By Jeff Speight
Managing a portfolio in today’s market is akin to navigating treacherous waters in a seemingly unsinkable ship. This is to say, the world is fraught with peril that makes getting comfortable with the current market environment very difficult despite the underlying backdrop for public corporations being in its best position in a very long time.
The primary crosscurrent we are currently faced with is the tension between geopolitical conflict in the Middle East and its impact on energy prices and the broader global economy, and a stock market driven by strong earnings and AI productivity gains trading near all-time highs. Other than a rather short-lived correction at the onset of the war in Iran, the market has quickly digested the new status quo and has shrugged off the Strait of Hormuz blockade and the potential for negotiations to fall short of a peace deal.
The longer oil prices remain elevated, however, the shakier the global economy’s footing becomes. We could be on the verge of a period of sustained inflation, as higher shipping rates and energy input costs flow through the global economy. As we face a potential “no landing” scenario where growth remains strong and inflation sticky, what looked like a year in which the Federal Reserve would be cutting interest rates to bolster housing affordability and broader economic growth now looks like one where it may have to return to a more hawkish posture to stave off rising costs.
This is not the Goldilocks setup many were expecting. Despite that, the S&P 500 index is trading near all-time highs, is historically expensive with a trailing price to earnings ratio of 28x versus a 5-year average of 23x and offering a dividend yield of just over 1.0%, the lowest in history going back to the late 1800s. The market is priced for the promised perfection AI was set to deliver, but we are seeing cracks in the foundation that promise is built upon. Add to this the increasing nervousness of investors regarding the tremendous amount of capital hyperscalers are spending on AI infrastructure while offering little in the way of proof that they will earn attractive returns on that capital in the future and you have a very complex setup going forward.
While we are not bearish, we have been more cautious than the market’s recent returns would suggest we should be. We, for one, are alright with that given the razor thin margin for error when starting to invest in stocks at such lofty valuations. While we all get swept up in the “fear of missing out” generated by all-time highs, our mandate is the preservation and disciplined growth of capital. We choose to respect the historically high multiple and low yield of today’s market by maintaining a conservative posture that prioritizes resilience over euphoria.
If you have any questions about portfolio advice and management, give us a call or email us at info@portfolioadvisor.com.
