by Scott Martindale
  CEO, Sabrient Systems LLC

Quick note: The previous website had some issues, but I invite you now to visit https://MoonRocksToPowerStocks.com to learn more about Sabrient founder David Brown’s new book, Moon Rocks to Power Stocks, which teaches how to build wealth through data and discipline. You can immediately download the book and two bonus reports (on investing in the future of Energy and Space Exploration) in PDF format and learn how to access the Sabrient Scorecards subscription product.

Overview

War and its impact on oil, LNG, and fertilizer supplies and pricing—and by extension the impact on inflation, supply chains, bond yields and mortgage rates, dollar strength, global liquidity and global GDP—continue to top the headlines. And as if that’s not enough, we have our worsening political polarization, an utterly feckless US Congress, and complete lack of bipartisan agreement on anything, with the severe fallout of no DHS funding and long TSA lines at the airport. And lest we forget, we have rising debt and expanding deficits, sticky services inflation, and a softening labor market with falling job openings, layoffs, stalled wage growth, and new college graduates facing rising unemployment. But the buildout of physical AI infrastructure is creating real ROI, wealth creation, and productivity gains, and the companies building the AI compute stack have been delivering incredibly bullish earnings calls and forward guidance—and they are not dissuaded in the least by any of those onerous macro issues.

The doomsayers have been joined by the realists and pragmatists in believing there is no escaping $150/bbl oil and an economic recession, depending upon how much longer the oil market and energy supply chain disruption goes on—leaving only the eternal optimists to carry the bullish flag. History shows that stocks tend to recover nicely following military conflicts that are resolved relatively quickly, finding a bottom concurrently with the peak in oil prices. But production and refining capacity take to time to bring back online, and destruction of energy infrastructure among the Gulf Cooperation Council countries (GCC—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and UAE) can take years to rebuild. If the Iranian regime tries to take it all down concurrent with their own demise, including crippling their own Kharg Island facilities—the future of their own citizens be damned—then the near-term future indeed may be challenging (or even bleak).

The war continues to consume precious resources and disrupt the global economy, as the whole world waits out with bated breath each missile launch and utterance from our president. President Trump’s goals are to defang Iran’s military and long-range missile capability, nuclear infrastructure, and terrorist network, and decapitate its radical, hateful, theocratic regime (and hopefully usher in a friendlier government) without destroying the civilian infrastructure and power grid so that the Iranian people (and the country’s future) aren’t catastrophically crippled. Indeed, rather than Trump “TACOing” again on harsh escalation (i.e., chickening out, as his critics accuse him of), I believe it is really an indication of his desire not to cripple Iran’s future as a thriving participant in the global economy. Trump doesn’t require a secular democracy there; he just wants to see a responsible, approachable government that doesn’t oppress its people, threaten all non-believers with death, aspire to a global caliphate, or zealously pursue an apocalyptic ending that ushers in the “Twelfth Imam.”

What’s left of Iran’s tyrannical regime is behaving like the Black Knight in the old comedy movie, Monty Python and the Holy Grail. Although thoroughly defeated, the regime just keeps on with its impotent saber-rattling. “It’s just a flesh wound!” the Black Knight exclaims after King Arthur chops off his arm. And after the king has chopped off all his arms and legs, the Black Knight says, “Alright, we’ll call it a draw.” Here’s the 4-minute clip. I have much more to say about the Iran War in my Final Comments section below.

Unfortunately, enough market participants are worried that maybe the Iranian regime’s bluster has a kernel of truth, or that US boots on the ground will lead to intolerable death and destruction in a bloody effort to take control of Kharg Island and ship traffic in the Strait of Hormuz. My view is that the regime is flailing like the Black Knight, and that the end is near. No money, dwindling munitions and resources. JP Morgan CEO Jamie Dimon opined that he is optimistic about the aftermath of the war given the new mentality across the region born of recent strong economic growth that has been creating incentives for stability and a desire among the GCC for a “permanent peace in the Middle East” that would open the region to foreign investment and robust growth. He said, “The Iran war gives it a better chance in the long run; [but] it’s probably riskier in the short run." BlackRock’s Larry Fink sees just two extreme potential outcomes with no middle ground: either we see growth, abundance, and $40 oil, or we see global recession and years of $150 oil. It’s worth noting that spikes in oil-to-natural gas ratio historically have receded within a few months; however, destroyed energy infrastructure could easily change this dynamic.

Since its all-time high of 7,000 on 1/28, the S&P 500 is down about 9% (as of 3/30), which means it has lost over $5 trillion in market cap, mostly due to fear-driven selling but also profit protection, capital preservation, and algo trading that is now short-biased. On Friday 3/27 alone, the MAG-7 stocks shed $330 billion in market cap. Traders have been clearing out positions ahead of each weekend due to uncertainty about war escalations. Even holding overnight is worrying for them. The Dow and Nasdaq have fallen more than 10% (i.e., correction territory). Investor trepidation has led to beat-and-raise earnings reports from dominant Tech companies being met with selling—notably Micron (MU) and its incredible quarterly report that confirmed huge demand for AI memory, as well as NVIDIA (NVDA) and its 73% YoY revenue increase that defied the “law of large numbers” for the largest market cap company in the world. Despite seeing its market cap contract for over $5 trillion to closer to $4 trillion, NVIDIA remains an incredibly profitable company with remarkable margins and ROE, and an index weighting of about 8% of the S&P 500—which is more than the weightings of 5 of the 11 GICS sectors (Consumer Staples, Energy, Utilities, Materials, and Real Estate).

