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Opinions John ZechnerA Comment -- General Comments From an ExpertA CommentaryCOMMENTJul 24, 2025
John ZechnerYou might be interested:
His point is that this has been a one-decision type of investment over the last 10 years. The compound is something like 22% over that time, but that's not a realistic expectation for investors. We've ridden a tremendous wave of AI, cloud computing, and electrification of the grid. If you look at the fundamentals of a lot of the NASDAQ companies, especially the Mag 7, they deserve to trade at high valuations.
That said, a lot of companies have come out of nowhere with big increases in market cap. No question, demand is off the charts for AI equipment. If that cools, we could face a period where (though some companies are doing amazing) the NASDAQ and the S&P could do nothing for years. It's simply because of the way the market's structured, with so many companies tied to the AI trade.
This worries him a bit. He wants to make sure his clients have reasonable expectations going forward. For a diversified portfolio set up for your retirement, the equity part of your holdings is looking at 8-10% and not 22% a year.
It's a good economy. Seeing lower unemployment, strong corporate earnings. When people spend $$ on infrastructure and AI, it blends into the entire economy. We're seeing the stock market be very strong, which leads to good vibes, rich people investing, and rich people retiring.
We're in for some pain at some point. He just can't tell you when. We're in the fourth year of strong markets for most of North America, double-digit returns this year. Sometime, the good news will start to fade.
You need to be selective with your investments. There are so many wonderful businesses that used to trade at 30-35x PE, and now trading at lower valuations even though their growth is just as good. The market's focusing on a lot of nit-picky stuff that's not relevant to long-term investors.
All have done extremely well. Trading at one of the highest valuations of the past number of years. So are US banks, as is the stock market. Banks benefit from the beta of strong stock markets, but the reverse is also true.
The better question is should I be taking some $$ off the table (and that depends on your rick tolerance)? How much of my portfolio does it now represent? Money managers have to follow rules on position size, but individual investors don't -- for them, it all depends on comfort level.
Right now he's attracted to companies that, for some reason, the market hates. Whether it's a META, UBER, V, or NFLX. Some are at 52-week highs, but haven't done a lot over the last 4-5 years. Instead, money's been rotating into the hot areas.
He sees so many opportunities in dislocated, high-quality companies. Growing really fast, but valuation is the cheapest it's been in a long time given the opportunities ahead.
He's held the hyperscalers as core holdings since 2015 and he still sees upside. The past quarter validated that with acceleration in the cloud business by Amazon, Microsoft and Google. Margins increased. But there will be more competition for AI services and prices are reducing for best-in-class models. Meta's in the doghouse from regulatory issues and are spending a lot of money but their core advertising business is on fire, which may surpass Google Shopify is using AI to accelerate its core offerings. As for software, Microsoft's Co-Pilot keeps getting better, while ServiceNow will build AI functionality across all its platforms. End users will use software they already trust, but will use AI.
Nvidia is the next big earnings report, next week Wednesday, then there's Jackson Hole. This week will see just a lot of noise. From Nvidia he wants to see how this "leverage on leverage" of circular financing works, which recalls the leverage that led to the 2008 mortgage debacle. It's great that the rally is broadening and earnings keep rising. We're late in the cycle and concerned over bubble characteristics in the market, though overall he's bullish. Given current valuations, the 10-year forecast on the rate of return on the S&P is negative--but the peak may be two years from now.
They're like T-class mutual funds where you get a component of your return every year. This is very tax efficient; the full distribution in the current year is not taxable. For those seeking tax efficiency now and need current income.
BMO. But how much credit risk will you take--high yield or investment grade? What's your time frame? Historically, credit spreads are very tight, so don't take credit risk now. Because rates are backed up, he doesn't mind taking duration risk. But will it make him a total return positive in the next few years? Not sure.
It's 55 years since Nixon took the world off the gold standard. Gold demand: 45% from India and China, mostly jewelry for gifts, but is a huge variable as the gold price fluctuates; 5% used in electronics and medical devices, but gold is expensive so other materials are used; 22% from central banks who keep buying more gold, and 28% from investments like ETFs, which is the speculative part. He likes gold and is bullish, because governments are inept at managing tax dollars. Gold will rise in the long run, but won't break out but go sideways for many years.
The S&P is in a bullish trend with the moving averages (13-, 26- and 40-weeks) sloping upwards. It has a strong floor of support under the 13-week. The S& recently made a 52-week high but didn't reach the top of the Bollinger bands, which means the index lacks momentum. However, watch 7,620, a key level if the S&P breaks down and could signal a sell-off. However, keep an eye on the bond market and the 2-year treasury yield; if it rises above 4.24% we're in trouble and the S&P will drift down to 7,514 (support). If rates stay in control, the S&P will keep rising. The S&P equal weighted index is outperforming the market cap weigh. Here too the three moving averages are sloping up, beautiful. Support is 8,360 in SPEXW. SOX index (the semis): support is 10,797, but we still need to see if the uptrend will continue. Watch NVDA's report next week which could give SOX a major boost.
He looks at a number of factors to determine market direction. It was mainly the technology sector that experienced a summer swoon. Luckily some of the other sectors held up, such as financials and healthcare. At the end of July and early August, everything has come back together.
That's a really good sign for the market. It means that there's strength elsewhere than in just technology.
He also looks at credit markets, which aren't showing fear or widening spreads. Interest rates have been a big story this year -- expected decreases flipping to potential increases. There's still a buffer there to decrease if things go off the rails with the economy. Lastly, we have low volatility. There's a saying: "Never short a dull market." When volatility dies down and markets seem to be trending higher, that's not the time to get out.
That was part of the tech swoon. Hyperscalers came out with good earnings, but there are concerns on the capex side. This is a really big investment cycle, and the market acknowledges that these are big numbers but can see them working out over time with monetization. They also have massive cloud revenues to back up spending.
Absolutely. He's getting more cautious, especially lately. There's just been too much bullishness, and he's looking at sentiment, valuation, and other things.
People are underestimating economic risks from the tariff regime. Suddenly 15% is the new level instead of 10%. Trump is feeling somewhat empowered after the Iran-Israel thing, the big budget bill, and some of these trade deals (even though it wasn't 90 deals in 90 days). Trump's going to stick to the tariff story. He likes the revenue coming in from tariffs, and they need it from a deficit basis.
The market hasn't adjusted to what the impact of tariffs is going to be. Starting to see it in some corporate earnings reports, such as GM, CNR and TXN. More importantly, we're moving from an average tariff rate of 1.5-2% to 14-15% (not sure what the number is, as it's constantly changing). This will change corporate behaviour. Companies need some type of surety going forward, some consistency as to what the environment's going to be like. Until they have that, they're not going to do capital spending or hire people to the same degree.
He has economic concerns and valuation concerns. The market's now 26x trailing earnings (pretty high historically), right back to the high. And that's for earnings that are only growing at a 5% rate.
Sentiment got really beat up into the April lows, which was a great buying opportunity. All the surveys, such as AAII and Bank of America's, are right back to lowest cash and highest bullish indicators. Valuation and sentiment alone do not create market tops, but they can accelerate the downside once you do get a move in that direction. That's what we saw in April.
We're starting to see weakness in consumer spending, housing, and employment numbers. He's increased his bond weighting. Between inflation and growth, what's the bigger risk from tariffs? He thinks it's to growth. Ultimately, Trump will get his way and rates will go lower but for the wrong reason (economic data will be slowing significantly).
So in that environment, you have to get defensive. He's taking the beta out of the portfolio. The only thing he's sticking with is tech. That sector's proven itself. AI spend will continue, as you saw with GOOG's numbers last night.