by Scott Martindale
  CEO, Sabrient Systems LLC

Quick note: Sabrient’s annual Forward Looking Value 14 portfolio just launched last week on 8/26 with a diverse mix of 31 stocks across 9 business sectors and a 50/50 Large/SMID-cap mix. Think of it as a less-concentrated and more value-oriented version of Baker’s Dozen. Last year’s FLV 13 terminates 11/17 and is up +38.4% vs. +19.4% for S&P 500 Value (SPYV) and +20.2% for S&P 500 (SPY) as of 9/2. I personally like the UIT structure as a diversifier for a client’s equity portfolio because they are unmanaged—while most other products are managed to some extent, even quarterly rebalanced rules-based indexes—and most active managers tend to underperform their benchmarks. Also, value stocks tend not to be as volatile, so value or dividend portfolios tend to fit well with the unmanaged, buy-and-hold-for-15-months structure.

Overview:

The US economy is changing faster than the traditional macro indicators can explain it. On the one hand, Q2 GDP (just +1.5%) and jobs growth look sluggish, inflation is sticky, debt and bond yields are surging, and the bifurcated “K-shaped” economy is causing poor consumer sentiment and public dissatisfaction—to the point that socialism(!) is gaining traction. The top 10% by net worth own 87% of stocks and 68% of total net worth, while the bottom 50% own just 1% of stocks but carry 52% of consumer debt. Consumer debt is rising while the personal savings rate remains low to support spending. Real (inflation-adjusted) consumer spending was essentially flat in July, while the personal savings rate finally edged up slightly to 3.0% in July after a steady decline from 6.4% in January 2024 to as low as 2.6% in June 2026.

On the other hand, the official Q2 GDP reading was held down by high AI-related imports and inventory drawdowns, which actually reflect robust economic activity. Private domestic demand (considered a truer signal of underlying economic health) was quite strong in Q2 at +4.2% annualized rate, consumer spending was up +3.4%, business investment excluding housing was up +8.5%. Indeed, the Atlanta Fed’s GDPNow now forecasts Q3 GDP at 4.7% (as of 9/3). Corporate profits, productivity, margins, cash flow, and capex are massive. Jobless claims in our “low-hire, low-fire” labor market are near their lowest level in decades, which Fed chairman Kevin Warsh calls "an empirically robust real-time indicator” constrained only by flattening labor supply (a lack of willing workers).

Perhaps the low personal savings rate is to be expected as Baby Boomers retire and draw down their wealth, and household debt as a percentage of disposable personal income has stopped rising in Q1-Q2. Stocks are near all-time highs even though interest rates have become punitive (compared to what the broad economy had become accustomed to), and market breadth is improving.

While these data points might seem like contradictions, they may in fact be a predictable reflection of a structural transition toward a more capital-intensive, AI-driven, productivity-led economy.

Regarding inflation and Fed policy, Warsh stated in his Jackson Hole speech, “Certain sectors—like housing and agriculture—are showing strains. But, on balance, I would be hard pressed to describe broad financial conditions as restrictive…. We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do.” But you likely heard it paraphrased as simply, “Inflation is running too hot…financial conditions are not restrictive…we have work to do,” which is clearly more hawkish than his actual statement and seemingly a fait accompli that rate hikes are imminent. Fed funds futures now imply 2+ rate hikes over the next 12 months, with 50% odds of a 25-bp hike at the upcoming FOMC meeting this month.
 
However, I humbly disagree. I think Warsh’s actual statement cleverly balanced between sounding sufficiently hawkish to appease the “bond vigilantes” while leaving himself an opening to avoid hiking rates. Most of the non-supply-shock components of inflation are relatively subdued, and by some key metrics, underlying inflation is indeed moving toward the 2% objective—for example, Warsh’s preferred Trimmed Mean PCE has held steady at +2.3% in June/July, and the real-time, blockchain-based Truflation CPI is also +2.3% (as of 9/3). Meanwhile, all is not well in this K-shaped economy. The labor market is stagnant, the lower/working class consumer and wage earner is struggling, and monetary policy is clearly restrictive in the most rate-sensitive industries and demographics.

