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

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 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 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 comes down to different styles. 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 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.

He's 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 second 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 the bubble broke and it collapsed 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 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.

Counter arguments to a rising stock market: U.S. fiscal imbalances and government debt

There has been worry about government debt for decades, but the recent budget bill in the U.S. has taken this worry to peak levels. The U.S. federal budget deficit is now projected at US$1.9 trillion in 2025 (about six per cent of GDP), far above historic norms. Excessive government spending, without clear plans for reduction, could force higher Treasury yields, increase the cost of borrowing for the government and corporations and threaten confidence in U.S. financial markets. Higher fixed-income rates could see money flow from the market to savings accounts and GICs. Higher rates could lower corporate earnings. Yes, government spending can also provide a stimulus, but at some point, the piper needs to be paid. Countries cannot simply borrow trillions for all eternity.
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AI should continue to dominate for the next few years. There is a need for a huge amount of power to run these big models. He is seeing efficiency across many different types of industries pick up with AI and this should continue to improve. While some industries have tariffs, inflation and interest rates take a bite out of earnings and profits, the AI economy is moving full force ahead and doing really well. Large companies have the resources to hire in-house developers but it will take a while for small and medium companies to build these tools into their business.

The question was on his favourites of the Magnificent 7. He likes Amazon, Microsoft, Meta and Alphabet. Amazon and Alphabet had recent strong reports. Amazon would be his top pick of all of them today. It has long tailwinds.

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.

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. 

He'd play the commodity directly in this case. Somewhat undervalued relative to gold. Has more of a commercial use than gold. Still likes precious metals.

Sometimes it's better to play the commodity, but sometimes stocks are the cheaper play.

The TSX has quietly been delivering an impressive run, passing 27,000 and outpacing the S&P 500 so far in 2025. It's seen strength in energy, materials, and financials. Combined with expectations for lower interest rates, it's really given the index a fresh tailwind.

With the all-time highs, she is a little cautious. Big question is whether upcoming earnings can justify these levels, especially with treasury yields creeping higher again. Nearly half of the S&P 500 is set to report earnings in the next 10 days, and it includes some big tech names. Even if you don't own those names directly, their concentration risk means their results will dictate the path of the market headed into the fall. 

Both the S&P 500 and the QQQ have closed above their 20-day MA for 60 days in a row, which is the longest streak going back to the late 1990s. So those remain in overbought territory if looking from a technical or RSI point of view. Going back to 1975, this has happened only 4 times; the average return 1 year later is in double digits around 22%.

Though she is still bullish on the next 9-12 months, investors should be cautious and selective, taking some profits off the table. Markets at these levels tend to go sideways or perhaps even sell off. August and September are typically weak months, so she wouldn't be surprised to see a 7-8% selloff from stretched valuations.