by Scott Martindale
  CEO, Sabrient Systems LLC

 Overview

The full pullback/correction I have been anticipating remains elusive. After all, stocks can’t go straight up forever, and this bull run has become long in the tooth. The greater the divergence, the worse the potential correction. Ever since the market recovered from its April “Liberation Day” tariff-driven selloff, every attempt at a correction or consolidation has been quickly bought before it could get started. But last week seemed different. It was Nasdaq’s worst week since April, and all the AI-driven market exuberance seemed to have suddenly shifted to fears of a valuation bubble. Alas, fear not. It seems to have been nothing more than another brief pause to refresh—i.e., take some profits off the table, reassess fundamentals versus sentiment, shake out the weak holders (including momentum traders), test technical support levels, and shore-up bullish conviction…punctuated by a nice bounce off the 50-day moving average.

Even on October 10, when the S&P 500 fell 2.7% on President Trump’s announcement of massive tariffs on Chinese imports and China’s retaliatory export restrictions on rare earth elements, the market began its recovery the next day. Besides Big Tech, speculative “meme” stocks were also hot. And to further illustrate the speculation, the Russell Microcap Index (IWC) has been performing in line with the S&P 500, setting a new all-time high in October (for the first time since 2021). It is notable that the lower-quality Russell 2000 Small-cap Index (IWM), in which over 40% of the companies in the index are unprofitable, has been substantially outperforming (+10.6% vs. +4.3% YTD) the higher-quality S&P 600 SmallCap (SPSM), in which all stocks are required to show consistent profitability for index admission.

So, it was only a matter of time for bears to try again to push the market lower, especially given the growing set of headwinds (described in my full commentary below). During last week’s selloff, we saw the CBOE Volatility Index (VIX) surge above 20 (fear threshold) as traders deleveraged. Bitcoin dropped below $100,000 for the first time since June (a 20% correction from its all-time high in October). The CNN Fear & Greed Index dipped into Extreme Fear category. State Street’s Risk Appetite Index showed Big Money refraining from risk assets for the first time since mid-May. And Warren Buffett’s Berkshire Hathaway’s (BRK.B) cash reserves hit yet another record high of $382 billion, as valuations had become too pricey for the “Oracle of Omaha.” But at its low last Friday, the S&P 500 was only down about 4.2% from its peak.

Market breadth remains a concern. While the mega caps kept rising, we have seen only occasional glimpses of nascent rotation, including this week in which the Dow Industrials (DIA), Dow Transports (IYT), and equal-weight S&P 500 (RSP) have all significantly outperformed the S&P 500 and Nasdaq 100. But each prior attempt this year at broadening across sectors and market caps has been short-lived. Only 22% of active fund managers are beating their passive benchmark. Investech noted that from an historical perspective, the Nasdaq Composite has hit a new all-time high with 2:1 negative breadth (decliners/advancers) only twice in its 54-year history—once just prior to the 2022 bear market and once several days ago. Notably, bitcoin and other cryptocurrencies corrected much more sharply than stocks, mostly due to deleveraging, and have not yet bounced back like stocks have. Nevertheless, blockchain, tokenization, and stablecoin implementation continue to progress, so I’m not concerned about my crypto allocation.

The S&P 500, Nasdaq 100, and Dow Jones Industrials each successfully tested support at their 50-day moving averages and then quickly recaptured and retested support at their 20-day moving averages this week as the government shutdown moved toward resolution. But leadership this week has noticeably swung to the Dow Industrials (notably, not cap-weighted), which is the first to get back above its all-time high, and the Dow Transports are getting close, which according to Dow Theory would confirm the bull market. Also, the small-cap Russell 2000 is on the verge of recovering its 20-day average. Notably, gold, silver, and copper have also recovered above their 20-day moving averages and seem bent on reaching new highs.

In essence, I would characterize the latest pullback as a passing “macro scare” within a structural bull market, with some promising new signs of healthy market rotation, and I still think the S&P 500 will achieve another 20%+ return for 2025—for the third year in a row, which would be only the second time in history other than the 5-year (1995-99) dotcom/Y2K bull run.

So, looking ahead, should we expect all rainbows, unicorns, blue skies, and new highs through 2026? Well, while there surely will be more macro scares, more consolidation, and more retests of bullish conviction ahead of the seasonal Santa Claus rally, I believe the fundamental tailwinds greatly outweigh the headwinds, as I discuss in my full commentary below. The government shutdown is over, at least until the end of January. Investors remain optimistic about AI capex and productivity gains, a trade deal with China, a more dovish Fed, business-friendly fiscal policies, deregulation, fast-tracking of power generation infrastructure and strategic onshoring, a stable US dollar, and foreign capital flight into the US (capital tends to flow to where it is treated best). And lower interest rates will lead to more consumer spending, business borrowing for investment/capex, earnings growth, and stock buying (including retail, institutional, and corporate share buybacks). Indeed, the 10-2 Treasury yield spread stands at about 50 bps today, which is consistent with past periods of continued US economic expansion. 

However, while retail investors have continued to invest aggressively, institutional investors and hedge funds (the so-called “smart money”) have grown more defensive and deleveraged. So, maintaining a disciplined approach—such as focusing on fundamental analysis, long-term trends, and clear investment goals—can protect against emotional kneejerk overreactions during murky or turbulent periods.

On that note, remember that stock valuations are dependent upon expectations for economic growth, corporate earnings, and interest rates, tempered by the volatility/uncertainty of each—which manifests in the equity risk premium (ERP, i.e., earnings yield minus the risk-free rate) and the market P/E multiple. Some commentators suggest that every 25-bp reduction in interest rates allows for another 1-point increase in the P/E multiple of the S&P 500; however, those expected rate cuts over the next several months might already be baked into the current market multiple for the S&P 500 and Nasdaq 100 such that further gains for the broad indexes might be tied solely to earnings growth—driven by both revenue growth and margin expansion (from productivity and efficiency gains and cost cutting)—rather than multiple expansion.

Broad, cap-weighted market indexes like the S&P 500 and Nasdaq 100 essentially have become momentum indexes, given their huge concentration in AI-driven, Big Tech mega-caps. So, although growth stocks and crypto may well lead the initial recovery through year end, longer term, rather than a resumption of the FOMO/YOLO momentum rally on the backs of a narrow group of AI leaders (and some speculative companies that ride their coattails), I expect the euphoria will be more tempered in 2026 such that we get a healthy broadening and wider participation across caps and sectors and with a greater focus on quality and profitability. There are plenty of neglected high-quality names out there worthy of investment dollars.

As I discuss in my full commentary, top-ranked sectors in Sabrient’s SectorCast model include Technology, Healthcare, and Financials. In addition, Basic Materials, Industrials, and Energy also seem poised to eventually benefit from fiscal and monetary stimulus, domestic capex tailwinds, a burgeoning commodity Supercycle, rising demand for natural gas for power generation, and more-disciplined capital spending programs.

As such, although near-term market action might remain risk-on into year end, led by growth stocks, the case for value stocks today might be framed as countercyclical, mean reversion, portfolio diversification, and market broadening/rotation into neglected large, mid, and small caps, many of which display a solid earnings history and growth trajectory as well as low volatility, better valuations, and less downside risk, with greater room for multiple expansion. On 10/30, I published an in-depth post detailing the case today for value investing titled, “Is the market finally ready for a value rotation?” in which I discussed three key drivers: 1) mean reversion on extreme relative valuations, 2) diversification of portfolios that have become heavily titled to growth, and 3) sticky inflation benefiting real assets and cyclical/value sectors. So, perhaps the time is ripe to add value stocks as a portfolio diversifier, such as the Sabrient Forward Looking Value Portfolio (FLV 13), which is only offered annually as a unit investment trust by First Trust Portfolios and remains in primary market only until Friday, 11/14.

In addition, small caps tend to benefit most from lower rates and deregulation, and high-dividend payers become more appealing as bond alternatives as interest rates fall, so Sabrient’s quarterly Small Cap Growth and Dividend portfolios also might be timely as beneficiaries of a broadening market—in addition to our all-seasons Baker’s Dozen growth-at-a-reasonable-price (GARP) portfolio, which always includes a diverse group of 13 high-potential stocks, including a number of under-the-radar names identified by our models.

So, rather a continued capital flow into the major cap-weighted market indexes, which are dominated by mega-caps, growth, and technology, a healthy market rotation would suggest equal-weight, value, dividend, strategic beta, factor-weight, small/mid-caps, other sectors, and actively managed funds. Indeed, I believe we are being presented with an opportunity to build diversified portfolios having much better valuations and less downside than the S&P 500. In actively selecting diversified stocks for our portfolios (which are packaged and distributed as UITs by First Trust Portfolios), Sabrient seeks high-quality, undervalued, often under-the-radar gems for our various portfolios—starting with a robust quantitative model followed by a detailed fundamental analysis and selection process—while providing exposure to value, quality, growth, and size factors and to both secular and cyclical growth trends.

The Q4 2025 Baker’s Dozen launched on 10/17 is off to a good start, led by mid-cap industrial Flowserve (FLS) among its 13 diverse holdings, as is our annual Forward Looking Value 13 portfolio, led by mid-cap rideshare provider Lyft (LYFT) among its 28 diverse holdings. In fact, most of our 20 live portfolios are doing well versus their relevant benchmarks. And for investors concerned about lofty valuations and a potential spike in market volatility, low-beta and long/short strategies might be appropriate, such as the actively managed First Trust Long-Short ETF (FTLS), which licenses Sabrient’s proprietary Earnings Quality Rank (EQR) as a quality prescreen.

You can find our EQR score along with 8 other proprietary factors for roughly 4,000 US-listed stocks in our next-generation Sabrient Scorecards, which are powerful digital tools that rank stocks and ETFs using our proprietary factors. You can learn more about them by visiting: http://HighPerformanceStockPortfolios.com.

In today’s full post, I discuss in greater depth this year’s speculative rally and mega-cap leadership, whether the AI trade has gotten ahead of itself, market headwinds versus tailwinds, inflation indicators (in the absence of government data), and reasons to be optimistic about stocks. I also reveal Sabrient’s latest fundamental-based SectorCast quantitative rankings of the ten U.S. business sectors, current positioning of our sector rotation model, and several top-ranked ETF ideas.

Click HERE to find this post in printable PDF format, as well as my latest Baker’s Dozen presentation slide deck and my 3-part series on “The Future of Energy, the Lifeblood of an Economy.” As always, I’d love to hear from you! Please feel free to email me your thoughts on this article or if you’d like me to speak on any of these topics at your event!  Read on….

  by Scott Martindale
  CEO, Sabrient Systems LLC

 Overview

Well, the FOMC followed the script and cut the fed funds rate (FFR) by 25 bps (from 4.25-4.50% range down to 4.00-4.25%) in an 18-1 vote. It was the first rate cut since December of last year—even though the rate needs to be 100 bps lower, in my view, as I have been advocating for quite some time, given the prior overreliance on government spending and hiring giving way to the growing impact of elevated rates on private sector growth and hiring, particularly within rate-sensitive industries. No more government largesse means the Fed must get busy with rate cuts. Market breadth was already improving in anticipation of the Fed’s dovish turn, with market segments like small caps, value stocks, banks, and transports perking up.

Although this was a relatively tepid move by the FOMC rather than the full-throated declaration of a new easing cycle that is needed, Fed chair Jerome Powell still believes monetary policy has officially shifted from "modestly restrictive" (his words at the July meeting) to "more neutral” today and characterized the latest rate cut as a "risk management" decision in light of slowing economic activity and jobs growth on the one hand, offset by sticky inflation on the other, which I discuss in greater depth in today’s post.