We can’t continue to rely solely on massive AI capex and retiring Baby-Boomer spending (neither of which are particularly rate sensitive) to power our economy while watching the lower leg of the K languish. All it takes is for one hyperscaler to announce a significant reduction in capex and we’ll likely see economic growth fall—along with the stock market.

So, I continue to believe a rate cut is appropriate—certainly not a hike (as fed funds futures and Polymarket confidently predict). A hike would only further hinder those struggling cash-poor segments (many of whom are warming up to the socialist “free stuff” rhetoric) while doing little to restrain the cash-rich AI trade or resolve the event-driven supply shock. I feel alone in the woods on this, but I see the neutral rate at 3.0-3.25%. Unfortunately, such an action apparently would be quite unpopular in the bond market and thus is unlikely to happen anytime soon, thus keeping the economy bifurcated. However, in speeches this week, Fed governor Christopher Waller and NY Fed president John Williams pumped the brakes on the tightening narrative (“Give disinflation a chance”).

Kevin Warsh has suggested in the past a preference for fulfilling his mandate of price stability through a combination of: 1) a lower fed funds rate, 2) continued balance sheet reduction to constrain money supply growth (including a revised Treasury-Fed relationship that gives the Treasury more say over balance-sheet decisions), and 3) structural reform of how inflation is measured (replacing the lagged and imputed components). This approach would ensure that liquidity is cheaper to access, preventing credit markets from locking up without flooding the entire financial system with inflationary liquidity. Less Fed demand for bonds might steepen the yield curve somewhat and keep 30-year mortgage rates elevated, but a lower fed funds rate reduces rates on short-term construction loans and adjustable mortgages.

According to global liquidity expert Michael Howell of CrossBorder Capital, the “Fed does not need to cut Fed funds to loosen US monetary conditions. It can hold the policy rate steady while Treasury bill issuance, reserve management and bank balance-sheet expansion deliver the liquidity impulse. This is the essence of ‘Treasury QE’: fiscal expansion financed at the short end, supported by enough reserve liquidity to keep funding markets orderly.”

By the way, regarding the sudden tariff flare-up with Canada, our neighbor’s retaliation could have targeted industrial inputs but instead it’s notable that they only apply to food and consumer products in an (admittedly) targeted effort to pressure Republican candidates in competitive US midterm election races in swing states like Pennsylvania, Michigan, and Wisconsin, and red states like Ohio, Indiana, and Kentucky.

In my full commentary below, I discuss:

1. Broadening continues as small caps, value, and the S&P 493 carry the baton
2. High earnings vs. high yields and the impact on valuations
3. The NVIDIA juggernaut and AI Phase II: proving the economy-wide ROI
4. Materials and power constraints on the AI buildout
5. K-shaped economy, inflation, and the Fed’s policy dilemma
6. Runaway Federal debt and the need to grow our way out of it
7. Crude oil inventory drawdown and oil company windfall profits
8. My Final Comments essay: Is AI opposition a nuclear power redux?
9. Sabrient’s sector rankings, positioning of our sector rotation model, and some top-ranked ETF ideas

According to Morgan Stanley, AI’s diffusion across the global economy is a $40 trillion opportunity that will rely on affordable compute. Indeed, there is so much demand for compute, some say it is becoming a new asset class—like stocks, bonds, commodities, real estate, private credit, crypto, collectibles, royalties, cash-flowing private businesses, or carbon credits. Pending regulatory review, CME Group and Silicon Data have announced plans to launch futures contracts on compute by tracking daily and hourly on-demand GPU rental cost indexes for NVIDIA's H100 and next-gen Blackwell B200 chips. This allows a company reliant on AI to lock in a future price and ensure delivery from a new datacenter that takes 2-3 years to build.

