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

If markets correct suddenly like last April, don't be in a GIC; you can't buy stocks. If you want to take advantage of a market decline, don't lock it up into a GIC. Much prefers a money market instrument or a long-term bond fund in the US and not Canada (out interest rates have declined a lot).

When more debt enters the market, there are few dollars for other assets. He was shocked, well shouldn't have, when Trump said we're making so much from tariffs that we're giving back $2,000 to every American, except the rich. Trump is trying to manipulate markets with a social media post, even though Bessent was very critical of Janet Yellen of manipulation, and yet they are doing the same thing. The TLT chart (the long end of the treasury curve). Getting the long-term rates down will benefit the US government. But giving $2,000 to everyone is an election promise going into the US Midterms is terrible policy, because it would increase the cost of funding the US debt. Therefore, bond yields will creep up on the long end. He likes TLT at $84-85. This will break out if the US falls off a cliff--a recession, stocks are in trouble. But if TLT falls below $84, this means stress on interest rates that could hurt stock markets. Watch the long end of the treasury curve.

The sell off last week was a natural pullback and the market needs breaks from times when they keep rising, especially if not based on fundamentals. However the AI trade is still  intact. Also many companies are trading at slight premiums but have the fundamentals for it with growth in cash flow and earnings. Be cautious with some that are trading on hope. Some are at 80 to 90 times revenue and should be avoided, eg. Palantir. A good portfolio can afford to have  one or two companies with stretched valuations but they must be coupled with companies that are grounded. Portfolios should be overall composed of quality companies. A basic theme is to hold companies that are growing faster than the market and trading at lower prices than the market.

She thinks so. That's the sector that's led the market and brought up the general indices. Markets have been very strong YTD. They had that pullback in April and have been up very strongly since then. 

It's natural that some of the valuations in some of the very momentum-driven names are, arguably, ahead of themselves. So we're getting a bit of a pullback.

Tech earnings are coming through. The Mag 7 that reported all came through with their numbers, but they also reduced capex for this year and next year. They're seeing very strong demand, and they know there's this debate out there as to when they'll see payback on all this investment. 

Generally speaking, if you look at the S&P 500 companies, earnings are coming in better than expected though the large-cap names do dominate those earnings numbers. Q3 is expected to be up 14%, up again in Q4. For the year as a whole it's expected to be up 12%, and 14% for next year. 

Consensus is that we're not going into a recession. If there is a slowdown in the economy, profit gets hit, and you actually have negative earnings growth. That's not what we're seeing right now.

The other groups have been OK. The impact of tariffs have not been fully felt yet in the economy. Some companies have been mitigating the tariff impact. Companies serving lower-end households are seeing weakness in spending. 

In general, earnings for industrial companies have come through. When you think of data centre growth and all the hyperscalers building data centres, it's actually providing a lot of growth for companies servicing that area. Semiconductors, power generation, gas turbines, and even utilities have done well.

To a degree he's seeing similar themes between the two. Canada is obviously more impacted by tariffs and international trade, including the north-south trade.

What's interesting is the reaction to some of the earnings, and that's a bigger tell for the overall market. Earnings disappointments have been absolutely punished and even, in some cases, earnings beats on higher-valued tech stocks. Take, for example, PLTR and META -- results are perceived as just not good enough, and they're selling off. For him, that's an underlying weakness in the overall market. 

We've all been saying for a while that valuations are stretched and wondering what the catalyst would be to bring that to an end. Doesn't know that there's been one single catalyst, maybe a lot of potential ones. Below the surface, he thinks the market's doing way worse than the averages would tell you. In the US everyone looks at the S&P 500, and it's so weighted to a couple of stocks that have not broken down such as GOOG and AAPL. Below that, it's been pretty ugly.

Do the generals finally fall, or what happens? For him, it's a warning sign that this continued move upward is hitting some resistance.

The data that we are getting continues to be weak. Whether IFM data, some of the corporate data, or ADP data from the other day. All of this shows that employment is not deteriorating dramatically, but it's not getting better either at this point.

As well, he's listening to commentary from some of the CEOs of the more cyclical companies. Transportation, rails, and some delivery companies are good barometers for the overall strength of the economy. Low-end consumers, and consumers in general, are getting hit. Fast-food restaurant chains like CMG are missing numbers, and that tells you there's weakness in the consumer.

For the longest time, all that mattered for the consumer was that they were employed. When he looks at the employment numbers, they're deteriorating a bit. The wealth effect (such as gains from the stock market) can keep the consumer strong for a while, but that's like the last leg to stand on. The pegs that have kept everything moving higher keep getting knocked out.

He and his team now have a much more cautious view.

He's taking money out of cyclical sectors, away from the consumer. Certainly taking the tech bet down in a large way, though he's not out of tech. Got out of all the semiconductors.

Increased his long-bond exposure, which is a nice hedge to economic weakness. The long end of the bond curve should do a bit better in both Canada and the US. He's taken financials down, as they're too tied to what's going on economically and there's some risk there.

Infrastructure names in Canada look pretty good, as that area was highlighted for capital spending in the federal budget the other day. As well as the energy sector.

He's in town to do this show, and wandering around downtown last night he's really hearing a buzz around investing in Canada. People are getting more positive than they've been in decades about a reversal of the flow of money out of Canada that we've seen for the longest time. The biggest indicator was OVV coming up to buy NVA -- when's the last time you saw $$ moving back to Canada in the energy sector?

What worries him about investors today is the amount of passive investing, similar to the late 1990s when people don't understand what they're buying. As much as you can overshoot on the upside, you can overshoot to the downside. A move, when it comes, could come quickly and sharply for all these companies.

We currently have the highest level of equity exposure in the US, over 70% of financial assets are in stocks right now. A level that's almost unheard of. The market has some risk.

Especially on the Canadian side. Weather has been an issue. With the state of relations with the US, we have to strengthen east-west strategy and move toward making LNG the better way to export. Especially when you look at how much Europe depends on nat gas from Russia.

There's a market for Canadian gas, but it's a long-term story that needs pipelines and the ability to deliver. Still a better growth commodity than oil.

Thought it would break below $60 and go down further. So it's held in relatively well. But then excess production starts to come back on, and there are so many geopolitical risks. Have to shake your head and wonder what's the US doing with Venezuela? Lots of balls in the air, excess supply, demand not necessarily growing.

Still looks a little tough short term. He's started picking away at some of the names.

There has to be some belief that what's happening with global trade will ultimately get settled to some degree. Globalization is what drove the economy for 4 decades and benefited everyone. Just because a guy in the White House wants to turn that off for a period of time for his own reasons, it won't stick.

At the end, globalization is a positive for all involved and we'll return to some sort of semblance of that. 

Maybe in the short term, as they have to digest recent moves. Since April, some of these stocks are up 60-80%. At best, we consolidate in the short term (which is weeks, not months) before we can get another leg up. The long-term trend is still playing out with this whole AI revolution.

There's going to be a rotation within the market. For the past 3 years (since November 2022 and OpenAI), we've been getting picks, shovels, and infrastructure in place. 

He thinks that going into 2026 it'll be the year of the engines -- how companies actually integrate the whole AI infrastructure to make them more effective and efficient in whatever business they're involved in. It started with some of the big guys -- banks, BA, AMZN. You can sort of tell where it's happening because, unfortunately, it's usually related to layoffs. 

In 2026, it'll start being more mainstream.