Of course, slashing FFR even 50 bps would give a panicky signal to the market, so newly appointed Fed Governor Stephen Miran was the lone dissenter, favoring 50 bps. Instead, they will proceed with gradual cuts on a steady path to eventually arrive at its long-term goal of a terminal FFR around 3.00% (2% inflation plus 1% neutral rate, aka “r-star”). The CME futures market now reflects 86% odds of two more 25-bp cuts this year (75 bps total for the year, bringing FFR down to 3.50-3.75%) and 78% odds of another two cuts next year (down to 3.00-3.25%)—as well as 50% odds of three cuts next year, despite the Fed’s own dot plot of two 25-bp cuts this year and just one in 2026. In my view, this will lead to more consumer spending, business borrowing for investment/capex, earnings growth, and stock buying (including retail, institutional, and share buybacks).

In response, the major indexes surged to new highs yet again. Any attempt at a pullback has been nothing more than an overbought technical correction/consolidation, as enthusiasm grows around the promise of AI revolutionizing our lives, workplace, and society at large, leading to rising productivity and prosperity. However, while we await the fully ripened fruits of these rapidly advancing technologies, stock gains have been driven more by multiple expansion in anticipation of great things to come, as well as a weaker dollar and surprisingly strong earnings growth—albeit driven more by cost-cutting and productivity growth than revenue growth, with net margins closing in on their 2021 peak of 13%.

Thus, lofty stock valuations and tight corporate bond spreads suggest an expectation that profitability and ROIC will remain strong for the foreseeable future despite the many storm clouds (such as geopolitical threats, ongoing hot wars, tariffs and unresolved trade negotiations, struggling global trading partners, sticky inflation metrics, weak jobs growth, social strife, and now a federal government shutdown). In fact, rather than investor fear manifesting in falling stock prices and rising market volatility, it instead seems to be reflected in the price of gold and silver, which have been surging.

Back in June, Mike Wilson of Morgan Stanley asserted, “we identified 4%-4.5% [on the 10-year yield] as the sweet spot for equity multiples, provided that growth and earnings stay on track.” Similarly, Goldman Sachs saw 4.5% acting as a ceiling for stock valuations. Wilson identified four factors that he believes would sustain market strength: 1) a trade deal with China (which China desperately needs sorted out), 2) stabilizing earnings revisions, 3) a more dovish Fed (i.e., rate cuts), and 4) the 10-year yield below 4% (without being driven by recessionary data). Indeed, all four have shown good progress.

From the 4/7 lows, retail investors flipped from tariff panic to FOMO/YOLO, and the rest of the investor world has jumped onboard. Speculative “meme” stocks have been hot, and AQR’s Quality-minus-Junk factor (aka “quality margin”) has been shrinking. Moreover, small caps have been surging, as evidenced by the Russell 2000 Small-cap Index (IWM) setting new all-time high last week (for the first time since 2021), which is a historically bullish signal, and the Russell Microcap Index (IWC) has done even better. Similarly, value stocks also have perked up, with the Invesco S&P 500 Pure Value ETF (RPV) also reaching a new high, and the transports, like the iShares Transportation ETF (IYT), seems bent on challenging its highs from last November.

The broad market was long overdue for a healthy broadening to bolster bullish conviction, and indeed it appears the ducks finally lined up to support it. This broadening bodes well for further upside as capital merely rotates rather than leave the market entirely. The Carson Group has observed that for every time since 1980 that the Fed cut rates while the market was within 2% of an all-time high (21 instances), stocks continued to rise over the ensuing 12 months. As Eric Peters of One River Asset Management opined, “There is no appetite for austerity within either party, so their preference is for inflation-resistant assets, which [suggests]…stocks, gold, bitcoin.”

Overall, there is no magic here, the setup is bullish for stocks, with improving market breadth (i.e., wider participation), as we enter Q4. But that’s not to say we won’t get a pullback in the near term. Chart technicals show a relative strength index (RSI) that has been in overbought territory for a historically long time, but I think any significant pullback would be a buyable event. So, following two solidly bullish years, I think this year also will finish strongly, with a potential third-straight 20%+ year (total return, assuming dividends reinvested) in the crosshairs. But the cautionary tale is that, while not unprecedented, a third straight 20%+ year has only happened once before in the past 100 years, during 1995-99, i.e., when it ran for five straight years during the dot-com boom (followed of course by the dot-com bust). Also, while I expect longer-duration yields (and by extension, mortgage rates) to eventually recede, be careful about jumping too aggressively into them, as elevated yields might remain sticky until federal debt and inflationary pressures have shown that they are indeed moderating, as I expect they will by early next year.

Although corporate insider buying has been weak, share buybacks have already set an annual record and are on track to hit $1.1 trillion by year end. Also, investor appetite for IPOs has returned in force, with 259 IPOs on US exchanges through Q3 2025, which is up 75% versus the same point in 2024, reflecting an abundance of both investor optimism and liquidity. And Electronic Arts (EA) is officially going private in the largest leveraged buyout (LBO) in history, at $55 billion.

Furthermore, the Atlanta Fed’s GDPNow Q3 forecast has risen to 3.8% (as of 10/1), interest rates are coming down across the curve, the US economy is holding up, corporate earnings momentum remains strong, the CBOE Volatility Index (VIX) remains low, the Global Supply Chain Pressure Index (GSCPI) remains at or below the zero line (i.e., its historical average), global liquidity and M2 growth is modest/supportive, new tax rates and deregulation from the One Big Beautiful Bill Act (OBBBA) are supportive and stimulative, exciting new technologies are accelerating, strategic reshoring and supply chain redundancies are underway (but not total deglobalization), and secular disinflationary trends and productivity growth have resumed. The only thing missing is a fed fund rate (FFR) at the neutral rate—which is around 3.0%, in my view.

However, as I discuss in my full post below, cautionary signals abound, so investors should be tactically vigilant in this environment of rising valuation multiples, overbought technicals, sluggish corporate revenue growth (with strong earnings growth based on margin expansion from productivity growth and cost-cutting), rising bankruptcies and delinquencies, and falling Leading Economic Indicators by focusing on high-quality companies and diversification (across sectors and asset classes) while holding hedges (like protective put options or inverse ETFs).

Top-ranked sectors in Sabrient’s model include Technology, Financials, Industrials, which all seem poised to benefit from stimulus and capex tailwinds. With the 10-2 and 30-2 Treasury yield spreads currently at 56 bps (4.10-3.54%) and 117 bps (4.71-3.54%) respectively—the highest since early 2022—the steepening yield curve should be favorable for regional banks, which borrow short and lend long (so a higher spread leads to higher profits). Also top-ranked in our model is Healthcare based mostly on valuation, and it indeed might be a sleeper opportunity, as (according to DataTrek Research) “US large cap Healthcare has lagged the S&P 500 by more than 4 standard deviations, a level of underperformance we’ve never seen in a major sector.” And while Energy sits at the bottom of our Outlook rankings, the sector also has earned consideration based on firmer oil prices and disciplined capital plans.

The Sabrient team focuses on fundamental quality—starting with a robust quantitative growth-at-a-reasonable-price (GARP) model followed by a detailed fundamental analysis and selection process—in selecting our Baker’s Dozen, Forward Looking Value, Dividend, and Small Cap Growth portfolios, which are packaged and distributed as UITs by First Trust Portfolios. By the way, the new Small Cap Growth (SCG 48) portfolio launches on Friday 10/3, so 10/2 is the final day to get into SCG 47, which is off to a good start, led by SSR Mining (SSRM) and Mercury Systems (MRCY) among its 44 holdings. The Q3 2025 Baker’s Dozen has also started off well, led by Sterling Infrastructure (STRL) and Valero Energy (VLO) among its 13 concentrated positions, as has our annual Forward Looking Value (FLV 13) portfolio. In fact, most of our 20 live portfolios are doing well versus their relevant benchmarks. Again, value and small caps seem like good ideas for a broadening market.

Notably, our proprietary Earnings Quality Rank (EQR) is a key factor used in our internal models, and it is also licensed to the actively managed First Trust Long-Short ETF (FTLS) as a quality prescreen. In fact, you can find our EQR score along with 8 other proprietary factor scores for roughly 4,000 US-listed stocks in our next-generation Sabrient Scorecards, which are powerful digital tools that rank stocks and ETFs using our proprietary factors. You can learn more about them by visiting: http://HighPerformanceStockPortfolios.com.

In today’s post, I discuss Fed policy, the modest inflationary pressures, the weak private sector jobs market, solid-but-fragile economic growth outlook, lofty stock valuations, and the case for value and small caps given emerging monetary and fiscal support. I also reveal Sabrient’s latest fundamental-based SectorCast quantitative rankings of the ten U.S. business sectors, current positioning of our sector rotation model, and several top-ranked ETF ideas. Click HERE to find this post in printable PDF format, as well as my latest presentation slide deck and my 3-part series on “The Future of Energy, the Lifeblood of an Economy.”

As always, please email me your thoughts on this article, and feel free to contact me about speaking on any of these topics at your event!  Read on….

  
  by Scott Martindale
  CEO, Sabrient Systems LLC
  
 Overview

As we close out H1 2025, markets seem eager to press higher on optimism about imminent fiscal stimulus and monetary policy support during H2—plus perhaps a “peace dividend” thrown in. Of course, investors at home and abroad know that President Trump will pull out all stops to demonstrate meaningful successes in raising organic economic growth and jobs creation, fostering an affordable and reliable energy supply for an electricity-hungry future, and leveraging trade negotiations to open up overseas markets while shrinking the debt/GDP and deficit/GDP ratios over the next 12 months. Otherwise, he risks a catastrophic loss in the mid-term congressional elections—which means his political opponents will be impeding him every step of the way in an effort to make that loss happen.

I had been expecting elevated volatility during H1 as the economy faced a gauntlet of challenges before surging to new highs in H2, but sanguine retail investors (with a healthy dose of FOMO) have been too eager to wait it out. Instead, they bought the April dip and never looked back, seemingly confident that my optimistic scenario would play out. And then the momentum-driven algos jumped in, followed by the institutional money. The Invesco S&P 500 High Beta ETF (SPHB) is up nearly 50% since the “Liberation Day” selloff, reflecting major risk-on behavior. Foreign capital is returning as well after a brief period of rebalancing, hedging, and “tariff paralysis.”

But, with lingering macro uncertainties and valuations seemingly “priced for perfection,” caution is warranted. Inflation and jobs metrics have been softening, in spite of what the headline numbers and MSM might suggest, as I discuss in greater depth in today’s post. The current inflation trend, as illustrated by the rolling 3-month annualized month-over-month (MoM) metrics rather than looking back 12 months to last year’s price index, shows Personal Consumption Expenditures (PCE) and Consumer Price Index (CPI) falling to just +1.08% and +1.01%, respectively. And regarding jobs growth, if you look under the hood of last week’s reports, private sector hiring has been quite weak, with the headline numbers bolstered by government hiring (at the state and local level, while federal jobs shrink) and government-supported sectors, like healthcare and education.

Of course, some of this reluctance to hire can be chalked up to the lack of clarity around trade deals, tariffs, inflation, the One Big Beautiful Bill Act (OBBBA), and Fed policy, but much of this is clearing up. For example, now that the OBBBA has been signed into law, we know the new rules on tax rates, subsidies, and incentives. Moreover, the trade deals are gradually coming to fruition. However, the FOMC might continue to lay low in “watch and wait” mode to see how the economy and inflation respond rather than cut rates, which leaves Fed policy intentions murky.

I discuss both inflation and jobs in greater depth in my full commentary below, and I again make the case that the FOMC should have a terminal/neutral fed funds rate 100 bps lower than today’s 4.33% effective rate. Bond yields have normalized with the 10-year Treasury now around 4.40%, which is back to its levels last November to flatten the yield curve, and the 2-year is around 3.90%. Both rates are signaling to the FOMC they should cut, and in fact the Fed’s own long-run estimate for the fed funds rate is 3.0%. The market needs lower interest rates in tandem with business-friendly fiscal policy, including a 5.0% 30-year mortgage rate and a weaker dollar, to support US and global economies, to allow other central banks to inject liquidity, to avert global recession and credit crisis, and to relieve indebted consumers and businesses.