Some are worried about falling token prices hurting the projected ROI on capex. But at the Google I/O 2026 Conference, CEO Sundar Pichai said that AI is using 3.2 quadrillion tokens per month, which is up 7x YoY. Indeed, rapidly falling inference costs can create demand that didn’t exist at previous prices. This is largely due to Jevons Paradox, which says efficiency gains lower production cost, which gets passed on to customers, thus driving up demand, which increases total resource usage over time—i.e., demand for a product or resource rises as price falls (aka demand elasticity). So, if the hyperscaler can produce and sell compute tokens cheaper, usage surges, and the hyperscaler makes more money overall. It seems this trend can only be disrupted by misguided (or deliberately subversive) politicians hell-bent on obstructing this broad, multi-layered, truly all-in, capital-investment cycle, as I discuss further in my Final Comments essay below.

This is just one of the many reasons I expect to see, through the end of this decade and likely beyond, smaller government and less low-ROI government spending in favor of more high-ROI capital allocation from an unleashed private sector as the primary engine of organic economic growth through fiscal support like favorable tax policy, deregulation, and other supply-side incentives for reshoring/onshoring to increase productive capacity.

As such, I still think the S&P 500 could reach 8,000 by year end. However, I also think a further market pullback this month is likely, perhaps to test support at the 50-day moving average, and as a reminder, September is the only month since 1975 in which the S&P 500 has averaged a net loss (-0.8%). But assuming continued healthy market broadening beyond the Big Tech titans, and praying the Fed does not start tightening, I continue to see opportunities in active stock selection, equal-weight indexes, value stocks, cyclical sectors, small caps, and bond-alternative dividend payers. I also continue to believe the Healthcare sector, which finally came alive this year, offers tremendous growth opportunities as it leverages AI. Sector earnings for Healthcare Select SPDR (XLV) are projected to rise by 22% YoY in 2027, which is second only to Technology.

Sabrient’s quant-based, actively selected (“quantamental”) Baker’s Dozen, Forward Looking Value, Dividend, and Small Cap Growth portfolios have been largely outperforming their benchmarks—several by substantial margins. And as a reminder, our Earnings Quality Rank (EQR) is licensed as a quality prescreen to the actively managed, low-beta First Trust Long-Short ETF (FTLS), which now has more than $2.5 billion in AUM.

Here is a link to this full post in printable PDF format. 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

Today, I’d like to reprint a couple of brief excerpts you might have missed from my lengthy June Sector Detector post on 1) the public backlash to AI and 2) how the growing demand for electricity to power datacenters is being addressed in the face of NIMBYism.

And then in my Final Comments section, I share an inspiring message in honor of America’s 250th anniversary from The Rational Optimist Society on Substack, which believes human progress and innovation—most of which originated in the USA over those 250 years—consistently improve living standards for all.

Happy Independence Day!

Read on….

  by Scott Martindale
  CEO, Sabrient Systems LLC

Quick note: Sabrient’s new Small Cap Growth 52 Portfolio just launched on 6/17 as a 15-month portfolio holding 43 stocks across a range of sectors. It offers an alpha-seeking alternative to the broad small-cap indexes. Notably SCG 46 is the next to terminate on 7/22, and it currently shows a gross total return of +81% vs. +48% for its benchmark S&P SmallCap 600 Growth (SLYG), as well as 61% for Russell 2000 Small Caps (IWM), and +43% for S&P 500 (SPY), as of 6/22.

Overview

The resilient bull market continues to be powered by a compelling combination of technological innovation, robust corporate earnings, resilient consumer spending (despite energy and supply-driven inflationary pressures), and investor optimism around productivity-driven economic growth, despite ongoing macro uncertainties (there’s always something). Notably, the April rally off the market correction was broad-based, then May saw a marked narrowing with Tech the clear leader while most other sectors struggling (as bond yields surged, which hurts interest-rate sensitive industries), and now June has the market resuming its broadening efforts, as evidenced by price action (including a new high for the Russell 2000 small caps) and a convergence in forward P/E multiples (e.g., cap-weight S&P 500 falling, equal-weight S&P 500 and Russell 2000 small caps rising).

