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
  President & CEO, Sabrient Systems LLC

Overview:

Strong US stock market performance has been driven, in my view, by the combination of: 1) a dovish Fed, money supply growth and global capital flight to the US (“shadow liquidity”), 2) expectations of lower energy costs and falling inflation, 3) AI exuberance and capex and the promise of massive productivity gains, and 4) growing optimism about technologies like nuclear energy, blockchain, quantum computing, robotics, autonomous vehicles, and genomics. But after two consecutive years of 20%+ gains in the S&P 500 for the first time since 1998 (and even greater gains for the Tech-dominated Nasdaq 100)—greatly outperforming all prominent forecasts—investors are looking ahead to a year that arguably brings even greater uncertainty and a wider range of expected outcomes, ranging from a recession and bear market to a continued bull run within a Roaring ‘20s-redux decade.

Will Trump 2.0 business-friendly fiscal policies (e.g., tax cuts, deregulation) and DOGE cost-cutting impact the economy, inflation, federal budget deficit, and corporate profits negatively for a period of time before kicking in later? What about sluggish economic growth abroad and the disastrous impacts of the ultra-strong dollar, particularly among key trading partners like Canada, Mexico, Europe, China, and Japan? And will the massive corporate capex (which is expected to accelerate under the new administration’s policies) start to show commensurate returns in the form of rising productivity and profitability, leading to rising GDP growth (in true supply-side style) without the crutch of government deficit spending (which accounted for about 30% of growth over the last 4 quarters)…and ultimately to rising tax receipts to quickly offset any initial rise in the deficit?

The bull case sees an economy and stock market driven by business-friendly fiscal policies under Trump 2.0 including deregulation, lower corporate tax rate, and restoration of civil liberties and constitutional freedoms should also be stimulative and might fuel disinflation (as opposed to the inflation that many critics expect). Trump’s energy policies are also likely to be disinflationary. Capital flight into the US (most of which stays outside our banking system and therefore is not captured by M2), huge corporate capex, less deficit spending (and politburo-style “malinvestment” and mandates), and strong productivity growth, and rising velocity of money that offsets any tightening in money supply growth.

According to Capital Group, a mid-cycle economy typically displays rising corporate profits, accelerating credit demand, modest inflationary pressures, and a move toward neutral monetary policy—all of which occurred during 2024. And besides expectations of a highly aggressive 15% earnings growth in the S&P 500 over the next couple of years, Silicon Valley VC Shervin Pishevar recently opined, “I think there’s going to be a renaissance of innovation in America…It’s going to be exciting to see… AI is going to accelerate so fast we’re going to reach AGI [Artificial General Intelligence, or human-like thinking] within the next 2-3 years. I think there will be ‘Manhattan Projects’ for AI, quantum computing, biotech.” So, it all sounds quite good.

However, my observation is that GDP and jobs growth have been highly reliant on huge government deficit spending bills, which is not so good. The Atlanta Fed’s GDPNow model forecasts Q4 GDP to come in at just 2.7%, which is sluggish growth considering the huge amount of government money and corporate capex being spent. Rising bond yields and strengthening US dollar means less liquidity and tighter financial conditions, which are negatives for risk assets. The incoming administration—free this time of the unknowing appointment of deep-state obstructionists like in his first term—is suggesting a new tack characterized by smaller government and the unleashing of animal spirits in the private sector, with the goal of achieving GDP growth north of 4%.

So, for 2025, I expect strong fiscal and monetary policy support for economic growth (albeit with some pains and stumbles along the way as government spending is reined in) as well as moderating inflation as shelter costs recede, military conflicts are resolved (war is inflationary), and deflationary impulses arrive from struggling economies in China and Europe. I also expect stocks and bonds will both attain modest gains by year end (albeit with elevated volatility along the way). In this transitional year in which a more politically seasoned Donald Trump’s policies and leadership have gained broader support domestically across demographics (and indeed across the world), how it all gets off the ground and how quickly it generates traction this year will have profound implications for the rest of his term and beyond. Heck, even a growing contingent in ultra-blue California have become willing to give his approach a chance—further red-pilled by the disastrous LA wildfires (more on this below).

To me, the biggest question marks for our economy and stocks in 2025 (other than a Black Swan event) are: 1) the net impacts of Trump’s cost cutting efforts (on federal deficit spending and boondoggles) balanced with his pro-business policies and a supportive Fed, and 2) the impacts of economic growth struggles abroad. China is dealing with deflation (PPI has declined for 26 months in a row), a real estate crisis, weak retail sales, and surging excess savings among a shrinking population. Since the Global Financial Crisis, China’s marginal returns on capital have plunged from around 14% to barely 5% (on par with the US). As for the Eurozone, its share of world GDP has fallen from a high of 26.4% in 1992 to just 14.8% in 202, as its obsession with renewable electricity (rather than fossil fuels and nuclear) costing 5x the price of conventionally produced electricity—and driving low returns on capital and thus capital flight. As MacroStrategy Partners UK has opined, “With all of GDP [essentially] an energy conversion, our future depends on either extending fossil fuel production further or developing nuclear.”

Indeed, the US remains the beacon of hope for global investors. However, at the moment, surging bond yields, weak market internals, and a strengthening dollar suggest investors have grown cautious. All the major stock and bond indexes fell below their 50-day simple moving averages (although they are trying to regain them today, 1/15). Inflation hedges gold and bitcoin have risen back above theirs, but all these asset classes have lost both their momentum in concert with sluggish global liquidity growth since October (as pointed out by economist and liquidity guru Michael Howell of CrossBorder Capital). Of course, rising real yields tend to reduce the appeal of gold, and nominal yields have been rising much faster than the modest (and likely temporary) uptick in inflation.

