by Scott Martindale
  CEO, Sabrient Systems LLC
 

Quick note 1: Sabrient’s quarterly Dividend 58 portfolio launched today 11/2 with a diverse mix of 41 stocks across sectors and market caps. It employs a Growth & Income strategy with bond-like yield (current yield upon launch of 3.33%) while seeking capital appreciation from high-quality companies. Also, our Q3 2026 Baker’s Dozen portfolio (13 top growth picks) launched on 10/20. Our Q3 2025 Baker’s Dozen just terminated on 10/20 with a gross total return of +33% vs. +24% for SPY. And our quarterly Small Cap Growth 52 portfolio launched on 9/15, with a mix of 44 small-cap stocks. It followed the launch of Sabrient’s annual Forward Looking Value 14 portfolio on 8/26, having a diverse mix of 31 stocks. Last year’s FLV 13 terminates on 11/17 and is currently up +42% vs. +21% for S&P 500 Value (SPYV) and +19 for S&P 500 (SPY) as of 10/30.

Quick note 2: I was recently a guest on the “Biz Wiz” podcast to tell my humble career story from engineering school to the oil industry to investment research and eventually CEO of Sabrient Systems. Key takeaway from the 30-minute discussion is that an entrepreneurial mindset means adaptability, resilience, focusing on high-potential projects, avoiding rabbit holes, responding to customer needs, creating and scaling value, and advocating for yourself and your ideas. I’d love to hear your impressions!

Overview:

Well, in case you thought you largely missed out on the AI trade, the market has given you another entry point. Sure, the sharp Technology selloff was amplified by technical selling, profit-taking, stop-loss orders, and leveraged algo traders temporarily switching to shorts. But I suspect investor anxiety about the approaching midterm elections also played a role. A potential “blue wave” raises the prospect of renewed efforts to roll back the OBBBA's tax reforms, deregulation, and shrinkage of government, along with greater regulatory scrutiny and possible restrictions on AI development and the construction of datacenters, natural gas pipelines, and nuclear facilities.

Such policies could impede the massive infrastructure buildout underpinning the investment boom, which has become a major driver of corporate capex, earnings growth, and broader economic activity. Combined with growing investor scrutiny of hyperscaler spending and ROI, the prospect of stiff political obstacles to this transformative secular technology and economic cycle may be adding another layer of uncertainty to a market already concerned about whether the massive “all-in” capital spending on the various acronyms AI/SI/ASI/RSI will generate adequate returns to justify it all. Some commentators estimate that it will take $1 trillion in revenue run-rate by end of 2028 to justify the capital commitments, which leaves little room for a slowdown.

Nevertheless, assuming the October selloff was driven more by technicals and macro worries rather than earnings growth, and assuming the president’s veto power can stave off the wolves if the blue wave happens, optimistic investors now enjoy much better equity valuations, not just on the broad market but on many of the technology leaders and cutting-edge innovators. Moreover, the rapid surge in risk-free rates—that have been squeezing valuations by raising both corporate borrowing costs and the discount rate applied to future cash flows—seems to have weathered a “blowoff top” and cycle peak, as I suggested was underway in my 10/6 post. Regardless, most of the leading corporations seem to be tolerating higher interest rates pretty well.

As a reminder, corporate revenue tends to track nominal GDP growth. So, with real US GDP coming in at 3.4% annualized pace for Q3 2026 and the Atlanta Fed GDPNow model estimating Q4 at 3.7% (as of 11/2), it means nominal GDP growth (including the GDP deflator for Q3 of 2.2%) is 5.6-5.9%, supporting strong revenue growth, which is well above today’s 4.9% 10-year yield. This suggests that economic output and tax revenues are expanding faster than long-term borrowing costs, making debt easier to service while keeping financial conditions stimulative.