As Real Investment Advice has opined, “…if interest rates drop by just 1%, this could reduce [federal] spending by $500 billion annually, helping to ease fiscal pressures, [and] the coming strategic investments, workforce development, and sustainable energy policies could improve economic outcomes while resolving deficit concerns.” I agree.

So, I believe the Fed remains behind the curve as it worries about tariffs and phantom inflation—which the FOMC sees as a lurking boogeyman, like frightened children lying wide-eyed awake in their beds at night, expecting it to pounce at any moment. But as I continually pound the table on, tariffs are actually disinflationary (in the absence of a commensurate and offsetting increase in income). And more broadly, I believe inflation has resumed its 40-year (1980-2020) secular downtrend, as I discuss in my market commentary below.

Famed investor, co-founder of PIMCO, and “Bond King” Bill Gross argues that the growing federal deficit, elevated bond supply, and a weak dollar likely will keep inflation above 2.5% and create headwinds for bonds. However, while we both like US equities (even at today’s valuations, which I discuss in greater detail below), I see the outlook for bonds differently. Now that we have some clarity on the OBBBA and the debt ceiling, foreign investors and US consumers and businesses know much more about the rules they will be playing under.

Capital tends to flow to where it is most welcome and earns its highest returns, so I think the recent tide of foreign capital flight leaving the US will reverse, helping the dollar find a bottom and perhaps strengthen a bit, which based on historical correlations would suggest higher bond prices (lower yields, despite elevated issuance in the near term) and perhaps lower gold prices. However, without the de facto boost to global liquidity of a weakening dollar, the Fed will have to step up and provide that liquidity boost, such as by lowering interest rates and implementing “stealth QE” (such as through reduced bank reserve requirements) to encourage lending and boost velocity of money (M2V), which has recently stagnated.

Most any foreign investor will tell you there is no other place in the world to invest capital for the innovation and return on shareholder capital than the US, given our entrepreneurial culture, technological leadership in disruptive innovation, strong management and focus shareholder value, low interest-rate exposure, global scalability, wide protective moats, and our reliable and consistently strong earnings growth, free cash flow, margins, and return ratios, particularly among the dominant, cash flush. So, I continue to like US equities over international equities for the longer term (other than a simple mean-reversion trade).

Hindered by its quasi-socialist policies, Europe doesn’t come close to the US in producing game-changing technologies, opportunities, and prosperity for itself and the world at large. In my view, it lacks our level of freedom, openness, dynamism, and incentive structures. And as for China’s unique “capitalism with Chinese characteristics,” although its authoritarian rule, homogenous society, and obedient culture helps ensure broad unity and focus on common goals, its system is still far inferior when it comes to freedom of thought, entrepreneurship, and innovation, in my view. Despite America’s inequalities and inadequacies, there is no better country on earth for tolerance and opportunity for economic prosperity, and we continue to grow ever more diverse and inclusive—without government programs forcing it to be so.

Moreover, it’s not just the Technology sector that is appealing to investors. As BlackRock wrote in their Q2 2025 Equity Market Outlook, “Commentators will often cite the prevalence of a large number of Tech companies in the U.S. as the driver of U.S. equity dominance. But our analysis points to wider breadth in U.S. quality. Current return on tangible invested capital (ROTIC), a proxy for a company’s ability to allocate capital for optimal profitability, is significantly higher in the U.S. than elsewhere in the world, suggesting quality exists not in pockets but across sectors.”

Indeed, rather than investing in the passive cap-weighted indexes dominated by Big Tech, investors may be better served by active stock selection that seeks to identify under-the-radar, undervalued, high-quality gems. This is what Sabrient seeks to do in our various portfolios, all of which provide exposure to Value, Quality, Growth, and Size factors and to both secular and cyclical growth trends. When I say, “high-quality company,” I mean one that displays a history of consistent, reliable, resilient, durable, and accelerating sales, earnings, and free cash flow growth, rising profit margins, a history of meeting/beating estimates, high capital efficiency and ROI, solid earnings quality, a strong balance sheet, low debt burden, competitive advantage, and a reasonable valuation compared to its peers and its own history.

These are the factors Sabrient employs in selecting our Baker’s Dozen, Forward Looking Value, Dividend, and Small Cap Growth portfolios, which are packaged and distributed as UITs by First Trust Portfolios. (By the way, the new Q3 Baker’s Dozen and Small Cap Growth portfolios are launching late next week, so these are the final several days to get into the Q2 portfolios launched in April—both of which are performing well versus their benchmarks so far.)

We also use many of those factors in our SectorCast ETF ranking model, and notably, our proprietary Earnings Quality Rank (EQR) is a key factor used in each of our portfolios, and it is also licensed to the actively managed First Trust Long-Short ETF (FTLS) as a quality prescreen. In fact, we have launched our next-generation Sabrient Scorecards, which are powerful digital tools that rank stocks and ETFs using our proprietary factors. You can learn more about them by visiting:
http://HighPerformanceStockPortfolios.com.

In my full commentary below, I discuss in greater depth the trends in inflation, jobs, GDP, and stock valuations, as well as Sabrient’s latest fundamental-based SectorCast quantitative rankings of the ten U.S. business sectors, current positioning of our sector rotation model, and several top-ranked ETF ideas. Click HERE for a link to this post in printable PDF format.

By the way, my in-depth discussion of energy and electrical power generation (that I keep teasing) will be released soon. As always, please email me your thoughts on this article, and feel free to contact me about speaking on any of these topics at your event!  Read on….

 
  by Scott Martindale
  CEO, Sabrient Systems LLC

  Overview

So much for the adage, “Sell in May and go away.” May was the best month for the stock market since November 2023 and the best month of May for the stock market in 35 years, with the S&P 500 up +6.1% and Nasdaq 100 up +9.3%. Moreover, the S&P 500 has risen more than 1,000 points (20%) from its 4/8 low and is back into positive territory YTD (and challenging the 6,000 level). History says when stocks rally so strongly off a low, the 12-month returns tend to be quite good. Even better news is that the rally has been broad-based, with the equal-weight versions of the indexes performing in line with the cap-weights, and with the advance/decline lines hitting all-time highs. An as Warren Pies of 3Fourteen Research observed on X.com, “…the S&P 500 has retraced 84% of its peak-to-trough decline. The [market] has never retraced this much of a bear market and subsequently revisited the lows. The technical evidence points, overwhelmingly, to the beginning of another leg to the bull market and new ATHs.” We certainly aren’t seeing the H1 volatility I expected, with the CBOE Volatility Index (VIX) back down to February levels. So, is this the all-clear signal for stocks? Well, let’s explore this a bit.

As Josh Brown of Ritholtz Wealth Management reminds us, “Stocks [tend to] bottom in price a full 9 months before earnings do… By the time earnings are reaching their cycle low, stocks have already been rallying for three quarters of a year in advance of that low. This is why you don’t wait to get invested or attempt to sit out the economic or earnings downturns.” Typically, the growth rates for GDP, corporate earnings, wages, and stock prices should not stray too far apart since they are all closely linked to a strong economy. And as of 6/9, the Atlanta Fed’s GDPNow model indicates an eye-popping +3.8% growth is in store for Q2 (albeit largely due to a collapse in imports following the negative Q1 print from front-running of imports, ahead of the tariffs).

And with the last administration’s last-minute surge in deficit spending wearing off, the new administration is doing quite well in bringing down inflation, starting with oil prices. Indeed, April CPI came in at +2.33% YoY and the rolling 3-month annualized CPI (a better measure of the current trend) is +1.56%. Looking ahead, the Cleveland Fed’s Inflation NowCasting model forecasts May CPI of +2.40% YoY and an annualized Q2 CPI of +1.70%, while the real-time, blockchain-based Truflation metric is +1.90% (as of 6/9). After all, disruptive innovation like AI is deflationary by increasing productivity, China’s economic woes are deflationary (cheaper goods), and tariffs are deflationary (in the absence of commensurate rise in income), so the rising GDP forecast and falling CPI numbers reflect the exact oppositive of the “stagflation” scare the MSM keeps trumpeting. I discuss inflation in greater length in today’s post below.

It all sounds quite encouraging, right? Well, not so fast. For starters, the charts look severely overbought with ominous negative divergences that could retrace a lot of gains. Moreover, with ISM manufacturing and services indexes both in contraction, with so much lingering uncertainty around trade negotiations, with President Trump’s “one big, beautiful bill” (aka OBBB) wending a treacherous path through congress, and with his ambitious drive to reverse the course and negative outcomes of decades of hyper-globalization, entitlement creep, and climate/cultural activism facing fierce resistance both at home and abroad, the coast is hardly clear.

Witness the rise in bond term premiums even as the Fed contemplates cutting its benchmark rate as foreign central banks and bond vigilantes slash demand for Treasuries (or even sell them short) due to expectations of unbridled federal debt and Treasury issuance. According to Mike Wilson of Morgan Stanley: “we identified 4%-4.5% [10-year yield] as the sweet spot for equity multiples, provided that growth and earnings stay on track.” Similarly, Goldman Sachs sees 4.5% acting as a ceiling for stock valuations—and that is precisely where the rate closed on Friday 6/6. Wilson identified four factors that he believes would sustain market strength: 1) a trade deal with China, 2) stabilizing earnings revisions, 3) a more dovish Fed (i.e., rate cuts), and 4) the 10-year yield below 4% (without being driven by recessionary data)—but there has been observable progress only in the first two.

Regarding our debt & deficit death spiral, I will argue in my full commentary below that despite all the uproar, the OBBB might not need to institute harsh austerity with further cuts to entitlements (which, along with interest on the debt, amount to 73% of spending) that would mostly hurt the middle/working classes. The bill rightly repeals low-ROI tax credits and spending for boondoggles from prior bills, most notably low-transformity/low-reliability wind and solar energy projects that require government subsidies to be economically viable. But beyond that, the focus should be on lowering the debt/GDP ratio through fiscal and monetary policies that foster robust organic economic growth (the denominator) led by an unleashed private sector fueled by tax rate cuts and incentives for capital investment, deregulation, disruptive innovation, and high-transformity/high-reliability natural gas and next-generation nuclear technology. Real Investment Advice agrees, arguing that market pundits might be “too focused on the deficit amount…rather than our ability to pay for it, i.e., economic growth.”  The charts below show the debt-to-GDP ratio, which is about 120% today, alongside the federal deficit-to-GDP ratio, which is about 6.6% today. (Note that US Treasury Secretary Scott Bessent’s target of 3% deficit-to-GDP was last seen in 2016.)

Of course, nothing is all bad or all good. But Trump is shining a bright light on the devastating fallout on our national security, strategic supply chains, and middle/working classes. Changing the pace and direction of globalization, including deglobalizing some supply chains, reshoring strategic manufacturing, and focusing on low-cost energy solutions for a power-hungry world cannot occur without significant disruption. Within the US, we can have different states provide different types of industries and services depending upon their comparative advantages like natural resources, labor costs, demographics, geography, etc.—after all, we are all part of one country. But on a global scale, with some key trading partners that might be better considered rivals, or even enemies in some cases, we can’t entrust our national security to the goodwill and mutual benefit of international trade. Indeed, China has a history of not fulfilling its commitments in prior trade agreements, like reducing state subsidies overproduction (“dumping”), and IP theft, moving some manufacturing into the US, and increasing imports of US goods.

I have talked often about the 3-pronged approach of addressing our federal debt by: 1) inflating it away with slightly elevated inflation around 2.4% to erode the value of dollars owed and increase nominal GDP to reduce the debt-to-GDP ratio, 2) cutting it away with modest reductions or at least freezes on spending and entitlements, and 3) growing it away by fostering robust organic growth from a vibrant private sector with pro-cyclical fiscal and monetary policies that ultimately grows tax receipts on higher income and GDP (even at lower tax rates) and reduces the debt-to-GDP ratio. But of these three, the big “clean-up hitter” must be #3—robust growth. In fact, a key reason that the OBBB does not propose more austerity measures (i.e., spending cuts beyond waste, fraud, and the “peace dividend”) is to ensure that GDP grows faster than the debt and deficit. We can only live with slightly elevated inflation, and it is difficult to cut much spending given the dominance of mandatory spending (entitlements and interest payments) over discretionary spending. So, the primary driver must be robust private sector organic growth—and by extension an embrace of disruptive innovation and a productivity growth boom that boosts real GDP growth, keeps a lid on inflation, widens profit margins—leading to rising wages tax remittances.

