declined form 50% in 2008 to a current 35%. They desperately created OPEC + to enhance market power but the more members of a cartel (going from 12 to 22 members), the more difficult it is to enforce the cartel’s agreements. Thus, significant cheating has occurred over the last couple of years in Kazakhstan, Iraq and Russia. And Qatar and Angola have dropped out.  This will likely continue in the future. And UAE is hell bent on increasing oil production capacity to 5 million barrels a day by 2027, three years ahead of plan.  They only produce a little over 3 million barrels a day of oil this year. The cartel is probably keeping oil prices at least $20 higher on average over the last 30 years. OPEC will have less power in the future, causing oil prices to lose its cartel premium. 

China demand for oil will increase about 100,000 barrels per day this year compared to growing at an annual rate of 750,000 per day from 2010-15. India will not be the next China as they have the benefit of bypassing building a big oil and gas infrastructure (doesn’t have sunk costs) in favor of mostly renewable energy. They also will not be urbanizing as fast as China did during its growth stage. Indian oil demand growth will be just slightly higher than China’s weak growth this year. 

There is also misinformation on the amount of investment that oil companies are making to sustain current oil production rates.  The industry is overestimating the investments needed to sustain that production. 

Most importantly it is clear that Trump has an agreement with Saudi Arabia and other Arab nations to keep production high during his Presidency.  However, Trump does not want oil prices to crash so there is a floor on the price of oil, at least in the intermediate term. Oil stocks are becoming trading and income vehicles, although the income is not as reliable as many investors believe.

As for natural gas especially LNG there should be strong demand in the next few years. Data center growth will be the strongest engine of growth. Thus, the near-term picture is positive, except that LNG producers in the US might have their margins squeezed because of rising US natural gas prices (spreads are narrowing).  However, there is significant planned investment in natural gas and LNG in Asia over the next few years, and enormous capacity will be installed.  And Russia is building the Siberian 2 pipeline to China that will have 50 billion cubic meter capacity, about a third of the capacity lost from Europe. Russia will find a way to replace the remaining natural gas lost from Europe, further increasing supply.  And of course when the AI bubble bursts, demand for natural gas to power data centers will decline. 

RISK-ADJUSTD RETURNS

With the extraordinary equity returns last decade especially in tech stocks, investors no longer care about risk-adjusted returns (it was a major focus for investors in earlier decades). Yet some of the best performing hedge funds and managed funds last decade had much lower alpha when adjusted for risk as tech stocks have very high volatility and high betas.   And in 2022 many of these high profile funds suffered losses as high as 66%.  With much lower returns expected over the next 10 years, risk-adjusted returns will likely come back in vogue. The standard Sharpe Ratio measures excess return per unit of risk but assumes a normal distribution of returns.  My research reveals that investors are more worried about downside risk than just volatility and especially losses of 10% or more in any year. That is why the Sortino Ratio should also be used in conjunction with the Sharpe Ratio, as it is a better measure of return per unit of downside risk. There is also a Probabilistic Sharpe Ratio which gives more weight to negative skewness and measures excess kurtosis. 

The economy escaped the 2022 hiking cycle and inverted yield curve without a recession.  I have accurately called recessions in the past but this cycle was different. In 2022 when the consensus was that we were entering a recession, I was convinced that there wouldn’t be any recession until at least the second half of 2023, as the yield curve had not yet inverted. However, I did forecast a recession starting in the second half of 2023 with the fourth quarter being the most likely start of the recession.  In October of 2023 I realized that we were not entering a recession and became bullish on the stock market.  I went to a three to six month recession watch from a recession call but the watch never triggered a recession call.  The chances for a recession dwindled after late 2023 according to my research, although it increased during the summer of 2024, but only for a brief period.  

I follow 16 different indicators that have each on their own never incorrectly forecast a recession in the past but incorrectly predicted a recession in 2023-24 period, ranging from the inverted yield curve to the leading economic indicators.  So why did we not have a recession?  First net immigration averaged between two and three million annual rate between 2022 and the first half of 2024 vs. less than one million per year in the prior decade.  These immigrants provided a big supply of labor in sectors of the economy that were experiencing labor shortages such as hospitality, farming, construction, landscaping and manufacturing.  They prevented the inflation rate from going higher (prevented further wage hikes) and thus the Fed from hiking rates even more. They also provided incremental demand to the economy as it began to slow from higher interest rates.  A higher percentage of immigrants are working age than the US population and they have high labor force participation rates.  

