Friends,
The stock market has been on quite a run. Since the President announced a pause to tariff plans on April 9th, the S&P 500 is up about 28%, while the Nasdaq Composite has advanced roughly 37%.
Those are incredible returns in a short time frame. While none of us are complaining, it does have us wondering: Have we reached bubble territory?
There are convincing arguments for both sides.
If you're worried about a bubble, you can point to:
- Macro: GDP is now believed to have contracted 0.5% during the first quarter. Consumer spending fell slightly in May, led by decreases in car purchases, travel, and restaurant spending.
- Geopolitical: Dual wars in the Middle East and Ukraine could destabilize global markets.
- Valuation: The S&P 500 currently trades for 25 times earnings. That's 15% higher than the 5-year average and 33% higher than the 10-year average.
However -- and this is the part that confounds beginner and seasoned investors alike -- the market cares far more about the future than it does the past. And while the future is unknowable, there's always a rosy story you can tell.
If you think we aren't in a bubble, you can point to:
- Macro: Potential rate cuts that might accompany a "soft landing". Such moves could not only spur consumer spending but also lead to a rotation into stocks.
- Geopolitical: The potential for geopolitical stability -- both from tariff agreements being signed and resolutions to global conflicts.
- Valuation: AI could meaningfully expand margins. Earnings estimates continue to be revised upwards, pushing the S&P's forward P/E down to 22. That's still over the 5-year and 10-year average (by 10% and 19%, respectively), but by a narrower margin
This is where being long-term investors can make all the difference. In essence, you have two options -- both of which have their own benefits.
- Raise cash: By trimming positions and building up your cash position, you could buy shares at better valuations if we are in a bubble. And if we aren't, you'll still be mostly invested in the market.
- Do nothing: For some reading this, retirement is decades away. If you're invested in a wide-moat business with reasonable valuations, the market's ups and downs largely balance each other out.
Either way, it will be interesting to see how the market unfolds. And so long as we're paying attention, we'll win either way -- with higher returns if the market goes up, or a broader base of wisdom if it goes down.
Wishing you investing success,
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Brian Feroldi, Brian Stoffel, & Brian Withers
Long Term Mindset
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