Opinions
Larry Berman CFA, CMT, CTA A Comment -- General Comments From an Expert A Commentary COMMENT Jul 28, 2025
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He's held cash for about 3 months now, as he typically likes to hold cash over the summer. He shuffled a few things around.
Continues to believe that certain tech stocks (Mag 7) are way overvalued. So he's been trying to go into whatever is not in that category -- value stocks, commodities, etc.
Premium contentHis team thinks so. An object in motion tends to stay in motion until it doesn't.
There's a lot of flow coming into the market. Part of that may be because a lot of market participants don't want to be in the bond market -- returns are low, perhaps not better than inflation, and could be facing a loss if interest rates do go up. Part of it could be FOMO, because the last 2 years have been great, and now European and Canadian markets are really shining. Third thing is margin debt; in the US, it's almost back to the record levels seen in 2021 before the huge S&P correction from 4800 to below 4000.
He's cautiously optimistic. Short term, markets may need a bit of a pullback. We have PCE numbers coming out tomorrow in the US. Next Friday, September 5, we have the labour report for August and we'll see how the market reacts. Then we're back into earnings season in October.
We need to make a distinction, because there are some great bargains in that sector. NVDA is the poster child; it's gone up a lot, and its valuation is probably 40x forward PE. That's quite expensive, unless you believe that they can maintain the treadmill of that kind of growth. He's not saying the growth is over, just that maybe the growth slows down from here. Perhaps the valuation on this type of name has to stay here while earnings catch up, or it has to come down a little bit.
Doesn't mean that capital can't rotate into other parts of the AI growth market, or even into NVDA's competitors which have lower multiples. See his Top Picks.
Quite in line with what was expected. We shouldn't be distracted by that. It will lead to more accommodation and more robust business growth down the road.
When you're in a situation where you've had higher interest rates, it does slow the economy. There's a great deal of growth and opportunity coming from our neighbour to the south. Because we're a resource-rich nation, and if we can get less carbon-embarrassed and more pro-resource, it puts us in a very good spot as we go through the tidal wave of innovation that's going to manifest in some sort of physical infrastructure (data centres, power sources, AI and digital asset booms). Things that were more software-oriented are going to become more hardware-oriented. We'll go "from software to steel".
Crisis necessitates change.
US administration is undertaking a coordinated program to achieve its goals. US used to control the currency. With rising debt and rising China power, that's going to fade. Nations are going to want to price things in other than US dollars. This takes away from the USD. But the US has a plan for that -- if you can't control the currency, control the protocol (that is, control the commerce through digital assets and AI). Data centres and power for AI will need to be created, and US will see deregulation to bring down barriers for resource development.
All this will benefit Canada in a big way, if we can just get out of our own way. We'll be forced to do that. It has to be done and it's economic. Sets up NA as a global head of commerce. It's a pretty bullish scenario.
Market Update
Canada’s tech job market has gone from boom to bust in a matter of years, as August job openings in the sector were down 19 percent from the early 2020 levels. While the CIBC economics published a report showing that unemployment among 15- to 24-year-olds has climbed to the levels typically seen only during recessionary periods. The Canadian dollar was 72.72 cents USD. The U.S. S&P 500 ended the week flat, while the TSX was up 0.6%.
It was a mixed week of greens and reds. Financials and Materials rose 1.4%, each, while energy gained 1.1%. Consumer discretionary dropped by 1.3%, while consumer staples and real estate slid by 1.2%, each. Technology and industrials ended the week lower by 0.9% and 0.8%, respectively. The most heavily traded shares by volume were Toronto-Dominion Bank (TD), Canadian Imperial Bank of Commerce (CM), and Royal Bank of Canada (RY).
The Coming Week
Lots going on, plus a lot of big tech earnings. This week has the potential of being an inflection week. We're heading into a negative seasonality period through September-October. Lots of risk to the market here. There's a rule of thumb when you're learning charts: if the market can't go up on good news, it's probably a sell.
So the tariff trade was potentially settled with the EU on the weekend. China's deal is kicked out 3 months down the road, we think. The market started up today, but now it's soft. We'll see where we close. There's a lot of information this week, so if the market can't go up on good news then we should take notice. On earnings and what's expected, George Soros always said to look at what's priced in and bet on the scenario that's not priced in.
He's looking at a chart of the S&P 500 going back to 1990 with anticipated earnings for the next 3 years. Earnings growth expectations are huge for the next couple of years. Do we have the economic backdrop to drive that?
The Congressional Budget Office recently put out an update. They took the "one big, beautiful bill" and forecast it out. Notwithstanding everything else, they put out a chart of where debt to GDP is going to go. Then they put out another one that assumes that all this AI investment adds to productivity and improves growth in the US. In that second scenario, the debt:GDP outlook starts to look a lot better if the growth rate and the economy can boom. Basically, it's a huge tailwind.
What's happening now in AI is huge. But so was the birth of the internet in the 1990s, and then the bubble broke and it collapsed for a couple of years. That's possibly coming.
Final chart shows the valuation of US long bonds against the S&P 500. When you take the PE ratio and invert it, you get the earnings yield of the S&P. We're now at the same level as we were at the dot-com peak. It's expensive. Bond yields today at the long end are ~5%. You're earning more in US treasuries than you are in the S&P 500. Historically, this isn't a buy/sell indicator but it tells you the market is very expensive at this point.
If we get a catalyst now, that catalyst is good news, and the market can't rally, then it's probably the end of this rally phase for the next 3-5 months.