Second, the massive fiscal and monetary stimuli in 2020-21 resulted in unprecedented demand for labor.  Even when the economy began to slow as a result of higher interest rates, there were such an excess of unfilled jobs that even the decline of those unfilled job openings did not result in many layoffs. Non-farm job openings spiked to 12.1 million in March of 2022, more than doubling the peak of 4.7 million before the financial crisis. Job openings then fell 42% to 7.1 million in September of 2024, which was only the figure before the pre-Covid peak in 2019.  In the past there has never been a drop of 42% in job openings without a recession. The 42% decline from 2022-24 was actually more than the 36% drop during the Covid recession in 2020, and almost as high as the 44% depletion in the 2001 recession. 

The number of unemployed per job openings also reached historical lows in May of 2022.  This ratio doubled from 0.5 to 1 from May of 2022 to September of 2024, and is now only at levels pre-Covid.  Only because we started the higher interest rate cycle at excess job openings per unemployed did we not have a recession. The quits rate was also extended in early 2022.  It fell from 4.5 million in March of 2022 to 3 million in November of 2024 with only a slight uptick in the unemployment rate. Again, starting at artificially high level allowed the quits rate to deteriorate by 33% without causing a recession. New hires were only moderately extended at its peak of 4.6 million in November of 2021.  They then declined 30% to 3.2 million in August of 2025, the same percentage decline as in the Great Recession! This figure is only moderately above the June 2009 low, and is still at recession levels.  

Continuing claims were also at historical unprecedented low levels of 1.25 million in June of 2022.  That number has increased 32% to 1.78 million without a recession. In the past a rise of 32% in continuing claims has always been accompanied by a recession. But again, we started the higher interest rate cycle at such extreme lows of continuing claims (especially when adjusting for the size of the labor force) that a big percentage increase off of a very low base is not that meaningful. 

In conclusion big increases in immigration combined with excess demand for labor at the start of the Fed interest rate hiking cycle prevented a recession.  Although new hires fell to recessionary levels, layoffs only increased minimally off of a low base. The massive immigration effects on the economy were difficult to forecast as official government figures in real time in 2022 and 2023 dramatically underestimated immigration by millions.  As an analyst very difficult to forecast the economy without accurate figures. 

ECONOMIC OUTLOOK

The economy has slowed in 2025 with real GDP growing only 1.5% in the first half vs. almost 3% in 2023 and 2024. Third quarter is expected to be about 3% but the average forecasts for 2025 are about 1.9% GDP growth.  This is a result of both reduced immigration and effects from the tariffs.  According to a recent paper (10/31/25) from the Minneapolis Fed, declining net immigration only accounts for about half of the recent drop in US job growth over the last year.  The other half is likely the result of declining labor demand, resulting in lower labor force participation as workers become frustrated in their job searches. The authors note that median real wages in 2025 are growing close to half the rate of 2023 and 2024 (1.7 times slower growth) that is most pronounced for low wage workers (2.5 times slower growth).  They don’t opine on the cause of lower wage gains or labor demand other than lower immigration, but the obvious culprit is tariffs. 

Tariffs actually have a bigger impact on the economy than inflation and we are seeing evidence of that this year. Not that it hasn’t increased inflation as well. Since Trump took office in late January, the PCE inflation rate has increased from a 2.6% to a 2.8% year over year rate and estimates are that the tariffs so far have increased the PCE inflation rate by about 50 basis points (the PCE inflation rate would have declined this year if not for tariffs).  Imports account for only 12% of GDP in the US and only about 50% of goods imports are subject to steep tariffs. Thus only 6% of GDP is directly affected by tariffs. That understates tariffs effects on inflation somewhat because tariffs give a price umbrella for competing American producers, which results in higher prices for goods that compete with tariffed imports. But expectations for a dramatic surge in inflation were misplaced, but still I was expecting an increase closer to 100 basis points in the PCE instead of 50 basis points. US manufacturers have eaten the tariffs so far more than expected. But usually the consumer bears more of the cost in the second year as inventory pre-tariffs is depleted.  We do know that the foreign exporters have not lowered prices much to offset the tariffs, bearing less than 20 to 30% of the tariff costs.  Thus, the tariffs are clearly taxes on both US businesses and the consumer. 

Approximately 45% of imports to the US are from US subsidiaries or affiliates, thus US companies ultimately bear the cost if the exporter lowers prices in response to the tariffs. 