In my full commentary below, I discuss:

1. Relative valuations and the SpaceX-led parade of mega-IPOs on tap
2. GDP, inflation, jobs, and productivity
3. Fed policy in the new Kevin Warsh chairmanship
4. AI backlash, the realities, and how to address it
5. Datacenter power demand and the NIMBY problem
6. My final comments section on government versus private sector capital allocation and ROI
7. Sabrient’s sector rankings, positioning of our sector rotation model, and some top-ranked ETF ideas

As I discussed in my May post, valuations in the broad market indexes have been falling even as the market has surged, as earnings surged at an even faster rate. The equal-weight indexes have outperformed their cap-weight brethren, most notably in the Tech sector, with the MAG-7 badly underperforming the aggregate of everyone else in the sector. Who are the new leaders? Those benefiting from all the hyperscalers’ capex, including names like Sandisk (SNDK), Western Digital (WDC), Seagate Technology (STX), Micron (MU), Broadcom (AVGO), Dell (DELL), Vertiv (VRT), Quanta Services (PWR), EMCOR (EME), Arista Networks (ANET), Bloom Energy (BE), Comfort Systems (FIX), and Sterling Infrastructure (STRL)—many of which have been holdings in Sabrient’s quarterly Baker’s Dozen portfolios.

With the splashy IPO debut of Elon Musk’s SpaceX (SPCX), there are now 12 companies in the $1 trillion market cap club as of 6/19 [including lone non-Tech name Berkshire Hathaway (BRK-B]. And given the rest of the mega-IPO lineup expected this year, some commentators are suggesting a new Big Tech-leadership acronym, such as “MANGOS”—Meta, Anthropic, NVIDIA, Google, OpenAI, and SpaceX. Or the “AI Big 10” that adds Micron, AMD, and Broadcom to the existing MAG-7.

Many of the main headwinds of H1 seem to be finding resolution. The Iran conflict is apparently winding down, and oil price has tumbled from around $105/bbl at its May peak to below $75/bbl (front-month futures contract for WTI on NYMEX), which soon will be reflected in inflation metrics. Consumer spending and retail sales have held up despite falling real wage growth, and now the extremely poor consumer and investor sentiment metrics are showing nascent signs of improvement—although still far from the euphoria or “irrational exuberance” of the dot-com era. Also, the huge SpaceX IPO hit the market without any notable damage.

Overall, I still think fundamental tailwinds outweigh headwinds as investors position for continued AI progress, robust capex for AI, reshoring, and re-industrialization, looser Fed monetary policy, resurgence in global liquidity growth, and One Big Beautifull Bill Act (OBBBA) policies fully kicking in with its pro-growth policies like tax reform, deregulation, smaller government, pro-energy protocols, and broad support for the private sector to retake its rightful place as the primary engine of growth via re-privatization, reshoring, and re-industrialization, with much more efficient capital allocation and ROI than government.

Furthermore, this should continue to attract foreign capital into the US (“shadow liquidity,” much of which is not counted in M2), cut the debt and deficit-to-GDP ratio, and unleash organic private sector growth. Today’s valuations are reasonable, particularly given rising corporate earnings forecasts (now at +23% YoY for CY2026), but future stock valuations likely will be driven more by rising earnings and ROI than by AI hope-driven multiple expansion, particularly given the lingering macro uncertainties and the risk of higher interest rates.

In addition, aside from the oil and supply-driven disruptions that have temporarily goosed inflation metrics, many disinflationary trends are still in place, including the secular implementation of AI and automation, rising productivity, falling shelter costs, the deflationary impulse from a struggling China, a stable/rising dollar (up nearly 5% YTD), and slow M2 growth (about 4.7% vs. last year and 3.5% annualized over the past 3 years, vs. 6.0% pre-pandemic average since 1960). So, as supply chains are repaired and rerouted (as I discussed in my April post) and as oil prices and inflation recede, we could see some multiple expansion—to perhaps as high as 24x on the S&P 500 (after the recent contraction to below 22x on a next-12-months basis)—which would further support stocks. Indeed, the market seems to be setting up the next up leg. Every dip has been a buying opportunity. According to InvesTech Research, “Margin Debt as a percentage of nominal GDP shot up 9% in May, reaching a new all-time high.”