The forward P/E on the S&P 500 has fallen from a high around 23x to around 20x today, which is near its 10-year average, The CBOE Volatility Index (VIX) closed last week in panic territory above 31. Bonds have offered no safe haven as auctions have seen limited demand. Nor have gold, silver, and crypto as the US dollar has firmed up and central banks, which had been accumulating gold in a big way, find they desperately need to sell non-interest-bearing assets (like gold) to raise money to either offset lost oil export revenue or to pay the surging price of oil imports. But money is flowing into hard assets, like oil, agriculture, industrial metals, and commodities broadly. Some say the dominos are stacking up much like 2008, this time driven by surging oil prices and a potential meltdown in private credit. The chart below shows the divergent performance of various asset class ETFs, including oil (USO), commodities (DBC), driven mostly by oil and gasoline prices which have seen their biggest surge in four years, agriculture (DBA), bitcoin (BTC-USD), long-term US Treasuries (TLT), and gold (GLD).

This market correction has served to reset lofty valuations in prominent names that many investors want to own for the long term. Keep in mind, large capital spending commitments for AI, defense, and energy projects persist and even grow, such as Meta Platforms’ (META) announcement of an increase in its investment in a state-of-the-art, 1.0 GW AI datacenter in El Paso, Texas, raising its projected capex for the project from $1.5 billion to over $10 billion, as part of a total $135 billion capital spending plan for 2026, creating 4,000 construction jobs and ultimately 300 permanent operations jobs. Moreover, it will be water-positive by employing a closed-loop cooling system, and the company will fully fund all associated infrastructure and power grid connections. This is why engineering & construction firms like Comfort Systems (FIX)—the top performer in our next-to-terminate Q1 2025 Baker’s Dozen—and Sterling Infrastructure (STRL)—a top performer in our Q2 2025 and Q3 2025 Baker’s Dozens—have held up so well despite the profit-taking in their benefactors. I talk more about these firms in my full commentary.

The One Big Beautifull Bill Act (OBBA) has fully kicked in, with its tax reform, deregulation, pro-energy policies, 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. US corporate earnings are expected to increase by 17% YoY in full-year 2026, according to FactSet—the most since the post-pandemic recovery and a level more typical of an economy emerging from a recession—as analysts keep revising upwards even as share prices fall. However, as DataTrek pointed out, while earnings growth isn’t a concern, Big Tech reinvestment rates are a concern (i.e., capex/cash flow ratio). To be sure, analyst optimism on earnings assumes only a temporary war shock and continued tech strength. As Barclays sees it, “There is a wall of worry—but it’s worth climbing.”

Yes, the Iran hostilities have created vast uncertainties and impacts on energy and supply chains—and by extension inflation. But I still think the overall picture suggests room for another Fed rate cut (certainly not a rate hike!). I go further into all of this in my full post below, including the economy, inflation, Fed policy, and the continued promise of the Tech sector. Then I close with my Final Comments section to expand on my opinions on the Iran “excursion” and the politics around it here at home, followed by an update on Sabrient’s sector rankings, positioning of our sector rotation model, and some top-ranked ETF ideas.

Looking ahead, stock market performance should be more dependent upon earnings growth and ROI rather than multiple expansion—although with this market correction, valuations have pulled back to the 10-year average, which may leave room for some multiple expansion as well. But regardless, rather than the broad passive indexes (which are dominated by growth stocks, Big Tech, and the AI hyperscalers), I think 2026 should continue to be a good year for active stock selection, small caps, and bond-alternative dividend payers—which bodes well for Sabrient’s Baker’s Dozen, Forward Looking Value, Small Cap Growth, and Dividend portfolios, which are packaged and distributed as unit investment trusts (UITs) by First Trust Portfolios.

Witness our Baker’s Dozen portfolios, which have held up relatively well compared to the benchmark S&P 500. The Q1 2026 portfolio (launched 1/17/26) is down only -1.7% vs. -6.1% for SPY (as of 3/27/26). It is led by refiner Valero Energy (VLO) and digital storage maker Western Digital (WDC). It remains in primary market until the Q2 2026 Baker’s Dozen launches on 4/17/26. Notably, last year’s Q1 2025 Baker’s Dozen that terminates on 4/16 has more than tripled the benchmark with a gross total return of +26.3% vs. +7.8% for SPY (as of 3/27/26).

Also, small caps and high-dividend payers tend to benefit from falling interest rates and market rotation—which should resume as the war comes to a (hopefully swift) resolution. Roughly 2/3 of Russell 2000 companies topped Q4 earnings expectations, which is the best beat rate since 2021 (coming out of the pandemic). So, Sabrient’s quarterly Small Cap Growth and Dividend portfolios might be timely investments. 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. Worth checking out.

I have been imploring investors in my recent posts to exploit any significant market pullback by accumulating high-quality stocks as they rebound, with earnings fueled by massive capex in AI, blockchain, energy, and onshoring of power infrastructure and factories, leading to rising productivity, increased productive capacity, and economic expansion. By “high-quality stocks,” I mean fundamentally strong, displaying a history of consistent, reliable, resilient, durable, and accelerating sales and earnings growth, positive revisions to Wall Street analysts’ consensus estimates, a history of meeting/beating estimates, rising profit margins and free cash flow, high capital efficiency (e.g., ROI), solid earnings quality and conservative accounting practices, a strong balance sheet, low debt burden, competitive advantage, a wide moat, and a reasonable valuation compared to its peers and its own history.

These are the factors Sabrient employs in our quantitative models and portfolio selection process. As former engineers, we use the scientific method and hypothesis-testing to build models that make sense. As a reminder, Sabrient founder David Brown reveals the primary financial factors used in our models and his portfolio construction process in his latest book, Moon Rocks to Power Stocks—now an Amazon international bestseller.

Here is a link to this post in printable PDF format, where you also can find my latest Baker’s Dozen presentation slide deck. 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

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….