If the tariffs are really slowing the economy this year why are S&P 500 profits expected to increase 10 to 15% this year?  First S&P 500 profits can diverge from GDP growth in the short term, especially with massive buybacks.  Second, 35% of S&P 500 profits are from overseas.  Third, small and mid-cap earnings are only increasing at a low percentage rate this year.  According to a large private equity firm, the 100 largest US companies have improved profit margins from 14 to 19% over the last five years while the next 1400 largest have not increased margins. This is especially true this year as the larger companies have more flexibility to offset tariff costs. The tariffs are disproportionately negatively affecting small and midsize businesses. 

According to Federal Reserve data, US corporate profits declined 9% in the second quarter of 2025 vs. the fourth quarter of 2024 (seasonally adjusted) and declined 3.3% year over year. This is in contrast to the 10% gain in S&P 500 second quarter 2025 earnings per share. The 9% decline from two quarters prior is the worst since the 12% drop in the first two quarters of 2020, during the Covid recession. Corporate profits before taxes and including inventory and capital consumption adjustments, declined 0.6% in the second quarter of 2025 from the fourth quarter of 2024 (seasonally adjusted), the first decline from two quarters prior since 2021. On a year over year basis, these profits increased only 4.3%.  

The divergence between the top 20% of wage earners and the rest of the population regarding real income and spending growth has reached extreme levels. Real income and spending growth has been minimal for the lower income cohorts over the last couple of years. US real income and real disposal income have actually declined since the tariffs took effect in April. In fact, real consumer spending has increased more than real income on a year over year basis every month since November of 2024.  

This K-shaped economy is not a stable economy.  Recent all-time highs in assets (equities, crypto, gold. housing as well as near record low high yield spreads) has buoyed the upper income groups.  Any significant decline in these assets will negatively affect the economy more than in the past, making the economy very dependent on asset appreciation.  

The economy will get a boost from the tax cuts of the bill passed this year.  In the first quarter there will be significant increases in tax refunds to individuals as well as tax relief from tips, interest on car loans, and social security.  The bonus depreciation will spur more capital investment especially relating to AI. However, the tax relief combined with lingering tariff effects will most likely not allow the Fed to lower rates as much as expected next year and long term Treasury yields could rise. Europe and Japan will most likely be raising rates (an ECB board member said that the next interest rate move in Europe is likely higher) which will limit the US ability to lower rates.  If the yen surges in response to higher Japanese interest rates, the carry trade could further erode, causing dislocation and liquidation in the US financial markets. These factors would also raise longer term rates in the US. If the economy does surge there will likely be wage pressure as there are not enough available workers to meet the demand, resulting in higher inflation, especially with a negative output gap. 

The boost to the economy will be short lived as the negative effects of the tax bill are delayed. The tax bill primarily favors the top 10% of income earners and may have a negative effect on lower income groups when all of the negative effects are considered such as the cutbacks in Medicaid, further widening the income disparity and making the economy more vulnerable in the long term. Trump’s last tax cut bill in 2017, which was bigger than this year’s bill, increased GDP for a few quarters before reverting back to average GDP growth in 2019 and 2020 estimates before Covid. Don’t expect anything different this time. 

One of the biggest risks is the appointment of Hassett or another crony of Trump as the new Fed chairman.  The longer term Treasury yields will rise if the new Fed chairman lowers rates more than the long term bond vigilantes desire. It could backfire and cause chaos in the bond markets. The Fed has already lost credibility with their not very serious goal of 2% core PCE inflation rate.  Businesses do actually listen to the Fed’s inflation targets to conduct business, but now the Fed may have lost that influence which is really underrated. If they change their target to 3% inflation, businesses may believe they may move it up to 4% in a few years if targets are not met, so why should they be sacrificial lambs and hold back on price increases.  

MARKET BREADTH

The recent outperformance of small caps and some value cyclical sectors such as consumer discretionary will likely not last for more than six to nine months. They began their outperformance in early December after extreme underperformance and when it became clear that the Fed was going to lower rates in December. This reminds me of the trade from October of 1998 through June of 1999 when the Fed was lowering rates and ex-tech sectors including financials and small cap, had a strong rebound.  As for small caps, earnings will likely rebound strongly next year, possibly more than large cap, but that doesn’t guarantee outperformance.  In 2018 the S&P 600 (small cap) grew earnings much faster than the S&P 500 (large cap) but still underperformed.  Also, it isn’t just renewed earnings growth that moves the market for small caps, it is whether earnings in the future are higher than expected. This rotation will just be a trade as AI and large cap growth are going to lead this market higher until the secular bull ends.  International will outperform once this bull market is over. 