As a case in point, I highly recommend a recent episode of the All-In Podcast in which the panel of four Tech billionaires (of various political persuasions) speak with Miami Mayor Francis Suarez. In 2017, Suarez took over leadership of a city that was in distress, near bankruptcy, and a murder capital of the country, and he resurrected it with three core principles for success: “keep taxes low, keep people safe, lean into innovation”—whereas he laments that most other big-city mayors prefer to do the opposite, i.e., raise taxes, tolerate crime, create suffocating regulations, and reject the offers and entreaties of billionaire entrepreneurs like Jeff Bezos (Amazon) and Elon Musk (Tesla) as overly disruptive or politically incorrect.

May inflation metrics will come out this week, and then the June FOMC meeting convenes 6/17-18. So far, the FOMC has been quite happy to just sit on its hands (while the ECB just cut for an 8th time) in the face of tariff paralysis; falling oil prices, unit labor costs, and New Tenant Rents; declining inflation and savings rates; rising delinquencies; and slowing jobs growth; instead preferring to be reactive to sudden distress rather than proactive in preventing such distress. Inflation metrics continue to pull back after being propped up by elevated energy prices, long-lag shelter costs, and the prior administration’s profligate federal deficit spending that overshadowed—and indeed created—sluggish growth in the private sector. Economist Michael Howell of CrossBorder Capital persuasively asserts that monetary policy “must prioritize liquidity over inflation concerns, so the Fed’s current hands-off, higher-for-longer, reactionary approach risks causing a liquidity crunch.”

So, I believe it’s going to be hard for Fed Chair Jay Powell to justify continuing to “wait & watch.” As of 6/9, CME Group fed funds futures show zero odds of a 25-bp rate cut this month, but increases to 17% at the July meeting, and 64% odds of at least 50 bps by year-end. I have been insisting for some time that the FFR needs to be 100 bps lower, as the US economy's headline GDP and jobs numbers were long artificially propped up by excessive, inefficient, and often unproductive federal deficit spending, while the hamstrung private sector has seen sluggish growth, and 30-year mortgage rates need to be closer to 5% to allow the housing market to function properly. But regardless of the FOMC decision this month, I expect the rate-cutting cycle to restart soon and signed trade deals to emerge with our 18 key trading partners, calming domestic and foreign investors.

I still expect new highs in stocks by year end. For now, traders might wait for a pullback and bounce from support levels, or perhaps an upside breakout beyond the 6,000 level on the S&P 500. But my suggestion to investors remains this: Don’t chase the highflyers and instead focus on high-quality businesses at reasonable prices, expect elevated volatility given the uncertainty of the new administration’s policies and impact, and be prepared to exploit any market pullbacks by accumulating those high-quality stocks in anticipation of gains by year end and beyond, fueled by the massive and relentless capital investment in blockchain and AI applications, infrastructure, and energy, leading to rising productivity, increased productive capacity (or “duplicative excess capacity,” in the words of Secretary Bessent, which would be disinflationary), and economic expansion, as I explore in greater depth in my full post below.

Rather than investing in the passive cap-weighted indexes dominated by Big Tech, investors may be better served by active stock selection that seeks to identify under-the-radar, undervalued, high-quality gems. This is what Sabrient seeks to do in our various portfolios, all of which provide exposure to Value, Quality, Growth, and Size factors and to both secular and cyclical growth trends. When I say, “high-quality company,” I mean one that is fundamentally strong, displaying a history of consistent, reliable, and accelerating sales and earnings growth, a history of meeting/beating estimates, high capital efficiency, rising profit margins and free cash flow, solid earnings quality, low debt burden, and a reasonable valuation compared to its peers and its own history. These are the factors Sabrient employs in selecting our Baker’s Dozen, Forward Looking Value, Dividend, and Small Cap Growth portfolios (which are packaged and distributed as UITs by First Trust Portfolios). We also use many of those factors in our SectorCast ETF ranking model, and notably, our proprietary Earnings Quality Rank (EQR) is a key factor used in each of our portfolios, and it is also licensed to the actively managed First Trust Long-Short ETF (FTLS) as a quality prescreen.

Sabrient founder David Brown describes these and other factors as well as his portfolio construction process in his latest book. He also describes his path from NASA scientist in the Apollo moon landing program to creating quant models for ranking stocks and building stock portfolios. And as a companion product to the book, we have launched our next-generation Sabrient Scorecards for Stocks and ETFs, which are powerful digital tools that rank stocks and ETFs using our proprietary factors. You can learn more about both the book and scorecards by visiting: http://HighPerformanceStockPortfolios.com.

Keep in mind, stock market tops rarely happen when investors are cautious, as they continue to be today. So, I continue to believe in staying invested in stocks but also in gold, gold royalty companies, Bitcoin (as an alternative store of value), and perhaps Ethereum (for its expanding use case). These not only serve as hedges against dollar debasement but as core holdings within a strategically diversified portfolio. Bitcoin’s climb back to new highs in May has been much more methodical and disciplined than its previous history of maniacal FOMO momentum surges that were always destined to retrace. This is what comes from maturity and broader institutional acceptance, characterized by “stickier” holders and strategic allocations. Notably, iShares Bitcoin Trust ETF (IBIT) had its largest-ever monthly inflow during May.

I highly encourage you to read my full commentary below. I discuss in greater depth the economic metrics, the truth about the OBBB, deglobalization, trade wars, affordable energy, economic growth, jobs, inflation, and global liquidity. I also discuss Sabrient’s latest fundamental-based SectorCast quantitative rankings of the ten U.S. business sectors, current positioning of our sector rotation model, and several top-ranked ETF ideas. Click HERE for a link to this post in printable PDF format.

By the way, rather than including my in-depth discussion of energy and electrical power generation in this post, I will be releasing it in a special report a little later this month, so please watch for it. As always, please let me know your thoughts on this article, and feel free to contact me about speaking on any of these topics at your event!  Read on….

 Overview

 Market indexes regained all of their losses since the president’s “Liberation Day” tariff announcement one month ago, culminating in an historic +10% 9-day rally for the S&P 500 (and +18% from its 4/7 intraday low) that sent it back above its 20-day and 50-day moving averages to test resistance at its 200-day. But was this just a short-covering relief rally as bearish commentators assert? I said in my April post that the $10 trillion that left the stock market was not the “capital destruction” they claimed, like a wildfire burning down homes, but rather a rotation into the safety of bonds and cash that could quickly rotate back. Sure enough, when retail investors swooped in to scoop up the suddenly fair valuations of the capitulation selloff, leveraged algo momentum traders quickly joined in. But while I think the longer term holds promise, the chart became short-term overbought (and is pulling back this week), and macro conditions are still treacherous, keeping investors jittery and headline-driven. So, the market remains fragile even as we wind down a solid Q1 earnings reporting season, with the FOMC policy announcement on tap this week.

Nevertheless, in my view, positive signs are emerging to suggest: 1) the trade war (particularly with China) and the hot war in Ukraine will both find their way to a resolution, 2) the fiscal legislation (“one big, beautiful bill”) with new tax cuts working its way through congress will soon be passed, 3) the size and scope of federal government that has crowded out the private sector is shrinking and making way for re-privatization and de-regulation of the economy to unleash organic private sector growth, 4) corporate earnings and capex commitments remain strong, and 5) the Federal Reserve will ensure liquidity growth and restart its rate-cutting cycle like other central banks—and liquidity leads pricing in risk asset markets, gold, and cryptocurrencies. So, I think the noise will quiet and the clouds will clear, making way for a renewed focus on corporate earnings and global liquidity to power forward the economy and stocks. And don’t forget—the market loves to climb a wall of worry, which means it discounts the future and typically turns well in advance of the economic and sentiment metrics.

Of course, the biggest news that juiced the stock market is the apparent offramp forming for the trade stalemate between the US and China. Publicly, China has been saber-rattling as a Trumpian bargaining tactic, in my view, and to stoke the flames of political division in our country with midterms on the docket next year—something the CCP doesn’t have to worry much about. Indeed, it has been loath to give an inch even though its economy was already struggling with deflation, a long-running property crisis, sluggish consumer demand, overcapacity, and weak business and consumer confidence well before the recent tariff escalation. Its services PMI just hit a 7-month low, its manufacturing PMI has officially fallen into contraction at 49.0, and its new export orders component plunged to the lowest reading since the pandemic at 44.7. And although China insists the US “unilaterally” started the trade war, the truth is we are finally pushing back after years of turning a blind eye to their tariffs, IP theft, forced technology transfers, hacking, state subsidies, dumping of goods, fentanyl trafficking, and currency manipulation.

In my view, the US is in far better position to weather a brief trade war than mercantilist China. As Treasury Secretary Scott Bessent succinctly articulated, “China’s business model is predicated on selling cheap, subsidized goods to the US, and if there is a sudden stop in that, they will have a sudden stop in their economy. So, they will negotiate.” Both governments know that an escalating trade war with big tariffs and a tight US Federal Reserve is especially bad for China. The dollar/yuan exchange rate is crucially important to China, and the dollar today is nearly as strong it has been against the yuan since yuan’s devaluation during the Global Financial Crisis. With its massive dollar-denominated debt, a weaker dollar relieves China’s financial strain by boosting global liquidity to the benefit of both countries. So, despite its theatrical saber-rattling, China needs a trade deal that ensures a weaker dollar to shore up the yuan and reduce capital flight.

Indeed, we are now hearing from China that “the door is open” to trade talks, and its security czar is evaluating ways to address the use of Chinese precursor chemicals by Mexican cartels to produce fentanyl for distribution in the US. Moreover, although the Port of Los Angeles announced that volumes will fall be 1/3 as several major American retailers are halting all shipments from China, in reality, American businesses as usual are finding a way to succeed (and skirt the most onerous tariffs) by rerouting supply chains through 3rd party countries like Vietnam and Mexico (“trans-shipping”) and delivering to bonded warehouses to delay the official receipt of goods. Also offsetting the tariffs is the 10% drop in the dollar index.

Looking ahead, although volatility likely will remain elevated for the next few months, unless something crazy comes out of left field, I think the market has seen its lows, and the path of least resistance is higher. American consumers, corporations, and entrepreneurs are optimistic by nature and are always pushing boundaries and seeking a path forward, rather than sitting on their hands waiting for government to tell them what to do. And of course, President Trump is not one to sit on his hands for one minute in his effort to “fix” our unsustainable “death spiral” of inflation, debt, deficit spending, offshoring, and hyper-financialization.

But then we have the FOMC, whose members have been quite happy to sit on their hands in the face of tariff turmoil, falling inflation, and slowing GDP and jobs growth. Among the 19 FOMC participants (the 7 Board of Governors and 12 Reserve Bank regional presidents, which includes both the 12 voting members and the 7 non-voting members who serve as voting members on a rotating basis), they almost unanimously (18 of 19) agreed at their March meeting that growth and employment risks are skewed to the downside while inflation risks are skewed to the upside. Overall, the Fed has taken a dovish stance but will be reactive to sudden distress in growth and jobs rather than proactive in preventing such distress.

Although Fed Chair Powell often talks about tariffs as being inflationary, in fact tariffs are deflationary like all forms of taxation—i.e., without a commensurate increase in income or credit, they necessitate a rethinking and reallocation of one’s existing disposable income. Furthermore, Powell & Co. seem to be ignoring the deflationary signals of falling oil prices, slowing household consumption, declining savings rates, and rising delinquencies. Inflation metrics are pulling back after being propped up by elevated energy prices and long-lag components (like shelter costs) and the prior administration’s profligate federal deficit spending that overshadowed—and indeed created—sluggish growth in the private sector. I talk more about inflation metrics and expectations for next week’s CPI and PPI releases in my full commentary below.

