Something on my mind as of late is US equities, this includes Dow, US500 and Nasdaq.
Keep in mind investors have not been this bullish on the markets in 25 years, in terms of positions, that is. Given that the US is 75% of the MSCI world, valuations are starting to get interesting. It doesn’t matter if you look at PE ratios, price to sales, price to book, Q ratio, the cape ratio, or the market cap; the GDP, it doesn’t really matter what valuation metric you look at; stocks are in the top one or two percentiles of historical observations in the last 50-odd years.
This could very well be indicative of future long-term returns over the next decade being far worse than the last decade we have seen. But remember that valuations don’t always tell you a huge amount about the short term. That’s the frustration of using valuations; I much prefer to look at positioning (CME), sentiment, and whether there are examples of frothy behaviour. If you look at positioning today, for example, you start with professional investors; BofA fund manager surveys are a favourite every month to look at. Today it shows you that investors have gone from record underweight equities in September 2022 to record overweight equities as of December 2024. A huge wall of worry has been climbed here, with essentially overweight equities being funded by a now record-low cash balance, i.e., there’s not much cash left on the sidelines. This is particularly interesting to me when rates are 4-5% in the US, that professional investors would have low cash.
Moving on, I’ve been lately looking at retail investors, or “households”. The recent Fed data shows that 41% of US household net worth is now exposed to the equity market. That is an all-time high; prior to that it was 2021, just as the market was getting re-pumped after the Covid dip, and prior to that it was 1999 at the peak of the dotcom bubble. Historically, we know that retail in aggregate tends to buy most at the top and less at the bottom. There’s also surveys showing retail investor sentiment is at 40-year highs.
Even looking outside the box at the anecdotal things in this timeline, like Warren Buffet’s $300bn accumulation of cash, extreme prices for NFT’s, and BTC topping $100K… I think that’s what tells us that this is a time where investors are pretty over their skis.
But let’s look at what’s been driving the majority of this rally; really, it comes down to the magnificent seven, and their current valuations are getting on for 30% of the index. Concentration in itself is not a problem. Even if you strip out the magnifcant seven, it’s not like the US isnt expensive. You can find other examples of other businesses, such as Walmart, which is trading on x40 earnings… Cosco, which is trading on x50 earnings. These are 2% earnings yields for businesses that are almost by definition boring. Theyre’ not trying to grow fast, but simply GDP+ businesses. Just this week, 5/3/25 I have begun to watch Walmart stock finally start to tick lower. The last week has seen the stock down -5% and -9.3% in the past month. This is a very high valuation at a time when you can earn 4% in a bank or 2% in a treasury inflation-linked bond…
Now with Trump back in office, on paper he is taking on a good economy. It has very low unemployment, it has good wage growth; he has inherited double the national debt he got in 2016, now sitting at $36 trillion. He has a large deficit, inflation that is a trouble, asset prices that are already very high, and tax rates that are still low from where he cut them the first time around. Thinking outside the box, Trump is actually inheriting a much better situation, meaning it’s harder to improve it, and markets are as we all know, forward thinking. So it’s harder to improve it. My exposure right now to US equities remains flat. This should be indicative of my upcoming views.