There have been numerous short term periods over the last few years when there has been broadening of the stock market and investors prematurely call for a lasting rotation.  For example, the equal weighted S&P 500 would outperform the S&P 500 over the last two years when there have been corrections in the S&P 500, but they didn’t last once the S&P 500 turned higher.  There are always a few sectors that become so absurdly undervalued that can play catch-up such as healthcare this year, but overall rotation has just been trading opportunities. I have not bought in to the broadening stock market thesis. 

I wrote negatively about small caps in early 2014 when its relative outperformance was peaking and stayed negative until April of 2020 when I wrote that it would outperform.  In April of 2021 I wrote that the small cap rally was over and have stayed negative since then but now see a short to intermediate term rally. Small and mid-cap equities at a 16 forward P/E are not expensive unlike their large cap peers, but they are not especially cheap either. 

When the AI trade dies, the secular bull market will end.  There is no precedent for a generational new technology leading a stock market rally and then ending without pain in the S&P 500 Index.  Small caps, value, and international can outperform for a time period after the new technology crashes as they did from March of 2000 to March of 2002, but they ultimately collapse with the S&P 500.  In absolute dollars even these other outperforming sectors made little or no money for investors from March of 2000 to March of 2003.  Also, the Value Line median annualized appreciation potential is now in the bottom 20th percentile, whereas in March of 2000 it was in the 80th percentile.  The Value line Index is an unweighted index of 2250 small, medium and large cap stocks, a broad index.  

Every secular bull market ends with overbuilding of the new generational technology advancement and the start of a major secular decline in the stock market. The Panic of 1893 was a result of overbuilding of the railroads and speculative railroad mania in the stock market. Railroads had spurred the long secular bull market that began in 1863 with market capitalization from railroad stocks reaching as high as 80% of the stock market. The “Roaring Twenties” secular bull market was the result of a technological shift of electricity surpassing steam as the primary source of power and of course automobile ownership increasing from 20 to 62%.  Overbuilding of these new industries combined with speculation led to the end of the secular bull market and the Great Depression.  In the 1960’s there was the first real technology boom led by computers, semiconductors, electronics and photography, along with advanced aerospace technology for the race to the moon.  Integrated circuits (microchips) first became massed produced in the late 1960’s and again overbuilding and speculation led to the secular bear market that didn’t end until 13 years later. Finally, we had the greatest speculative bubble ever in the late 1990’s with the internet that led to the end of the secular bull market in 2000 when the bubble burst.  

TIMING OF AI BUBBLE BURSTING

The timing and circumstances are almost too perfect for the AI bubble to burst within the next couple of years to end the current secular bull market.  It seems too easy to call.  Almost every CEO of the major hyperscalers have publicly stated that we are in an AI bubble but that they have to continue to invest or else risk being left behind in the race.  There are a myriad of events that could go wrong in the next year or two to burst this bubble. First, we are in a race with China for AI dominance and China has at least 20 times more effective training runs per dollar than the US.  China’s $42 billion private investment in 2025 delivers the equivalent real world training output of $1-1.4 trillion in US terms.  At some point in the future are American hyperscalers going to realize similar efficiencies or will more world capital flow to Chines AI to get higher returns for each dollar spent. Second, there is still no proof that AI companies are going to deliver a reasonable return on capital for all the money invested so far, at least in the next couple of years, which may lower demand for AI. Third, even if demand for data centers continues to grow, will there be enough energy supplied to the data centers?  Orders for nuclear and natural gas turbines are back ordered for the next 5 to 10 years and Trump is discouraging investment in renewable energy that could come online faster.  Also, they need local community permits for these energy facilities and there is increasing NIMBY resistance, especially as the enormous demand for water to cool the data enters could deplete the local water supplies.  And the latest research reveals higher cancer rates in communities surrounding the data centers. Fourth, nefarious uses of AI could cause stricter regulation.  Fifth, the bonus depreciation could actually backfire as it encourages even more AI investment that wouldn’t generate a high enough return on investment without the tax incentive, adding to the bubble. 