Q1 earnings reporting season was stellar, with robust YoY earnings growth, margins, and productivity, plus rising forward guidance and analyst earnings forecasts. Blended EPS growth across sectors was up 28% in Q1, led by Tech sector at 54%. Revenue growth was 11%, led by Tech at 16%. Profit margins were 15%, led by Tech at 29%. But because EPS growth has exceeded price performance, the P/E multiple has shrunk. The S&P 500 started the year at 6,845 and closed last week at 7,500. The latest Wall Street consensus for S&P 500 operating EPS is about $339 for 2026 (implied P/E of 22.1x based on $7,500 price) and $392 for 2027 (forward P/E of 19.1x on current price). Both are roughly 10% higher than at the start of the year. An official resolution to the Iran conflict and supply shock could allow for some multiple expansion, perhaps pushing the forward P/E to 24x—which implies the S&P 500 Index hitting 8,000 by year-end 2026 and potentially 9,300 by year-end 2027. Are these realistic targets? Not out of the question, in my view, although bouts of volatility along the way surely should be expected—perhaps severe pullbacks as price stretches from moving averages (like a rubberband).

As the S&P 500’s concentration in Big Tech has grown, its dividend yield has compressed to below 1.0%—reminiscent of the late-1990s and well below its multi-decade average around 1.7%—mainly because those high-growth Big Tech companies that dominate the cap-weight index don’t need to pay dividends to attract investors. Instead, investors are willing to pay up for strong growth and high margins, increasingly discounting a world in which AI becomes deeply embedded in business operations in a long-term secular investment cycle rather than short-term cyclical trend. And this is in spite of the elevated benchmark 10-year Treasury yield around 4.5%, which normally would suppress valuation multiples (on a discounted cash flow basis). Although Big Tech is largely immune to interest rate volatility, the smaller companies—into which the market is seeking to broaden—are not.

Furthermore, many uncertainties remain. Investors are concerned about the worrisome inflation prints, Fed policy under the new chairmanship, and the concise-but-vague MOU with Iran. Moreover, the long stretch of years in which demand for US stocks has far outstripped supply (“scarcity”) seems to be suddenly reversing. The line-up of mega-IPOs this year, pre-IPO shares coming out of lock-up, and Big Tech’s shift from using its massive cash flow for share buybacks to supplementing cash with new share issuances to instead fund historic levels of AI-related capex for datacenters, advanced compute hardware (chips, memory, servers), networking, and power infrastructure. According to Michael Gayed, the four largest hyperscalers (Meta, Alphabet, Microsoft, Amazon) spent $416 billion on capex in 2025 and have projected 2026 capex of $725 billion.
 
Concurrently, there is concern about Big Tech earnings quality and circular financing (e.g., NVIDIA investing in its customers who in turn buy NVIDIA’s GPUs), not to mention speculation on how soon all this massive AI spend will pay off (i.e., ROI) and what happens if and when the capex firehose dials down or shuts off. However, as the engraving in every convex passenger-side car mirror reminds us, “Objects in the mirror may be closer than they appear,” which certainly seems to be the case with AI as fundamentals are evolving much faster and impacting workflows much sooner than most anyone expected.

As for the Fed’s increasingly hawkish stance and rising odds of a rate hike (like the ECB just instituted), my view is that a hike won’t reduce the oil or food prices that are driving up the inflation metrics unless it induces an economic recession, which is not what the Fed or anyone wants to see. Assuming the Iran conflict is indeed coming to an end, inflation and interest rates likely have topped, with disinflationary structural trends resuming control and bonds catching a bid.