To be fair, government spending (to the tune of nearly 6.5% of GDP) exacerbated the inflation and private sector malaise it created by making it difficult for the Powell & Co. to justify helping out the private sector with lower interest rates, thus crowding out the efficient capital allocation and high return on investment of the private sector with the inefficient capital allocation of bloated government boondoggles. Economist Michael Howell of CrossBorder Capital reminds us that “public debt is expanding faster than private debt, fueled by welfare commitments and rising interest burdens, ensuring persistent liquidity growth.” Importantly, Howell persuasively asserts that, “monetary policy must prioritize liquidity over inflation” concerns, so the Fed’s current hands-off, higher-for-longer, reactionary approach risks causing a liquidity crunch. In his view, “The modern financial system is a fragile, collateral-driven mechanism, and one that requires constant intervention [through proactive management] to avoid collapse.”

As Andrew Lees of MacroStrategy Partners has pointed out, “Economies naturally self-order productively when not constrained by excessive regulation and over-bearing government intervention. The current "financialized" economic system as it is, is dependent on debt and unproductive use of capital (Wall Street vs Main Street).” The private sector has proven to be much better at the efficient and highly productive allocation of capital to maximize ROI. So, as Secretary Bessent has described, the Trump administration seeks to reduce the budget deficit to 3% of GDP and increase real GDP growth to 3%, which would lead to the same kind of small-government/strong-private-sector economy that has turned around a foundering Argentina under President Milei.

The May FOMC meeting convenes this week, so we shall see. CME Group fed funds futures show only 3% odds of a 25-bp rate cut, but increases to 32% at the June meeting, and 78% odds of at least 75 bps (3 cuts) by year-end. In my view, they should be readying for 50 bps in rate cuts by July and a target neutral rate of around 3.25-3.50% by early 2026. Certainly the 2-year Treasury yield (the shortest term that is substantially market driven) at 3.80% (as of 5/6) is signaling to the Fed that rates should be much lower than the current 4.25-4.50% fed funds rate. According to a recent post by AlpineMacro, “…the current 10-2 year spread in the bond market is not sustainable, particularly if the economy slows sharply. Ultimately, the long end of the curve will gravitate to the short end, particularly when investors realize that tariff-induced price increases are temporary.” Notably, projections on bond issuance from Secretary Bessent suggest a gradual return to an 80/20 split between T-bonds & notes (80%) versus T-bills (20%) going forward as opposed to the nearly 100% allocation to T-bills (< 1 year) under his predecessor Janet Yellen.

I have been insisting for some time that the FFR needs to be 100 bps lower, as the US economy's headline GDP and jobs numbers were long artificially propped up by excessive, inefficient, and often unproductive federal deficit spending, while the hamstrung private sector has seen sluggish growth. Moreover, today’s DOGE-led spending cuts, trade war uncertainty, and with budget reconciliation and fiscal legislation still in progress have removed much of that artificial stimulus. But regardless of the May FOMC decision, I expect the rate-cutting cycle to restart in June and signed trade deals with our 18 key trading partners beginning this month.

But for the near term, until those things come to fruition, I continue to expect stocks will remain volatile (with VIX above the 20 “fear threshold” but below the 30 “panic threshold”). CNN's Fear & Greed Index just jumped from "Fear” to “Greed” on the dial but remains volatile. The American Association of Individual Investors' ("AAII") Investor Sentiment Survey has shown more than 50% bearish (vs. historical average of 31%) for 10 consecutive weeks, which is the longest streak since 1990. Capital flows reflect a sharp drop in foreign capital flight into US bonds and equities over the past two months in something of a “buyers’ strike,” adding pressure to the US dollar. And last week saw a negative Q1 GDP print, somewhat offset by an upside beat from the jobs report and rising labor force participation.

There are certainly plenty of high-profile bears. One market technician I respect a lot, A.J. Monte of Sticky Trades, still believes stocks will eventually retest their pandemic lows (!). He warned of the dreaded “death cross” when the 50-day moving average crossed down through the 200-day moving average on 4/12. And then we have Christoper Wood of Jefferies, who believes that US stocks saw a permanent (!) peak last December (at lofty valuations) and will never (!) see those levels again—much like Japan’s market peak in 1989. Instead of US stocks, Wood thinks investors should buy Europe, China, Japan, and India. Others have pronounced that the US brand is permanently damaged and that we have witnessed the end of “American exceptionalism.” Heavy sigh.

Call me overly patriotic with rose-colored glasses, but my view is a little different. Capital tends to flow to where it is most welcome and earns its highest returns, so the recent falling tide of foreign capital flight leaving the US will surely return once visibility clears and the dollar firms up. Most any foreign investor will tell you there is no other place in the world to invest capital for the innovation and expected return than the US given our entrepreneurial culture, technological leadership in disruptive innovation, strong focus on building shareholder value, low interest-rate exposure, global scalability, wide protective moats, and our reliable and consistently strong earnings growth, free cash flow, margins, and return ratios, particularly among the dominant, cash flush, Big Tech titans, which continue to use their piles of cash to seed AI startups and other disruptive technologies. Notably, the US boasts more than 50% of the world’s privately owned late-stage start-ups valued at over $1 billion (aka “unicorns”) and leads in R&D spending and patent applications.

Moreover, it’s not just the Technology sector that is appealing to investors. As BlackRock wrote in their Q2 2025 Equity Market Outlook, “Commentators will often cite the prevalence of a large number of Tech companies in the U.S. as the driver of U.S. equity dominance. But our analysis points to wider breadth in U.S. quality. Current return on tangible invested capital (ROTIC), a proxy for a company’s ability to allocate capital for optimal profitability, is significantly higher in the U.S. than elsewhere in the world, suggesting quality exists not in pockets but across sectors.”

As Kevin O’Leary has opined, “Our number one export is the American dream. Everyone wants to come to America and start a business and become personally free." And this will not change just because our president seeks to incentivize the private sector to strategically reshore manufacturing with the ultimate goals of reviving the middle class, narrowing the wealth gap, reducing the trade deficit, ensuring reliable supply chains, and reinforcing national security. Moreover, Trump’s federal cost-cutting, tariff regime, and America-First rhetoric does not aim for absolute deglobalization, fiscal austerity, mercantilism, and isolationism as the MSM would have you believe, but rather to simply rebalance a system that had become completely out of balance—and indeed was falling into that aforementioned death spiral of rising inflation, debt, deficit spending, offshoring, and hyper-financialization. The rebalancing involves re-privatization and de-regulation rather than relying on massive government spending—and what I call “smart austerity” to eliminate waste, fraud, abuse, corruption and unaccountability, plus a “peace dividend” from ending the war in Ukraine.

So, I continue to believe the macro uncertainty and jittery market will ultimately give way to a melt-up, sending the market to back near its highs of Q1 by year-end or early-2026, driven by rising global liquidity, a weaker US dollar, reduced wasteful/reckless government spending and regulatory red tape, lower interest and tax rates, massive corporate capex, and the “animal spirits” of a rejuvenated private sector and housing market.

The early April selloff brought down some of the loftiest valuations among the popular mega-cap stocks, with the forward P/E on the S&P 500 falling to 18.5x on 4/8 versus 22.7x at its February peak and today’s 20.6x (as of 5/5). In fact, many of the prominent names in the Technology and Communication Services sectors saw their valuations retreat such that they are scoring well in Sabrient’s growth models (as shown in our next-gen Sabrient Scorecards subscription product)—including large caps like Taiwan Semiconductor (TSM), Broadcom (AVGO), and Spotify (SPOT) that are in the new Q2 2025 Sabrient Baker’s Dozen portfolio, and small caps like Freshworks (FRSH), QuinStreet (QNST), and RingCentral (RNG) that are in our new Sabrient Small Cap Growth 46 portfolio. These portfolios along with Sabrient Dividend 51 (a growth & income strategy yielding 4.05% as of 5/5) are packaged and distributed quarterly to the financial advisor community as unit investment trusts through First Trust Portfolios.

Indeed, rather than the passive cap-weighted indexes dominated by Big Tech, investors may be better served by active stock selection that seeks to identify under-the-radar and undervalued gems primed for explosive growth—many of whom could coattail on the Big Tech names and provide greater returns. This is what Sabrient seeks to do in our various portfolios, all of which provide exposure to Value, Quality, Growth, and Size factors and to both secular and cyclical growth trends.

As a reminder, the “Size” factor refers to market cap and the Fama French study that showed small caps historically tend to outperform over time. Although that has not been the case for the small cap indexes (like Russell 2000) for most of the past 20 years, I still think the small cap universe is where to find the most explosive growth opportunities, even if the broad passive indexes can't keep up. So, insightful active selection is important for small cap investing—which is easier to do given the relative lack of analyst coverage and institutional ownership of small caps.

For each of our portfolios, we seek high-quality, fundamentally strong companies displaying a history of consistent, reliable, and accelerating sales and earnings growth, rising profit margins and free cash flow, solid earnings quality, low debt burden, and a reasonable valuation. Notably, our proprietary Earnings Quality Rank (EQR) is a key factor in each of our growth, value, dividend, and small cap models, and it is also licensed to the actively managed First Trust Long-Short ETF (FTLS).

Sabrient founder David Brown describes these and other factors as well as his portfolio construction process in his latest book. David describes his path from NASA engineer in the Apollo moon landing program to creating quant models for ranking stocks and building stock portfolios. And as a companion product to the book, we have launched next-gen versions of Sabrient Scorecards for Stocks and ETFs. You can learn more about both the book and scorecards by visiting: http://DavidBrownInvestingBook.com.

In my full commentary below, I discuss earnings, gold, tariffs, inflation, global liquidity, the power of free market capitalism, and the imminent “bullish triumvirate” of tariff resolution, tax cuts, and deregulation. I also discuss Sabrient’s latest fundamental-based SectorCast quantitative rankings of the ten U.S. business sectors, current positioning of our sector rotation model, and several top-ranked ETF ideas. Our model likes Technology, Healthcare, Communication Services sectors, and assuming interest rates indeed come down and liquidity rises as I expect, I also like dividend stocks and gold. HERE is a link to this post in printable PDF format.

I had so much to say this month that I decided to defer until next month my in-depth commentary on the exciting new developments in energy and electrical generation. Please contact me to speak on any of these topics at your event!  Read on….

  by Scott Martindale
  President & CEO, Sabrient Systems LLC

 Key Points:

 1. The country’s 40-year path into a debt & deficit spending spiral was not working and had to change dramatically, not gradually, and the process to fix it is scary and uncomfortable.

2. The president’s “Liberation Day” tariff regime is at once simplistic and perplexing, but the selloff seems overdone, in my view, although the market remains fragile.

3. After an initial price shock, tariffs are deflationary like any tax; and countries are already coming to the table to negotiate them down.

4. The US is much less dependent on trade, less vulnerable to trade disruptions, and in far better position to weather a brief trade war than any other country, including mercantilist China, which is saber-rattling as a Trumpian bargaining tactic and to stoke the flames of political division in our country, in my view.

5. The $10 trillion that left the stock market was not lost like a wildfire burning down homes; it simply rotated into bonds and cash and can quickly rotate back if the outlook does not change and we have fiscal stimulus, supportive Fed, and rising global liquidity.

6. Volatility (up and down) may be sticking around through H1 until clarity improves later in the year.

7. For those still contributing to a 401(k), the selloff has presented a long-awaited opportunity to “buy low.”

8. Investors may be better served by active stock selection, such as Sabrient’s Baker’s Dozen, Small Cap, and Dividend portfolios.