Nividia (NVDA 184) only trades at a 25 P/E on 12 month forward earnings estimates, with many investors believing it is very cheap vs. its growth rate and its historical P/E.  But for all of its strengths, NVDA is still a cyclical company and the stock market is saying that NVDA’s earnings are going to decline significantly sometime in the not too distant future.  Cyclical companies actually trade at their lowest P/E’s near the top of earnings cycles and their highest P/E’s near the bottom of cycles. NVDA also has major concentration risk with the hyperscalers and potential increasing competition.  The stock market also does not like the circular agreements it has made with its customers, a real red flag and similar to the circular agreements back in the late 1990’s.  Memory chip prices are advancing this year at the highest rate since 1999, another eerie resemblance to 1999. The stock market could be wrong, but I wouldn’t bet against it. 

Higher interest rates have always been the catalyst for recessions and major bear markets, thus it is difficult to figure how this secular bull market is going to end next year if interest rates are going to decline.  Valuation has never been the catalyst for a bear market except for the 1962 bear market.  2026 should be a difficult year for the stock market, especially with the third year of the Presidential cycle having statistically significant lower returns.  At the very least it will be a more volatile year.  During the bear market earlier this year, which I did not foresee, I thought there was a chance that the secular bull market may have been ending, but never went to a sell signal.  Then in April and May numerous technical indicators, such as the Zweig thrust, the recovery of 50% of the losses, how quickly we recovered above the 50 day moving averages, led me to believe that the stock market was in a new bull market that would have very little downside through at least February of 2026.  This was particularly true of semiconductors, as their bottom off of a cyclical downturn always lasts at least 10 to 12 months.  Also new bear markets rarely occur within 17 months of the bottom of the prior bear market. But there could be a major top somewhere between the spring and October of next year. Crypto has most likely formed a major top in October and it has historically been a leading 3 to10 month indicator for the stock market. That would put the time frame of a potential major stock market top between January and August of next year, more likely on the latter end.  

The high yield market is also signaling that the end is not too far away.  In January of this year the BoFa US High Yield Option-Adjusted Spread fell to a cycle low of 2.6%.  The only other times this spread was this low in the past was in September of 1997 and May of 2007.  We subsequently entered 50% or more equity bear markets in March of 2000 and October of 2007. Using that time frame, we are within 18 months of a major bear market. 

The next recession that ends this secular bull market will likely be similar to the 2001 recession, led by the decline in technology investments and not consumer led. The parallels to the late 1990’s are very strong, although there are more headwinds for the consumer in this cycle than in 2000.  Housing was not in a bubble in 2000 as it still is today, and the low income cohort was doing better.   

Positioning by investors is at some of the highest historical levels of equity exposure for both retail and institutions, but especially for retail (hold a record 45% of their assets in equities).   They have their highest ever allocations to equities (both public and private) with defined contribution plans holding 70% of their assets in equities. Leveraged ETF’s have become very popular with individual investors as well. Retail investors now account for a historical high 20 to 30% of trading volume. They are now allowing speculative crypto in 401 (k) plans! Trump accounts for newborns were approved at the top of the equity market.  Ditto for Dell’s children accounts.  These are great ideas but just poor timing on initiation.  These are all contrarian indicators and they remind me so much of 1999-2000 when Congress attempted to pass a bill that would invest Social Security in equities. 

A recent poll found that 28% of young men (ages 18-29) own crypto but only 24% own equities. This is an added risk for the next bear market, as younger people will have to liquidate their equity holdings to offset their crypto losses. 

STOCK MARKET CONCENTRATION

Very high stock market capitalization concentration is also a leading indicator of the end of secular bull markets. Market concentration peaked in 1904, less than two years before the start of a secular bear market in 1906.  In 1937 market concentration again peaked and the second part of the secular bear market began that same year.  The next peak in market concentration was in 1964, about 18 months before a secular bear market began.  Finally market concentration peaked in 2000, the start of another secular bear market.  We now have the highest market concentration ever with the top 10 stocks accounting for 38% of the S&P 500. Increasing market concentration is not the trigger for the beginning of a secular bear market, but it does increase the risk at high levels of concentration. It is the peaking of the concentration that is a lead indicator for secular bear markets. That is why investors hoping for a broadening of the stock market should be careful what they wish for.  

I thought all of the antirust lawsuits brought against most of the Mag 7 would be the catalyst for a market concentration peaking, but the extremely weak penalties ordered for GOOG’s antitrust violations gives me some doubt.  But the bursting of the AI bubble and new competition and changing technology (i.e. replacement of the smartphone) could be the catalysts to end these clear monopolies. 

