To investors,
I have been spending an inordinate amount of time trying to answer the question, “what is going on in financial markets?” Some of you believe we are in a tech-enabled economic boom that will go on for years, while others believe everything is overvalued and a significant market crash is right around the corner.
It is that enthusiastic disagreement that interests me. The market is ultimately the referee, so it will determine the winner, but the work I have been doing is focused on ensuring I am on the right side of the outcome.
Lets start with one of the negative views of the market.
Charles Schwab’s Kevin Gordon explains “The S&P 500’s forward P/E is at the same level today as it was in January 2021. Today, the effective fed funds rate is 4.09% ... in January 2021, it was 0.09%.”
The X Capitalist sees this as a major red flag. He writes “The market is basically more overvalued than it was back in 2021. Investors are counting on AI to grow corporate earnings at an unprecedented rate. We haven’t seen this yet and I don’t think we’ll see it soon enough. It’s time to be more fearful than greedy.”
But I don’t know if people should be as pessimistic about this data as it seems on the surface. Kevin Gordon goes on to explain the “S&P 500’s forward profit margin has been rising sharply and is at a new all-time high.”
That is a great sign that profit margins are rising. This reinforces the idea that companies are growing revenue and profits, but doing it with less employees.
A big reason for the investor enthusiasm we are seeing right now is artificial intelligence. JP Morgan’s Michael Cembalest writes “AI related stocks have accounted for 75% of S&P 500 returns, 80% of earnings growth and 90% of capital spending growth since ChatGPT launched in November 2022.”
The AI boom is not happening in a vacuum either. Carson Group’s Ryan Detrick says when the S&P 500 makes a new all-time high in September, “Q4 is higher more than 90% of the time.”
This September all-time high is being driven by a persistent bid in the market. Bloomberg reports “The S&P 500 has gone 107 sessions without a drop of 2% or more, the longest streak in more than a year.”
And the backdrop of continued bullish momentum is locking arms in solidarity with the fact that odds of an October rate cut are now 94%.
There are plenty of folks who will see all this economic data and say “this time is different.” They will point to some weird political policy or a critique of the existing administration, but that is all noise.
Detrick shows that stocks go up under almost every President, regardless of whether they are Republican, Democrat, Independent, or an alien.
Don’t let politics ruin your portfolio. Stocks are structurally built in a way where they will continue to go up forever over a long period of time. And maybe most importantly, consumers are showing the bullishness in the market is warranted.
We saw the Q2 real GDP number revised higher to 3.8%, which is significantly higher than the estimated 3.3% from economists. Take a listen to how surprised CNBC was this morning:
So we have much stronger than expected consumer spending, rising incomes, and lower imports. That all sounds like positive developments to me.
After reviewing the economic data, I understand why some people are bearish. But I also just think they are wrong. Lets see what happens though. Time will tell and the market will be the referee.
Have a great day. I’ll talk to everyone tomorrow.
- Anthony Pompliano
Founder & CEO, Professional Capital Management
Anthony Pompliano Explains Bitcoin Outlook For Q4
Anthony and John Pompliano discuss bitcoin, why gold has been doing so well, Strive buying Semler Scientific, bitcoin treasury companies, and can AI replace the Fed?
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