I remain of the belief that interest rate-sensitive segments of the economy, including housing, homebuyers, small businesses, and lower-income consumers, are already struggling with current financing and mortgage rates, offset only by the locked-in low interest rates from 2020-21, in a K-shaped economy, with higher income people doing well and spending, while lower income is being squeezed. For instance, higher income households have not reduced their driving habits at all, while most others have, and teenagers are having a hard time finding summer jobs due to all the older workers who have re-entered the workplace to supplement their retirement income. Moreover, the still-solid GDP growth metrics have been overly reliant on the combination of the AI race and its massive infrastructure spending, financed mostly on Big Tech cash flow than debt, plus unsustainable levels of fiscal deficit spending—i.e., around $1.9 trillion or 5.8% federal deficit-to-GDP, which includes $1 trillion in interest payments on 100% publicly held federal debt-to-GDP (and 123% total debt-to-GDP).

Notably, if you look solely at the primary deficit (excluding interest on debt), the ratio to GDP is 2.6% (20.1% spending minus 17.5% total revenue), which exceeds the 50-year historical average of 1.7% primary deficit-to-GDP ratio. If any of this spending slows, recessionary conditions might follow. In other words, we need all segments of the economy to flourish, and that can be supported by lower rates. And by the way, elevated inflation helps “inflate away” the debt as long as growth in real (after-inflation) GDP is positive (preferably strongly positive, like 2.5% or more) and exceeds growth in deficit spending, and interest rates remain contained (including any financial repression or yield curve control).

Having a hyper-financialized global economy means that rising rates could cripple debt-addicted businesses, governments (including our own federal government), and the housing market (which is critical for a healthy consumer). Sure, mortgage rates have been much higher in the past, but home prices today are based on a lower baseline of post-GFC easing and low rates. And given recent strengthening of the dollar, some emerging market economies with dollar-denominated debt may be forced into default. In other words, today’s global financial system simply can’t handle higher US interest rates.

Given the market broadening beyond the Big Tech titans, and assuming the Fed does not become overly hawkish, we continue to see opportunities in active stock selection, small caps, and bond-alternative dividend payers. Indeed, Sabrient’s Baker’s Dozen, Forward Looking Value, Small Cap Growth, and Dividend portfolios have been largely outperforming their benchmarks. Our latest Q2 2026 Baker’s Dozen Portfolio launched on 4/17 as a 15-month portfolio with a mid-cap bias and a diverse group of 13 stocks across eight business sectors. After two months, it is already off to a good start, up +9.5% vs. +5.1% for SPY and +3.6% for equal-weight S&P 500 (RSP), as of 6/22. Notably, last year’s Q1 2025 Baker’s Dozen terminated on 4/20 with a gross total return of +46.7% vs. +20.3% for SPY, and the next-to-terminate Q2 2025 portfolio is up +61% vs. +43% for SPY and +32% for RSP. And, as a reminder, our Earnings Quality Rank (EQR) is licensed to the actively managed, low-beta First Trust Long-Short ETF (FTLS) as a quality prescreen. FTLS now has $2.4 billion in AUM.

Sabrient employs a variety of fundamental financial factors in our quantitative models and portfolio selection process. Sabrient Scorecards for Stocks and ETFs are investor tools that provide access to several of our proprietary models for idea generation and portfolio monitoring. To learn more, I invite you to visit https://MoonRocksToPowerStocks.com where you can download founder David Brown’s latest book (an Amazon international bestseller) and 2 bonus reports (on investing in the Future of Energy and Space Exploration)—all in PDF format—and start subscribing to the Scorecards, which make David’s process easy for idea generation and portfolio monitoring. They include our Top 30 stocks each week for 4 distinct investing strategies—Growth, Value, Dividend, and Small Cap. To go straight to the Scorecard subscription, go to: https://www.moonrockstopowerstocks.com/sabrient-scorecard

Here is a link to the post in printable PDF format. 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!  Click here to continue reading my full commentary....

The market continued its slow but persistent trek upward, inching along as it did during the holiday-shortened past week. In fact, the S&P 500 set an 18-month high today at 1187.73 and closed very near the high.