One of the most important indicators for a major bear market and especially for a secular bear market is the increase in margin debt relative to the increase in the S&P 500 on a year over year basis.  As of October, margin debt has increased 40% year over year vs. only 18% for the S&P 500.  Margin debt growth has only exceeded the increase in the S&P 500 by more than 500 basis points three times in the last 35 years.  This occurred in late 1999-2000, spring/summer of 2007 and late 2021, all months away from major bear markets.  This may appear to be a small sample but in reality it is not as there are about 32 years when margin debt year over year did not exceed the S&P 500 year over year gains by more than 500 basis points and there was never a bear market more than 20% that followed.  Just a way to observe the data in reverse with more data points. 

Many investors are using the Netscape analogy to time the end of this secular bull market.  Netscape went public in August of 1995 and the bull market ended about four and one half years later. ChatGPT released its AI version in November of 2022.  Thus, using the same timeline as Netscape would lead to a major top in May of 2027. Obviously, these are only rough guidelines. 

Secular bull markets at the end can go to crazy valuations as in 1999-2000.  The biggest gains usually occur at the very end and the biggest losses at the very beginning of the subsequent secular bear market. I have heard some strategists comment that investors can just wait until earnings begin to decline and then exit. It is not so easy.  In 1998 during the Asian crisis, many analysts were cutting estimates on some tech stocks that declined as much as 40% or more. That was a false sell signal. Then when earnings really began to deteriorate in the second half of 2000, waiting for the first poor earnings report from Cisco (CSCO 69) meant selling after a 40% decline.  So it is very difficult to predict and navigate near the end. But anything goes at the end!

That is why Greenspan was so criticized when he made his “irrational exuberance” speech in December of 1996.  The S&P 500 with dividends reinvested compounded at an annual rate of 26.2% over the next three years making Greenspan appear foolish.  However, the average returns for 6 to 15 year time frames starting with the same December 1996 starting point were well below average.  Even the 20 year total return from 1997 was below the long term  average of 10%, coming in at 7.2%. 6 to 20 year time frames are considered long term investment periods.  In fact the average total return for the 6 to 15 holding year periods was an annualized 4.9%, well below average.  A 15 year Treasury bond purchased at the time of Greenspan’s speech yielded 6.3% and returned more than the 5.3% annual return of the S&P 500 during that 15 year period with much less risk. So yes Greenspan was actually right!

Janet Yellen had a similar experience when she declared that small cap biotech was overvalued in July 2014.  A top biotech analyst immediately criticized her analysis as well as most of the investment community.  As of today the small cap biotech index (XBI 122) has increased 126% vs. the 315% total return of the S&P 500 with much less risk.  Almost all of the XBI’s gains have occurred since April of this year. Again she was proven right over the long term. 

BOXES CHECKED FOR NEAR END OF SECULAR BULL MARKET

Just about all of the boxes have been checked that an investor would look for to determine that the end of a secular bull market is near. 

1. Near record bullish investor positioning.

2. Near record low junk bond spreads.

3. Market concentration at extreme highs.

4. Extreme Valuations by all metrics.

5. Bubbles in multiple assets (gold, housing, high yield spreads, equities, crypto).

6. Unemployment near historic lows for a sustained period.

7. High Leverage.

8. Speculative Fever.

9. Long period of time without a down credit cycle

10. Outperformance of large cap growth stocks, especially technology.

11. Poor market breadth.

12. A new revolutionary technology that captures investors enthusiasm for at least a few years.

13. Overinvestment in the near term of the new technology.

14. Low to mid-teens annualized real total returns for the S&P 500 over a 15 to 20 year period, preferably 16 to 18 years. 

15. Leading Economic Indicators declining.

16. Negative output gap.

17. Divergence of free cash flow from earnings (hyperscalers).

18. Circular agreements by the leading tech companies.

19. High labor participation rates especially prime age (18 to 55). 

20. Investor margin debt increasing year over year more than 500 basis points more than year over year gains in the S&P 500.