Overview:

The news has been dominated by President Trump’s announced “Liberation Day” regimen of draconian tariffs, which are intended to induce both fairer trade policies from our trading partners and the onshoring of manufacturing. As his words moved from a 10% across-the-board baseline tariff (a nominal amount that initially sent stocks higher) to the gory details of his broader plan, the swan dive commenced. Negative volume went through the roof. Margin calls rained in. Algorithmic trading systems switched from leveraged long to either leveraged short or out of the market completely (thus removing critical liquidity), tripping stop losses and creating a cascade of selling pressure. The next day’s weekly AAII Sentiment Survey hit an extreme 62% bearish reading and will likely fall lower in this week’s survey. IPOs are being put on hold. The Polymarket odds of an emergency rate cut surged to 285, as did the odds of a rate cut meeting (36% at the May FOMC meeting but a 92% lock by the June meeting).

As of Monday morning’s open, the stock market had essentially given back all last year’s gains. Chartists are lamenting the failure of scary-bearish chart patterns (like the dreaded inverse flag pattern) that could potentially send stock indexes all the way down to their pandemic lows. The CBOE Volatility Index (VIX) surged above 45 on Friday 4/4 and then touched 60 in the pre-hours on Monday 4/7, which is reminiscent of the pandemic lockdown five years ago.

But are things today really as bad as that, when global supply chains were paralyzed and people were falling ill (and/or dying) en masse? I would say no, and in just a couple of blood-red, gap-down days, the rapid market meltdown already seems overdone, as I discuss further in today’s post. As famed value investor Ben Graham once said, “In the short run, the market is a voting machine, but in the long run it is a weighting machine.”

Although the VIX certainly could still go higher (perhaps a lot higher) and stocks lower, Friday looked to me a lot like capitulation and perhaps the start of a bottoming process leading to a great (and long-awaited) buying opportunity for long-term investors. Just be careful about “catching a falling knife.” Many countries (reportedly more than 50) have apparently reached out to fix their trade arrangements, although the biggie, China, is still in saber-rattling mode, at least for now.

Of course, the current selloff also was exacerbated by “priced for perfection” valuations and a complacent “buy every dip” mentality, largely driven by AI exuberance (and its promise of transformation disruption and rapid growth in productivity) and the massive capex allocated for AI infrastructure and datacenters. Furthermore, during the run-up to all-time highs in 2024, hedge funds had become more heavily leveraged long in US equities than at any time since the pandemic lockdown (as much 300% leveraged), essentially pulling forward gains from 2025 based on strong earnings expectations. So, there might be some similarities to the dot-com bubble bursting in 2001 in that respect. But even at its recent high, the overvaluation was nowhere near 1999 levels of the dot-com mania, and we don’t have the systemic credit and accounting issues leading into the 2008 Global Financial Crisis. Company balance sheets are quite sound, and although credit spreads have spiked, they remain low on a historical basis.

Even before the 4/2 tariff announcement, stocks were already looking shaky. It was fascinating to watch the charts of the major indexes like the S&P 500 ETF (SPY) and Nasdaq 100 ETF (QQQ) as they struggled for several days to hold support at the 300-day simply moving average, like a sloth hanging from a tree branch, until ultimately losing grip in dramatic fashion following the big tariff announcement. I opined in my March post that it might be time to create a shopping list of stocks but that volatility would likely continue into the tariff target date (4/2) and perhaps into Tax Day (as liquidity draws down for making tax payments). But few (including me) expected the cataclysmic selloff. Volatility may be sticking around for a while until clarity improves, particularly as Q1 earnings season (and forward guidance) kicks off this week.

To be sure, the reality of the new administration’s aggressive policies to fix many long-festering trade issues has caused much consternation and gnashing of teeth, drawn swift retaliation (particularly from China), disrupted global supply chains, lowered corporate earnings estimates, and raised recession risk (both domestically and globally). In response, just like when the so-called “bond vigilantes” short Treasury notes and bonds (or go to cash) in protest of rising budget deficits and total debt, the “stock vigilantes” went to work shorting stocks (or defensively moving to cash or Treasuries, removing market liquidity and briefly driving the 10-year yield below 4.0%) in protest of the uncertain impacts on the economy and corporate earnings. Or as former Democrat turned Trump supporter Batya Ungar-Sargon sees it, “Suddenly, everybody is sitting around saying, ‘Oh, no, the stock market!’ Yeah, the stock market looks like that because the rich [i.e., Wall Street institutional investors and hedge funds] are punishing Trump for siding with the neglected and humiliated American working class over them.” Indeed, the top 10% of Americans by income own 88% of stocks, the next 40% own 12%, and the bottom 50% are shut out.

So, yes, stock portfolios, IRAs, and 401(k) plans are way down, as the evening news keeps telling us. According to Bespoke Investment Group, the Russell 3000 has seen well over $10 trillion in lost market cap since Inauguration Day (1/20). However—and this is an important point—this is not “capital destruction” in the same sense that a wildfire can destroy homes and businesses. The capital pulled from the stock market didn’t vanish from the earth. It simply rotated into cash and bonds. And it very likely will return to stocks once trade situations are ironed out and visibility improves. It might take several months…or it could come back in a hurry. Be prepared. Perhaps start nibbling at stocks now. If you’re like me, you probably received a slew of low-price alerts for your target list. Some speculative investors might be going all-in at current levels. Regardless, for those still contributing to their IRA or 401(k) and not yet drawing on it, this selloff is a gift to be appreciated, in my view, restoring some value back into the market. After all, when you are in long-term accumulation mode, you want to “buy low.”

Of course, no one knows for sure how low it can go and when the selloff will bottom—and the bottoming process may be lengthy and volatile. The wild card for stocks going forward is uncertainty around the severity and duration of tariffs, which seem designed by their sheer audacity to induce a swift resolution. After all, there is no underlying malady in the economy that prevents business leaders and entrepreneurs from adapting like they always do, and only pride and prejudice can prevent a quick resolution to most of the trade arrangements.

Political, economic, and market volatility will surely continue during H1. But even if we get a larger correction than I expect, I continue to believe stocks will soon find support and ultimately give way to a gradual melt-up, sending the market to back near its highs of Q1 by year-end or early-2026, driven by rising global liquidity, a weaker US dollar, reduced wasteful/reckless government spending and regulatory red tape, lower interest and tax rates, massive corporate capex, and the “animal spirits” of a rejuvenated private sector and housing market. So, if you have been hoping and praying for lower prices in risk assets (including stocks and crypto) or for a lower mortgage rate to buy a house, you are getting them now, with the forward P/E on the S&P 500 at 18.7x as of 4/4 (before any significant downward revisions to earnings estimates), versus 22.7x at its February peak. As the poet Virgil once said (in Latin), “audentes Fortuna iuvat” — i.e., “fortune favors the bold.”

Because this market correction was led by the bull market-leading MAG-7 stocks and all things AI related, investors now have a second chance to get positions in some of those mega-cap titans at more attractive prices. There remains a persistent sense among global investors of “American exceptionalism” based on ouir entrepreneurial culture, a tenacious focus on building shareholder value, and the mesmerizing appeal of our Big Tech companies that offer disruptive innovation, huge cash positions, reliable and consistently strong earnings growth, free cash flow, margins, return ratios, low interest-rate exposure, global scalability, and wide protective moats.

So, the initial recovery may well be led by the Big Tech titans that are now much more fairly valued, such as NVIDIA (NVDA) at a forward P/E of 21x (as of 4/4). Notably, some of these names have seen their valuations retreat such that they are once again scoring well in Sabrient’s growth models (as found in our next-gen Sabrient Scorecards subscription product)—including names like Amazon (AMZN), NVIDIA (NVDA), Salesforce (CRM), Alphabet (GOOGL), Meta Platforms (META), Microsoft (MSFT), Broadcom (AVGO), Oracle (ORCL), Arista Networks (ANET), Fortinet (FTNT), Palo Alto Networks (PANW), Palantir (PLTR), and Taiwan Semiconductor (TSM)—two of which (TSM and AMZN) are in the Q1 2025 Sabrient Baker’s Dozen.

But longer term, rather than the passive cap-weighted indexes dominated by Big Tech, investors may be better served by active stock selection that seeks to identify under-the-radar and undervalued gems primed for explosive growth—many of whom could coattail on the Big Tech names and provide greater returns. This is what Sabrient seeks to do in our various portfolios, all of which provide exposure to Value, Quality, Growth, and Size factors and to both secular and cyclical growth trends.

As for small caps, which as pointed out by Fama French used to outperform large caps over the long haul (higher risk, higher reward), the small cap indexes have been consistently lagging large cap indexes over the past 20 years, mostly due to their much lower allocation to the Technology sector. For example, the S&P 500 has a massive 17.6% relative overweight to the Tech sector (30.3%) versus the Russell 2000 (12.7%). And if you include the Tech-adjacent MAG-7 names that are categorized as Consumer Discretionary (i.e., Amazon and Tesla totaling 5.3%) and Communications (Alphabet and Meta Platforms totaling 6.4%), the S&P 500 allocation to the MAG-7 is 30.5%, and the combined Tech plus Tech-adjacent allocation is a whopping 42.0%—or a 28.9% relative overweight versus the Russell 2000!

Some might say that small caps are due for a mean reversion versus the S&P 500, but it seems its relative overweight to cyclical sectors like Industrials, Financials, Real Estate, Materials, and Energy (with only noncyclical/secular growth Healthcare having an overweight of 5.9%) rather than to secular growth Technology would make any attempt at mean reversion temporary. Nevertheless, I still think the small cap universe is where to find the most explosive growth opportunities (with the notable exception of large cap names like NVDA), even if the broad passive indexes (like Russell 2000) can't keep up. So, insightful active selection is important for small cap investing—which is easier to do given the relative lack of analyst coverage and institutional ownership of small caps.

We at Sabrient have become best known for our “Baker’s Dozen” portfolio of 13 diverse growth-at-a-reasonable-price (GARP) stocks, which is packaged and distributed quarterly to the financial advisor community as a unit investment trust through First Trust Portfolios, along with three other offshoot strategies based on Value, Dividend, and Small Cap investing. By the way, our Q1 2025 Baker’s Dozen remains in primary market until 4/16, after which time the Q2 portfolio launches. Also, our Small Cap Growth 45 portfolio remains in primary market until 4/21, followed by the launch of Small Cap Growth 46, and Dividend 51 is in primary market paying a 4.25% yield on new purchases.

As a reminder, Sabrient founder David Brown’s new book, How to Build High Performance Stock Portfolios, is available in both paperback and eBook versions on Amazon. And as a companion product to the book, we have launched next-gen versions of Sabrient Scorecards for Stocks and ETFs. You can learn more about the scorecards book and, download a sample scorecard, and sign-up for a free trial subscription—by visiting: http://DavidBrownInvestingBook.com/

In today's post, I examine in detail the new tariff regimen, the case for reducing (but not eliminating) the trade deficit, the liquidity challenge and “debt maturity wall,” and the case for tariffs and trade realignment. You won’t regret reading it through! I also discuss Sabrient’s latest fundamental-based SectorCast quantitative rankings of the ten U.S. business sectors, current positioning of our sector rotation model, and several top-ranked ETF ideas. Here is a link to this post in printable PDF format.  Read on….

  by Scott Martindale
  President & CEO, Sabrient Systems LLC

The S&P 500 rose 20.8% during the first three quarters of 2024, which is its best start since 1997 and the best for any presidential election year in history. Moreover, for perspective, the ratio of US stock market capitalization to the global stock market has risen from 30% in 2009 (following the GFC) to almost 50% today. This has happened despite escalation in multiple wars, numerous catastrophic weather events ravaging the country, a highly contentious election tearing apart friends and families, strapped consumers (after 25%+ cumulative inflation over the past few years), falling consumer confidence, and jobs and GDP growth over-reliant on government deficit spending, with national debt approaching $35.7 trillion and rising $2 trillion/year (as debt carrying costs alone cost over $1 trillion/year). Even over the past several days when oil prices spiked above $75/bbl (on sudden escalation in the Middle East conflict) and bond yields surged (with the 10-year reaching 4.05%), the major indexes continue to hold near their highs.