Indeed, the latest PPI and CPI readings this week show stabilization, which the markets cheered (across all asset classes). As I write, the 10-year Treasury yield has fallen below 4.70% and the 20-year dropped below the important 5% handle. Hopefully, this will stem the rise in 30-year mortgage rates, which are above 7.0%, creating a big impediment to the critical housing market. The delinquency rate on commercial office MBS jumped to a record 11% in December, which is the highest since the Global Financial Crisis. Consumer credit card defaults jumped to a 14-year high as average cc interest rates hit a record high, now in excess of 23%. And then we have our federal government needing to roll over at least $16 trillion (of our $36.2 trillion debt) during the next four years.

Although Michael Howell thinks the 10-year Treasury yield could continue to rise to perhaps 5.5%, which would be a huge definite negative for risk assets, my view is that bond prices will soon find support (and stabilize yields), which would help stocks stabilize as well. After all, US Treasury yields are attractive in that they are among the highest among developed markets, and the two largest economies are diverging, with China’s yields collapsing (10-year below 1.7%) as US yields surged. Indeed, debt deflation and sluggish economic conditions in China are at risk of creating a deflationary spiral. Also, the traditional 60/40 stock/bond portfolio rebalancing is taking place, which shifts capital from equities to bonds.

If I am right and the bottom in 20-year Treasury price (i.e., peak yield) is nigh (as it retests its low from April 2024), we likely would see the dollar decline, gold rally, and bond yields fall, which would be a tailwind for growth stocks. Ultimately, I expect the terminal fed funds rate will be around 3.50% (from today’s 4.25-4.50%), although it might not get there until 2026, and I think the 10-year will gradually settle back to around 4.25%.

Assuming AI and blockchain capital spending and productivity gains are already largely priced into the lofty Big Tech valuations, perhaps this is the year that the market finally broadens in earnest such that opportunities can be found among small caps, bonds and dividend paying stocks, value, and cyclical sectors like Financials, Industrials, and Transports (and perhaps segments of Energy, like natural gas production, liquefication, and transport), However, the Basic Materials sector, particularly industrial commodities (like copper), may struggle with weak Chinese demand, and because many commodities are priced in dollars, a strong dollar reduces purchasing power among all our trading partners, which further hinders demand. As such, Materials continues to rank at the bottom of Sabrient’s SectorCast rankings.

I go into all of this (and more, including my outlook for 2025) in my full post below. Overall, my suggestion to investors remains this. Don’t chase the highflyers and instead focus on high-quality businesses at reasonable prices, hold inflation and dollar hedges like gold and bitcoin, 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 massive capex in blockchain and AI applications, infrastructure, and energy, leading to rising productivity, increased productive capacity (“duplicative excess capacity,” in the words of Treasury Secretary nominee Scott Bessent, would be disinflationary), and economic expansion.

When I say, “high-quality company,” I mean one that is fundamentally strong by displaying a history of consistent, reliable, and accelerating sales and earnings growth, positive revisions to Wall Street analysts’ consensus forward estimates, rising profit margins and free cash flow, solid earnings quality, and low debt burden. These are the factors Sabrient employs in selecting our portfolios. 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).

Sabrient founder David Brown describes these (and other) factors and his portfolio construction process in his new book, How to Build High Performance Stock Portfolios, which is available on Amazon for investors of all experience levels. David describes his path from NASA engineer on the Apollo 11 moon landing project to creating quant models for ranking stocks and building stock portfolios in 4 distinct investing styles—growth, value, dividend, or small cap growth. To learn more about David's book and the companion subscription product we offer that does most of the stock evaluation work for you, visit: https://DavidBrownInvestingBook.com

As a reminder, our research team at Sabrient leverages a process-driven, quantitative methodology to build predictive multifactor models, data sets, stock and ETF rankings, rules-based equity indexes, and thematic stock portfolios. As you might expect from former engineers, we use the scientific method and hypothesis-testing to build models that make sense—and we do that for growth, value, dividend, and small cap strategies. We have become best known for our “Baker’s Dozen” growth portfolio of 13 diverse picks, which is packaged and distributed quarterly to the financial advisor community as a unit investment trust, along with 3 other offshoot strategies for value, dividend, and small cap investing.

In fact, the Q1 2025 Baker’s Dozen will launch this Friday 1/17, followed by Small Cap Growth on 1/22 and then Dividend on 2/11.

Lastly, let me make a brief comment on the LA wildfires. It seems every wildfire in SoCal has always ended when “we got lucky,” as the fire chiefs and local meteorologists would say, due to the winds tapering off and/or rains arriving just in time. I certainly saw this firsthand a few times during my 20 years raising a family in Santa Barbara. And I always wondered, what will happen when this “luck” doesn’t materialize the next time? Of course, even if one believes that reversing climate change is humanly possible, the lengthy timetable to decarbonization (while countries like China and India continue to increase carbon emissions by burning coal at record amounts to generate 60% and 70% of their electricity, respectively) means that proper preparation today for disasters is essential. And yet California’s leadership was doing the opposite, prioritizing specious social justice agendas while degrading readiness for the “perfect storm” of wildfire conditions…when luck fails to arrive. My deepest sympathies, thoughts, and prayers go out to all those impacted by this preventable tragedy.

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