21. Historical high retail trading volume.

Now it is just a timing issue. The leverage is in government debt and in the median debt to EBIDTA of public companies (although interest coverage is still high) as well as the coming  build up of debt and negative cash flow of the hyperscalers. Market breadth as measured by the cumulative advance/decline line for all exchanges has not been good over the last couple of months despite the appearance of the broadening of the stock market. Overall, it has not been great since the 2022 low but we need much worse breadth to start a secular bear market.  The IPO market, which is one box that has not been checked, has not been especially exuberant.  However as explained earlier, we already had our once in a generation speculative IPO market in 2020-21 and will likely not see another one of that magnitude in the near future.  Another important box that has not been checked yet is rising interest rates/FED restrictive policy, although the Fed has been somewhat restrictive over the last couple of years. 

INVESTMENT STRATEGY

This year I have been short consumer cyclical (especially retailers), oil (other than refiners), and employment agencies along with other specific researched names and have been overweight in healthcare and technology as well as industrials. I closed out most of my shorts in energy in October and some discretionary in December. I have been adding some discretionary but still consider it a trade. I did buy a few of the dollar store names when they were depressed earlier this year and they have actually outperformed Walmart (WMT 112) and Costco (COST 874).

S&P 500 earnings are expected to grow about 15% or more in 2026 which has caused investors to be very bullish for 2026.  However, when S&P 500 earnings grow 15% or more the stock market has a mixed record of performance.  The S&P 500 had subpar or negative returns in 1984, 1994, 2002, 2011 and 2018 when S&P 500 earnings grew 15% or more. 

My biggest out of consensus call is that tech stocks will not outperform the S&P 500 over the next 10 years or at least not be big outperformer.  It is very rare for the best performing sector of one decade to be the best performing sector in the following decade.  Tech has significantly outperformed since the fall of 2012 and especially since 2016.  

My investing strategy is more value oriented but also buy growth stocks that are reasonably priced and buy higher priced growth stocks that fall out of favor on a tactical basis. Thus, I was able to buy Crowdstrike (CRWD 520) after its faulty software update caused its stock to drop in half and purchase Reddit (RDDT 238) when its stock also was halved as a result of fears that it would be vulnerable to losing traffic from Google and other AI search tools. But I really like stocks that have divisions with spinoff potential to recognize the full potential of the company’s parts.  I purchased Western Digital (WDC 182) last fall and its’s spinoff Sandisk (SNDK 233) has soared 564% since its debut in February while WDC has increased 303%.  I didn’t capture all of the gains as I sold in the early fall. Likewise, Expedia (EXPE 267) last year was getting no value for its Vrbo division even though Vrbo’s competitors such as Airbnb (ABNB 126) were valued very highly.  EXPE has more than doubled since May of 2024 as this division was recognized.  Natera (NTRA 231) in late 2022 was trading with a negative value for its most valuable division, its residual molecular disease unit. NTRA has soared over fivefold since then. 

I also prefer value names that have low risk, high dividends and optionality.  Thus Gilead (GILD 121) was trading in the $60’s and $70’s a couple of years ago with a stable 5% dividend yield and numerous shots on goal with its drug development pipeline.  The stock has almost doubled.  The same for IBM (IBM 312) which had a low P/E and a 5% dividend, with upside potential from its hybrid cloud and AI strategy as well its quantum computing division. The stock has more than doubled over the last two years.  Now they all don’t work out as I have a loss in Teleflex (TFX 131) even though they just sold a division at a good price and the rest of the company is undervalued. 

One of the most insane valuation discrepancies occurred earlier this year when Costco whose earnings growth will likely be high single digits or 10% at best over the next few years was trading with a 50 P/E while Johnson & Johnson (JNJ  206) with also a high single digit earnings per share growth profile was trading at a 14 P/E and a 3.5% dividend yield. JNJ ‘s main division, pharmaceuticals, has been one of the best drug companies fundamentally in the past, growing at high single digit rates and is expected to continue that growth through the rest of the decade.  And JNJ is more recession proof than COST.  JNJ has advanced 42% this year while COST has declined 5%.  

Full Disclosure: I own several of the securities mentioned positively.  None have been purchased within the last month.   The opinions merely represent the opinion of the author as CIO of Journey 1 Advisors, LLC and intended to inform the readers about our investment philosophy and strategy.   The contents of this report are based on sources believed to be reliable.  It is not intended for circulation.  It is not intended to offer investment advice, or to recommend the purchase or sale of any securities or investment product. Investment advice is only given after a client has signed an investment advisory agreement with Journey 1 Advisors, LLC and will be subject to the terms and conditions therein. Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stock’s expected performance and risk.