A Comment -- General Comments From an Expert (A Commentary)

Sees $80 oil before too long. Demand coming in much stronger than consensus believes. Everyone's expecting the largest supply-driven glut in history, but he doesn't see that. Marginal increase in barrels from US shale is coming to an end. Believes OPEC has fully normalized its spare capacity.

Sentiment is uncertain in the short term. At some point in 2026, people will look beyond that to a world where we've run out of OPEC's spare capacity, we've lost the largest source of incremental barrels, and the IEA just revised peak demand to 2050 and beyond.

It's something he's watching. It's the biggest competitive threat to Canadian oil. The US gulf coast was geared to produce our oil; but if there are substitutes, you could argue for a wider differential. 

It behooves us as a country, for our largest export, to build out more pipelines as a strategic imperative. It's a product that everyone on earth uses, and increasing capacity would benefit hundreds of thousands of Canadians. How did this ever become so controversial?

Not really. But perhaps it might be if we can rely on it, and he doesn't know that we can. It'll be  an incomplete set of data. Might be useful to confirm some of the other anecdotal data we've seen from ADP payrolls every week, for example. Numbers from ADP suggest the labour market's still soft. 

Optimism recently about an uptick in the US economy. Look at the Atlanta Fed GDPNow forecast, which has Q3 running pretty hot right now. A lot of people are starting to forecast into the end of 2026.

A number of factors are at play. See today's Educational Segment.

Investors at home aren't going to run out and sell their portfolios because some hedge fund or private equity manager sold some stock. It won't be until they feel some pain, but that's always too late. Market's already down 15-20% from the high, and that's when they feel they need to do something about it.

This speaks to the fact that it's impossible to time markets with any precision. Typically we react the wrong way at the wrong time -- buying when you should be selling, and selling when you should be buying. The euphoria in markets today, based on sentiment surveys out there, is pretty astronomical. It's probably the wrong time to be that optimistic.

Absolutely. Still in very early innings of what AI means for the marketplace. NVDA's not a $25 stock anymore. Many of the plays that are ancillary to the AI space have gone up 10x, 20x, 50x YTD. Very vulnerable to a shock of bad news. 

Seeing a bit of concern creep into markets today. But by no means is it widespread at the moment.

Over the past 10-15 years, with the 0% interest rate policy, there was a growing dialogue in the marketplace that multiples should be higher because of the cheaper cost of capital. That argument was valid.

You'd argue today that if inflation is more of a consideration than it has been for the last number of decades, and wage pressures are up, then the cost of capital should be higher. And so the multiples should be lower.

Is AI disinflationary? Will it add to productivity so we get better and more robust economic growth? The answer is a little bit yes, and a little bit no. Productivity means that perhaps fewer people are working, which means lower aggregate income for everybody.

He'd argue that valuations today should be somewhat higher than historical norms. If the historical norm is 16-18x, and we're trading at 25x, that's a significant multiple above where fair value would be. At an index level, with tech being a bigger component, the multiple for the index should be higher. But not as high as we're trading at today.

If you look at the risk of a correction, and we're trading at 25x, but you say fair value might be 20-21x, then that's 1000+ points lower on the S&P from where we're trading at today.

He's been concerned about valuation, but valuation alone is a terrible timing tool. He's worries about a weaker economy, less globalization being inflationary. Lots of considerations that tell him to be very cautious at the moment.

Will a correction be a month from now? Three months? A year? That's the part that's hard. Can't time markets with precision. We're in an environment where a more material correction can definitely take place. For most people, staying fully invested with the right asset mix is the right long-term thing to do to remove the emotional part of selling at the wrong time.

Through his lens, prudent to have some reserves at this point. Look at Berkshire Hathaway, which has record cash positions on hand probably so they can take advantage of a correction when it eventually happens.

Growth

Economy has reaccelerated in recent months, but we have no data to confirm that. That view comes from anecdotal data. As analysts look forward into 2026, they're looking at this positive economic momentum and saying it could translate into above-average earnings growth for next year.

From the Atlanta Fed GDPNow chart, you can clearly see the steep drop in March/April when we got into the tariff war. Much angst about whether we were in a recession, and caused the US administration to backpedal. 

The biggest factor right now that's driving consumption (70% of the US economy) is the wealth effect with equity markets at all-time highs. He brought along a chart from one of the US banks, based on data from the Fed, which shows the net worth of US households as a factor of GDP. It's never been bigger. It's been a huge driver in the years post-Covid.

When you look at the Michigan Consumer Sentiment Index, it's at multi-decade lows. Average consumer still saying it's hard to make ends meet. The top 25% of households are really keeping the economy going. It's really bifurcated. To him, that's not robust economic growth. It's strong economics, which translates into earnings. But it's not a strong, broad, healthy economy.

Question becomes is the economy going to broaden out to support this, or is the top end going to crater? Investors are wondering if there's going to be a big correction, and he wishes he knew the answer.

Look at a graph of retail sales adjusted for inflation. You can see the initial downward shock caused by Covid, the subsequent upward spike in sales, and consumption normalizing since then. That trend is catching up, which tells him that we don't have a broad market here. Will be hard for the average stock to catch up to the leaders. And that's a concern. 

All this is a concern for him, but you can't time these things. 

Bottom line:  recently (and last week in particular) several people on the Fed are saying that growth is reaccelerating, they're worried about inflation, and they don't need to stimulate the market or the economy any more. Larry believes Fed will pause at next meeting. Thinks we'll see a lot of upgrades from analysts for next year of about 13-15% earnings  growth, but doesn't think we'll actually get that. So markets are ripe for disappointment relative to expectations.

He was late getting into cryptos. The market in peaked on Oct. 6; momentum assets have been rolling over since, and now it's hitting cryptos. This won't end soon. The President is the most pro-crypto ever, but crypto prices are flat this year. 

Partly due to concerns about tech. The broader question is why are markets up 20% in the first place? 

When you look at how the year started, we were talking about tariff wars, we had actual wars, widening deficits,  shutdown in the US, slowing growth. Yet somehow stock markets are up 20% in the US and Canada.

It's a healthy thing. We're at very high valuations in both Canadian and US markets, and not necessarily justified by the fundamentals. There's a lot of froth coming about from AI, which has pushed up a lot of the tech stocks and pulled the market up. Hard to justify on a fundamental basis.

We've only pulled back 2%, so we're still at record valuations by any measure you want to use. Markets can continue to go up, but he'd argue that upside is limited. Some caution is warranted at this point.

There are always opportunities, especially in the Canadian mid-cap space. That segment tends to have a lot fewer eyeballs on it, and those stocks are generally underfollowed and undervalued. As a consequence, always effective places to put capital to work in the space.

Pretty limited selection in Canada when it comes to technology stocks, and his firm is focused in Canada. Quality tech stocks in Canada are few and far between. See his Top Picks for a name he's positive on. In the Canadian market, he tends to look at segments other than tech.

He's generally in favour of them, because management in Canada is generally very complacent. Shareholders are even worse, they're like sheep. Activists can come in and review things very positively. One of his Top Picks highlights this reason as a potential catalyst coming up.