As investor Howard Lindzon (of StockTwits fame) said the other day, “There is a fear trade happening (e.g., gold and bitcoin) while there is growth trade happening. It’s really mind-boggling.” Indeed, many of the most prominent investors are wary, including the likes of Warren Buffett, Jamie Dimon, and Jeff Bezos, and corporate insider buying has slowed.

I’m not an economist. I started my career as a structural engineer with Chevron Corporation, then earned an MBA in night school and moved into the business side of the company before venturing into the world of investment research. But as a long-time student of the economy and capital markets, combined with my critical-thinking nature and engineering training, I’ve developed a healthy skepticism of numbers presented to me, even from supposedly objective sources like the government. They have to pass the “smell test.”

Of course, the Fed has been basing its monetary policy primarily on metrics calculated by federal agencies regarding inflation, jobs, and GDP. But headline YoY numbers can be illusory—particularly when they are propped up by massive government deficit spending. So, I like to look beyond the headline numbers. For inflation, my skepticism of official numbers (with the long lag times of key components, like shelter cost, and distorted metrics like “owner’s equivalent rent,” which is highly subjective and based on surveys of homeowners) is why I seek alternative metrics like: 1) the annualized rolling 3-month average of month-over-month price changes (which better reflects current trends), 2) a European method (quietly published by the BLS since 2006) called the Harmonized Index of Consumer Prices (HICP), and 3) the real-time, blockchain-based Truflation, which is published daily.

My skepticism was further elevated when I saw the jobs, retail sales, and ISM Services metrics all suddenly perk up in September—right before the election after a lengthy period of decline and contrary to several negative developments like a record divergence between rising consumer credit card debt and falling personal savings and The Conference Board’s Consumer Confidence dropping to the bottom of its 2-year range and showing increasing pessimism about labor market conditions.

On the other hand, it is notable that Truflation also has risen quickly over the past couple of weeks to nearly 2.0% YoY, so could this be corroborating the apparent rise in consumer demand? Could it be that the Fed’s dovish pivot and 50-bps rate cut has suddenly emboldened consumers to start spending again and businesses to ramp up hiring? Or are my suspicions correct such that we are in store for more downward revisions on some these rosy metrics post-election? After all, the last set of major revisions in early September showed not just an over-reliance on government jobs and government-supported jobs (through targeted spending bills), but the August household survey showed 66,000 fewer employed than in August 2023, 609,000 more “”part-time for economic reasons,” and 531,000 more “part time for noneconomic reasons,” which implies 1.2 million fewer full-time jobs in August 2024 versus August 2023.

Then along came the big 254,000 jobs gain in the September report that made investors so giddy last week, and the household survey showed 314,000 more employed workers than in September of last year. However, digging into the numbers, there are 555,000 more “”part-time for economic reasons” and 389,000 more “part time for noneconomic reasons,” which suggests 630 million fewer full-time jobs in September 2024 versus September 2023, so it’s no surprise that the average weekly hours worked also fell. Furthermore, government spending (and the growing regulatory state) continues to account for much of the hiring as government jobs have soared by 785,000 (seasonally adjusted) over this 12-month timeframe, which was the largest month-over-month (MoM) gain on record. Also, workers holding multiple jobs hit an all-time high. And notably, native-born workers have lost 1.62 million net jobs since their peak employment in July 2023 while foreign-born workers have gained 1.69 million over the same period.

Hmmm. I continue to see the GDP and jobs growth numbers as something of a mirage in that they have been propped up by government deficit spending (which our leaders euphemistically call “investment”). As you recall, leading into the September FOMC announcement I had been pounding the table on the need for a 50-bps rate cut, which we indeed got. Many observers, and at least one Fed governor, believe it was a mistake to go so big, but as I discussed in my post last month, recessionary pressures were mounting despite the impressive headline numbers, and the pain felt by our trading partners from high US interest rates and a strong dollar essentially required some agreement among the major central banks, particularly Japan and China, to weaken the dollar and thus allow an expansion in global liquidity without inciting capital flight to the US. And the PBOC soon did exactly that—slashing its reserve requirement ratio (RRR), cutting its benchmark interest rate, and loosening scores of rules regarding mortgages and the property market—which has restrengthened the dollar after its summer decline.

Of course, cutting taxes and regulation is the best way to unleash the private sector, but it's often argued that a tax cut without a corresponding reduction in spending only serves to increase the budget deficit and add to the federal debt. In fact, I saw a Harris campaign commercial with an average guy named “Buddy” lamenting that it’s “not cool” with him that Trump would give “billionaires” a tax break because they should “pay their fair share.” But Buddy and Harris both need to know what DataTrek Research has observed—i.e., since 1960, regardless of individual and corporate tax rates, federal receipts have averaged 17% of GDP. This means that raising taxes stunts GDP growth while cutting taxes boosts GDP growth by leaving more money in the pockets of consumers, business owners, and corporations to spend and invest with the wisdom of a free and diverse marketplace (Adam Smith’s “invisible hand”). In other words, the path to rising tax revenues is through strong economic growth—and the best return on capital comes from the private sector, which has proven itself much more adept at determining the most efficient allocation of capital rather than Big Government’s top-down picking of winners and losers, like a politburo.

Nevertheless, given the Fed’s dovish pivot (and despite the “heavy hand” of our federal government), I continue to expect higher prices by year end and into 2025. Bond credit spreads remain tight (i.e., no fear of recession), and although the CBOE Volatility Index (VIX) is back above the 20 “fear threshold,” it is far from panic levels. So, I believe any “October surprise” that leads to a pre-election selloff—other than a cataclysmic “Black Swan” event—would likely be a welcome buying opportunity, in my view. But besides adding or maintaining exposure to the dominant MAG-7 titans—which provide defensive qualities (due to their disruptive innovation and wide moats) as well as long-term appreciation potential—I think other stocks may offer greater upside as the economic cycle continues its growth run and market rotation/broadening resumes.

So, my suggestions are to buy high-quality businesses at reasonable prices on any pullback, hold inflation hedges like gold and bitcoin, and be prepared to exploit any credit-related panic—both as stocks sell off (such as by buying out-of-the-money put options while VIX is low) and before they rebound (when share prices are low). Regardless, I continue to recommend high-quality, fundamentally strong stocks across all market caps that display consistent, reliable, and accelerating sales and earnings growth, positive revisions to Wall Street analysts’ consensus estimates, rising profit margins and free cash flow, solid earnings quality, and low debt burden. These are the factors Sabrient employs in selecting the growth-oriented Baker’s Dozen (our “Top 13” stocks), the value-oriented Forward Looking Value, the growth & income-oriented Dividend portfolio, and Small Cap Growth, which is an alpha-seeking alternative to a passive position in the Russell 2000.

We also use many of those factors in our SectorCast ETF ranking model. And notably, our Earnings Quality Rank (EQR) is a key factor in each of these models, and it is also licensed to the actively managed, absolute-return-oriented First Trust Long-Short ETF (FTLS).

Each of our key alpha factors and their usage within Sabrient’s Growth, Value, Dividend, and Small Cap investing strategies (which underly those aforementioned portfolios) is discussed in detail in Sabrient founder David Brown’s new book, How to Build High Performance Stock Portfolios, which is now available for pre-order on Amazon at a special pre-order price.

And in conjunction with David’s new book, we are also offering a subscription to our next-generation Sabrient Scorecard for Stocks, which is a downloadable spreadsheet displaying our Top 30 highest-ranked stock picks for each of those 4 investing strategies. And as a bonus, we also provide our Scorecard for ETFs that scores and ranks roughly 1,400 US-listed equity ETFs. Both Scorecards are posted weekly in Excel format and allow you to see how your stocks and ETFs rank in our system…or for identifying the top-ranked stocks and ETFs (or for weighted combinations of our alpha factors). You can learn more about both the book and the next-gen Scorecards (and download a free sample scorecard) at http://DavidBrownInvestingBook.com.

In today’s post, I discuss in greater detail the current trend in inflation, Fed monetary policy, stock valuations, technological trends, and what might lie ahead for the stock market. I also discuss Sabrient’s latest fundamental-based SectorCast quantitative rankings of the ten U.S. business sectors, current positioning of our sector rotation model, and several top-ranked ETF ideas. And be sure to check out my Final Thoughts section with a few off-topic comments on the imminent election and escalating Middle East conflict.

Click here to continue reading my full commentary online or to sign up for email delivery of this monthly market letter. Also, here is a link to this post in printable PDF format. I invite you to share it as appropriate (to the extent your compliance allows).

  by Scott Martindale
  President & CEO, Sabrient Systems LLC

July saw new highs for the broad market indexes followed by a big fall from grace among the Magnificent Seven (MAG-7) stocks. But it looked more like a healthy rotation than a flight to safety, with a broadening into neglected market segments, as inflation and unemployment metrics engendered optimism about a dovish policy pivot from the Federal Reserve. The rotation of capital within the stock market—as opposed to capital flight out of stocks—kept overall market volatility modest. But then along came the notorious month of August. Is this an ominous sign that the AI hype will come crashing down as the economy goes into a recession? Or is this simply a 2023 redux—another “summer sales event” on stock prices—with rate cuts, accelerating earnings, and new highs ahead? Let’s explore the volatility spike, the reset on valuations, inflation trends, Fed policy, and whether this is a buying opportunity.

Summary

Up until this month, a pleasant and complacent trading climate had been in place essentially since the Federal Reserve announced in Q4 2023 its intended policy pivot, with a forecast of at least three rate cuts. But August is notorious for its volatility, largely from instability on the trading floor due to Wall Street vacations and exacerbated by algorithmic (computer-based) trading systems. In my early-July post, I wrote that I expected perhaps a 10% correction this summer and added, “the technicals have become extremely overbought [with] a lot of potential downside if momentum gets a head of steam and the algo traders turn bearish.” In other words, the more extreme the divergence and euphoria, the harsher the correction.

Indeed, last Monday 8/5 saw the worst one-day selloff since the March 2020 pandemic lockdown. From its all-time high on 7/16 to the intraday low on Monday 8/5 the S&P 500 (SPY) fell -9.7%, and the Technology Select Sector SPDR (XLK) was down as much as -20% from its 7/11 high. The CBOE Volatility Index (VIX) hit a colossal 67.73 at its intraday peak (although tradable VIX futures never came close to such extremes). It was officially the VIX’s third highest reading ever, after the financial crisis in 2008 and pandemic lockdown in 2020. But were the circumstances this time around truly as dire as those two previous instances? Regardless, it illustrates the inherent risk created by such narrow leadership, extreme industry divergences, and high leverage bred from persistent complacency (including leveraged short volatility and the new zero-day expiry options).

The selloff likely was ignited by the convergence of several issues, including weakening economic data and new fears of recession, a concern that the AI hype isn’t living up to its promise quite fast enough, and a cautious Fed that many now believe is “behind the curve” and making a policy mistake by not cutting rates. (Note: I have been sounding the alarm on this for months.) But it might have been Japan at the epicenter of this financial earthquake when the Bank of Japan (BoJ) suddenly hiked its key policy rate and sounded a hawkish tone, igniting a “reverse carry trade” and rapid deleveraging. I explain this further in today’s post.

Regardless, by week’s end, it looked like a non-event as the S&P 500 and Nasdaq 100 clawed back all their losses from the Monday morning collapse. So, was that it for the summer correction? Are we all good now? I would say no. A lot of traders were burned, and it seems there is more work for bulls to do to prove a bottom was established. Although the extraordinary spike in fear and “blood in the streets” was fleeting, the quick bounce was not convincing, and the monthly charts look toppy—much like last summer. In fact, as I discuss in today’s post, the market looks a lot like last year, which suggests the weakness could potentially last into October. As DataTrek opined, “Investor confidence in the macro backdrop was way too high and it may take weeks to fully correct this imbalance.”

