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

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.

There will certainly be a gap in data because of the government shutdown. But there are positives that overcome the negatives for markets. Based on what numbers come out, it could change the impetus for the Fed to cut rates in December. 

Despite the volatility we've seen in November, equity markets remain pretty well supported by earnings, liquidity, and seasonal trends. If you look at Q3 earnings season for the S&P 500 so far, 80% of constituents are beating expectations. Looking ahead to 2026, we're seeing about a 13% earnings growth rate projection.

As for dry powder there's about $7.5T in US money market assets, a record amount. Seasonally, Q4 is the best quarter to be in.

You know, what aren't investors concerned about? Lately we've been talking about a potential bubble in the AI space and technology. That's very premature. He was around in 1999-2000, and we don't have the same conditions as we did back then.

The concern really is have we gone too far, too fast? Markets have really taken off since April/May. There's also potential volatility with the midterm elections next year.

There's some softness in the Canadian economy, and that's expected for the next couple of quarters. 

He believes that investors are really going to refocus on monetary policy, at least in the US. There's a strong case for another 25 bps cut by the US Federal Reserve in December. At this point, futures markets are predicting a 60-70% chance of a December cut.

He has no REITs in the portfolio. He'd probably look south of the border to storage, as well as logistics-type spaces such as data centres. Those are growing areas. Could look at PLD.

In Canada you want to be careful, given the softness we're seeing in the Canadian economy. In Q2, we had a negative GDP number. Consumer's stretched, and inflation since Covid has had an impact.

Perhaps in the last week or so, given that the higher-beta, growthy stocks in the market have come down a little bit. The Dow is actually positive month-to-date, whereas the NASDAQ is negative. That's why it's important to have both areas in your portfolio, because they offset each other when markets go one way or the other.

Bull market's 37 months old at this point. Average bull market is 67 months, though some are shorter and some are longer. Interest rates are falling, inflation's in check, large amount of liquidity in money market assets in the US, 13% estimated growth for the S&P next year, and unemployment numbers in the US are steady (softening just allows for more interest rate declines). 

He's still very constructive on the markets. Could argue that we're very oversold in the near term, given the moves since April. But 75% of the year, markets are going higher. You don't want to be really high in cash for long periods of time.