Stockchase Insights A Comment -- General Comments From an Expert A Commentary COMMENT Jun 13, 2025

A lot of the macro uncertainty has been melting away, in fits and starts over the last couple of months, and more quickly over the last 2 weeks. Various countries are coming to the table and coming to terms with the US on trade and tariff matters -- whether substantively or performatively, let viewers be the judge. The market's taking it as a good sign, or at least (probably a correct assumption) that the worst-case scenarios priced in during April are off the table.

As a result, stock markets in Canada and US are hitting all-time highs.

Broadly, he's below weight on the Mag 7. Just for context, their market weight is massive. His firm runs a NA mandate, but if you were to run just a US mandate this would mean that about 33% of your portfolio would be in just 7 stocks. That's an imprudent amount of concentration.

So they've picked their spots and own a couple. The ones they don't like, they don't own.

Increasingly, there are signs of that. A couple of things point to complacency and greed. 

One is the resurgence in the meme stock trade, as it did in 2021. The other one is leverage. NYSE members extend margin credit to clients of member firms. Data suggests that margin debt outstanding has surpasses $1T, and that's quite a lot. Shows that people are getting increasingly comfortable with the durability of the economic cycle and the stock market rally.

He is too, but there's a lot of ground between comfort with durability of an economic expansion and piling headlong into things like meme stocks, zero-date expiry options, and triple-levered ETFs.

About 1/3 of S&P earnings are in the bank already. Couple of things to note. Companies that are beating are beating by a bit more than estimates, but fewer companies are beating. 

Also, when you take out big tech, and specifically anything that has some kind of link to AI capex, there's no real earnings growth. When you look at nominal growth, sales overall are up 3-3.5%, and that's roughly equivalent to inflation. So if a company is raising prices at about the rate of inflation, if it's growing it should be growing sales at a faster rate than that. It tells you the economy's slow on a broad basis beyond what's happening in AI.

He goes back and looks at the dot-com bubble. In December 1996, Greenspan was early with his comment about "irrational exuberance" and the market kept going for 3.5 years before it peaked out. Nobody can time this. 

What we do know is that we're early in AI adoption as the next phase of tech and productivity growth for the world. It's a very bullish theme. But what do you pay for that today, and what's the catalyst to upset that? A few months ago the catalyst was tariffs, but now the market's not so worried about them. The next catalyst might be higher for longer; if they're going to run the economy hotter, then rates might just stay up. The market multiple should not be expanding in that environment, but so far multiples have held up.

We just saw some new headlines of the new need to fund debt and deficits. The cost of that debt is big. Looks as though the estimate is a bit below consensus, so that's a slight positive. So they either expect more revenues from tariffs, or they expect less spending somehow. We'll find out Wednesday morning how they're going to fund that -- are they going to fund it with bills (as the president wants) or are they going to issue more coupon debt (which has a negative implication for risk premiums)?

We have the Fed on Wednesday. They're not going to move on rates, but do they signal in their dot plot confirmation that they'll begin to cut rates later this year? Two reasons to cut rates:  the economy is slowing and labour market is starting to weaken (some signs of that), or inflation is well contained (and we still don't know this piece yet). 

We get the PCE (Fed's favourite inflation gauge) this week. We have yet to see any real transmission of higher costs from tariffs. That's still coming because even though there's a deal with Europe, there's a tariff. The tariff rates are going to be mid-high teens from all the estimates he's read. A lot of revenue from tariffs, but how much is that going to get into consumer prices at the end of the day? It'll take months and months to find out. 

Good case to be made that the Fed should be on hold until we see the labour market or the consumer really start to weaken. Typically, those start to line up together when people start losing their jobs.

It's a different style. When BMO writes their options, they're writing a bit further out of the money so you get a bit more capital appreciation. The Hamilton style is writing more of the portfolio closer to the money, which increases your yield but limits your upside. 

If you're really bearish, the Hamilton ones are a little bit better because they'll generate more income. If you're bullish but you need the income, then the BMO ones will probably give you a better experience because you're giving up less of the upside.

If you can positively tell him what the market's going to do over the next year, he could tell you which one will outperform. In general over time, since markets go up more often than not, he'd expect the BMO ones to provide a bit better performance.

When you're investing in corporate bonds, you're investing in the spread of that bond over the government equivalent in terms of interest rate risk. Whether it's the 1-, 5-, or 10-year corporate, it's the additional yield (the credit spread).

Credit spreads have been very narrow. Here's the rule of thumb everyone should use:  when equity markets hit their peaks, credit spreads are at their narrowest. Not a good time for new investment in corporate bonds. Much better to put $$ into government bonds at that point. Because when equities correct, government bonds do better and credit spreads widen.

So the corporate bond will underperform when equity markets are correcting. When equity markets have finished their correction (down 5-15% or whatever), that's a better time to own corporate bonds because the credit spread will narrow. And that's really what you're playing when you're investing in corporate bonds.

Bonds are less correlated with the ups and downs of the world. But when you're in an inflationary environment, bonds don't give you the same protection that they once did during the disinflationary environment that we were in for decades. We're in an environment where inflation will be a bit more  persistent than it's been for the last 40 years, so typically bonds will underperform equities. 

If we get stagflation (no growth, but inflation) that's bad for all assets.

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.

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 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 it collapsed and the bubble broke 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 in 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.