Stock prices are always forward-looking and speculative with respect to expectations of economic growth, corporate earnings, and interest rates. The FOMC held off on a rate cut at its July meeting even though inflation is receding and recessionary signals are growing, including weakening economic indicators (at home and abroad) and rising unemployment (now at 4.3%, after rising for the fourth straight month). Moreover, the Fed must consider the cost of surging debt and the impact of tight monetary policy and a strong dollar on our trading partners. On the bright side, the Fed no longer sees the labor market as a source of higher inflation. As Fed Chair Jerome Powell said, “The downside risks to the employment mandate are now real.” 

The real-time, blockchain-based Truflation metric (which historically presages CPI) keeps falling and recently hit yet another 52-week low at just 1.38%; Core PCE ex-shelter is already below 2.5%; and the Fed’s preferred Core PCE metric will likely show it is below 2.5% as well. So, with inflation less a worry than warranted and with corporate earnings at risk from the economic slowdown, the Fed now finds itself having to start an easing cycle with the urgency of staving off recession rather than a more comfortable “normalization” objective within a sound economy. As Chicago Fed president Austan Goolsbee said, “You only want to stay this restrictive for as long as you have to, and this doesn’t look like an overheating economy to me.”

The Fed will be the last major central bank in the West to launch an easing cycle. I have been on record for months that the Fed is behind the curve, as collapsing market yields have signaled (with the 10-year Treasury note yield falling over 80 bp from its 5/29 high before bouncing). It had all the justification it needed for a 25-bp rate cut at the July FOMC meeting, and I think passing on it was a missed opportunity to calm global markets, weaken the dollar, avert a global currency crisis, and relieve some of the burden on highly indebted federal government, consumers, businesses, and the global economy. Indeed, I believe Fed inaction forced the BoJ rate hike and the sudden surge in US recession fears, leading to last week’s extreme stock market weakness (and global contagion).

In my view, a terminal fed funds “neutral” rate of 3.0-3.5% (roughly 200 bps below the current “effective” rate of 5.33%) seems appropriate. Fortunately, today’s lofty rate means the Fed has plenty of potential rate cuts in its holster to support the economy while still remaining relatively restrictive in its inflation fight. And as long as the trend in global liquidity is upward, then the risk of a major market crash this year is low, in my view. Even though the Fed has kept rates “higher for longer” throughout this waiting game on inflation, it has also maintained liquidity in the financial system, which of course is the lifeblood of economic growth and risk assets. Witness that, although corporate credit spreads surged during the selloff and market turmoil (especially high yield spreads), they stayed well below historical levels and fell back quickly by the end of the week.

So, I believe this selloff, even if further downside is likely, should be considered a welcome buying opportunity for long-term investors, especially for those who thought they had missed the boat on stocks this year. This assumes that the proverbial “Fed Put” is indeed back in play, i.e., a willingness to intervene to support markets (like a protective put option) through asset purchases to reduce interest rates and inject liquidity (aka quantitative easing). The Fed Put also serves to reduce the term premium on bonds as investors are more willing to hold longer-duration securities.

Longer term, however, is a different story, as our massive federal debt and rampant deficit spending is not only unsustainable but potentially catastrophic for the global economy. The process of digging out of this enormous hole will require sustained, solid, organic economic growth (supported by lower tax rates), modest inflation (to devalue the debt without crippling consumers), and smaller government (restraint on government spending and “red tape”), in my view, as I discuss in today’s post.

In buying the dip, the popular Big Tech stocks got creamed. However, this served to bring down their valuations somewhat, their capital expenditures and earnings growth remains robust, and hedge funds are generally underweight Tech, so this “revaluation” could bode well for a broader group of Tech stocks for the balance of the year. Rather than rushing back into the MAG-7, I would suggest targeting high-quality, fundamentally strong stocks across all market caps that display consistent, reliable, and accelerating sales and earnings growth, positive revisions to Wall Street analysts’ consensus estimates, rising profit margins and free cash flow, solid earnings quality, and low debt burden. These are the factors Sabrient employs in selecting our growth-oriented Baker’s Dozen, value-oriented Forward Looking Value (which just launched on 7/31), growth & income-oriented Dividend portfolio, and the Small Cap Growth (an alpha-seeking alternative to a passive position in the Russell 2000).

We also use many of those factors in our SectorCast ETF ranking model. And notably, our Earnings Quality Rank (EQR) is a key factor in each of these models, and it is also licensed to the actively managed, absolute-return-oriented First Trust Long-Short ETF (FTLS) as an initial screen.

Each of our alpha factors and their usage within Sabrient’s Growth, Value, Dividend income, and Small Cap investing strategies is discussed in detail in Sabrient founder David Brown’s new book, How to Build High Performance Stock Portfolios, which will be published this month (I will send out a notification).

Click here to continue reading my full commentary, in which I go into greater detail on the economy, inflation, monetary policy, valuations, and Sabrient’s latest fundamental-based SectorCast quantitative rankings of the ten U.S. business sectors, current positioning of our sector rotation model, and several top-ranked ETF ideas. Also, here is a link to this post in printable PDF format. I invite you to share it as appropriate (to the extent compliance allows). You also can sign up for email delivery of this periodic newsletter at Sabrient.com.

  by Scott Martindale
  President & CEO, Sabrient Systems LLC

The April-August 5-month stretch was the best 5-month period for the S&P 500 (+35%) since 1938. The index was +6.3% higher than its pre-COVID high on 2/19/20 and +56.2% higher than its COVID selloff low on 3/23/20. But any market technician would tell you that the further the market rises without a pause, the more severe the inevitable pullback. And indeed, along came the traditionally challenging month of September and a nasty bout of profit-taking mixed with capital preservation – and exacerbated by the standoff on new fiscal stimulus, an uptick in COVID cases hindering global economic reopening, and the potential for a SCOTUS nomination firestorm. Many of the investor darlings from among the disruptive, secular-growth Technology companies that had been surging so strongly have suddenly fallen hard, with the S&P 500 (SPY) pulling back -10.3% from its 9/2/20 intraday high to its 9/21/20 intraday low and the tech-laden Nasdaq 100 (QQQ) falling -14.3%.

After giving back all of August’s strong gains, perhaps Monday was the capitulation day from which the market can recover anew. Q3 earnings reporting season starts in a couple of weeks, so it will be important to get a read on the trajectory of earnings recovery and forward guidance.

I have written often about the stark market bifurcation that has developed over the past few years, beginning with the unwinding of the “Trump Bump” reflation trade in light of the emerging trade wars. It led to historic extremes in Growth over Value and Large over Small caps, with the broad-market, cap-weighted indexes hitting new highs as investment capital has favored mega-cap, secular-growth Tech and passive, market-cap-weighted ETFs. But today, although I think it is unlikely that investors are giving up on Technology names, their high relative valuations as the economy enters what I see as an early-stage expansionary cycle appear to be opening the door for greater market breadth and some capital rotation into value, cyclicals, and smaller caps.

My expectation is that, as the historic imbalances in Value/Growth and Small/Large performance ratios gradually revert and market leadership broadens, strategic beta ETFs, active selection, and equal weighting should thrive once again. This should be favorable for value, growth-at-a-reasonable-price (GARP), and quality-oriented strategies like Sabrient’s, although not to the exclusion of secular growth industries. In other words, an investor should be positioned for both cyclical and secular growth.

This is why, rather than continuing to wait around for the value/growth performance gap to converge, we chose to introduce new enhancements to our GARP stock selection process to better balance value-oriented cyclical growers with consistent secular growers while also reducing relative volatility versus the benchmark. Moreover, we have leveraged our full suite of 7 core quantitative models to create 11 new strategic-beta, passive indexes. You will be hearing more about these in the near future.

In this periodic update, I provide a comprehensive market commentary, offer my technical analysis of the S&P 500 chart, review Sabrient’s latest fundamentals-based SectorCast rankings of the ten US business sectors, and serve up some actionable ETF trading ideas. In summary, while I still have a favorable long-term view on stocks, there will be plenty of volatility ahead. In addition, our sector rankings have a moderately defensive bias (given that the near-term outlook in our fundamentals-based model is muddled and the Outlook scores are tightly bunched), the technical picture looks might be setting up for a bullish reversal, and our sector rotation model sits in a neutral posture. As a reminder, you can find my latest Baker’s Dozen slide deck and commentary on terminating portfolios at http://bakersdozen.sabrient.com/bakers-dozen-marketing-materials.

Read on....

  by Scott Martindale
  President & CEO, Sabrient Systems LLC

Quick assessment:  We have an historic pandemic wreaking havoc upon the global economy, with many US states reversing their reopenings. We just got the worst ever quarterly GDP growth number, and jobless claims are resurging. The Federal Reserve is frantically printing money at breakneck pace to keep our government solvent, with M3 money supply growth having gone parabolic. We have a highly contentious presidential election that many consider to be the most consequential of our lifetimes. There is unyielding and unappeasable social unrest, with nightly rioting in the streets in many of our major cities. Tensions with China are again on the rise, with a new Cold War seemingly at hand. Hurricanes are threatening severe damage in states that are already reeling from a surge in COVID hospitalizations. And yet the Nasdaq 100 (QQQ) has burst out to new highs while the S&P 500 (SPY) is within 3% of its all-time high (although, quite notably, both of these cap-weighted indexes are dominated by a handful of mega-cap, disruptive juggernauts).

Of course, stocks have been bolstered by unprecedented congressional fiscal programs and Fed monetary support, including zero interest rate policy (ZIRP), open-ended quantitative easing (QE), de facto yield curve control (YCC), and the buying of corporate bonds (including junk bonds and fixed-income ETFs – and perhaps will include equity ETFs at some point). This de facto “Fed put” has induced a speculative fervor, FOMO (“fear of missing out”), and a TINA (“There is No Alternative!”) mindset for risk assets – particularly given infinitesimal bond yields and a falling dollar. Furthermore, while COVID cases have risen with the economy’s attempt at reopening, the death rate is down 75% since its peak in April, as the people being infected this time around are generally younger and less vulnerable and hospitals are better prepared.

However, we have witnessed extreme bifurcation in this market, with certain secular growth segments performing extremely well and hitting new all-time highs, while other segments are quite literally in a depression. And although the pandemic has exacerbated this situation, it has been developing for a while. As I have often discussed, when the trade war with China escalated in mid-2018, the market became highly bifurcated to seek the perceived safety of the dominant mega caps over smaller caps, growth over value, and secular growth Technology over the neglected cyclical growth sectors like Financials, Industrials, Materials, and Energy. It rotated defensive and risk-off even given the positive economic outlook. This is also when the price of gold began to ascend. Yes, gold has become much more than just a hedge; it now has its own secular growth story (as discussed below), which is why Sabrient’s new Baker’s Dozen for Q3 2020 includes a gold miner.

So, while Sabrient’s flagship Baker’s Dozen portfolios over the past two years have been dominated by smaller caps, the value factor, and cyclical sectors – to their detriment in this highly bifurcated market – you can see that our newer portfolios since the enhancements were implemented have been much more balanced among large, mid, and small caps, with a slight growth bias over value, and a balance between secular growth and cyclical growth companies.

In this periodic update, I provide a market commentary, offer my technical analysis of the S&P 500, and review Sabrient’s latest fundamentals-based SectorCast rankings of the ten US business sectors, and serve up some actionable ETF trading ideas. In summary, while our sector rankings look neutral (as you might expect given the poor visibility for earnings), the technical picture is bullish, and our sector rotation model remains bullish.

As a reminder, Sabrient has introduced process enhancements to our forward-looking and valuation-oriented stock selection strategy to improve all-weather performance and reduce relative volatility versus the benchmark S&P 500, as well as to put secular-growth companies (which often display higher valuations) on more equal footing with cyclical-growth companies (which tend to display lower valuations). You can find my latest Baker’s Dozen slide deck and commentary on terminating portfolios at http://bakersdozen.sabrient.com/bakers-dozen-marketing-materials. To read on, click here....