I hear the argument that rates are merely normalizing back to pre-GFC/ZIRP levels and that this 0.7% growth-to-yield spread in a highly resilient economy will keep upward pressure on interest rates. But this isn’t your father’s economy, and it certainly doesn’t mean today’s economy can readily absorb a “mean reversion” in interest rates. Today’s hyper-financialized, post-GFC/ZIRP global economy had become so accustomed to assuming lots of debt because rates were so low, which means that rising rates could cripple the many vulnerable debt-addicted businesses, governments (including our own massive federal debt), and a housing market (which is critical for a healthy consumer) stubbornly priced for low mortgage rates and low inventory. And most of this debt is either floating-rate or must keep rolling over through refinance.

In addition, 30-year mortgage rates (reaching as high as 7.4% recently) certainly have been even higher in the past. But home prices today are largely based on that lower baseline of post-GFC easing and ultra-low rates. And given recent strengthening of the US dollar, some emerging market economies with dollar-denominated debt may be forced into default.

In other words, outside of the largest corporations with fortress balance sheets, today’s highly indebted global financial system simply can’t handle the current level of interest rates.

Economist and liquidity expert Michael Howell of CrossBorder Capital sees cracks in the veneer of economic strength. He says that while capital markets were traditionally intended to raise new capital for real-world investments, infrastructure, and projects, today the reality is that 70-80% of all global financial transactions are simply rolling over existing debt, effectively turning the global financial system into a massive "refinancing machine."

Furthermore, I do not buy the “persistently elevated inflation” narrative. I believe underlying core inflation is stable and structural disinflationary trends are poised to take control once the energy/supply shocks are resolved. Indeed, I continue to assert that Fed rate hikes are a policy mistake for our bifurcated K-shaped economy (although it is notable that M2 money supply continues to grow at the same decent clip since 2024). We have soaring corporate profits and stock prices juxtaposed with stagnant labor and housing markets, negative real wage growth, a falling personal saving rate, and surging bond credit spreads.

In my comprehensive commentary below, I discuss:

 1. The booming IPO market
 2. Earnings and valuations
 3. Stock valuations and bond yields
 4. Jitters over the AI trade
 5. Surging credit spreads
 6. GDP, industrial production, and productivity
 7. Inflation and the K-shaped economy
 8. What should the Fed take from this?
 9. China’s economy is a growing problem for the world
10. My Final Comments section on the oath of office, crisis in France, and AI fearmongering
11. Sabrient’s sector rankings, positioning of our sector rotation model, and some top-ranked ETF ideas

The combination of high bond yields, surging credit spreads, geopolitical risks, elevated oil prices, ongoing supply shocks, election uncertainty, and jitters about both AI safety and when significant ROI will arrive for the massive AI capex are conspiring to hurt investor confidence and drive down valuation multiples more than recent S&P price action reflects, as overall earnings and guidance continue to march higher. Indeed, a market correction has been underway for months, even though the broad cap-weighted market indexes hasn’t reflected it. While a relatively small group of large stocks kept the S&P 500 near its highs, valuations across much of the market have been declining for months as investors are increasingly rewarding companies with stronger profitability, healthier balance sheets and more dependable earnings while assigning lower valuations to businesses whose prospects are less certain.

The aggregate P/E multiple is down over 20% from its high, and EPS growth is expected to slow substantially next year, albeit from an incredibly (and unsustainably) high level. And credit markets are getting more selective, forcing a quality rotation that includes equities—an internal rotation rather than an abandonment of stocks. So, when I talk about greater market breadth being “healthy” for the market, I’m not talking about equal-weight outperforming cap-weight for an extended period. No, after such periodic periods of cleansing the leverage and speculation, we still need Technology sector leadership, including from Big Tech. But having broader participation across the stock market with more (if not all) “boats” lifted is healthy and desirable for the stock market for many of the same reasons that having broader participation from the lower leg of the K-shaped economy is healthy and desirable for the economy and society.

However, the Fed knows that credit spreads have surged as investors seek either higher quality or greater compensation for elevated risk. But only CCC or worse are in distressed territory. This is yet another sign of the neglected lower-leg of the K-shaped economy being left behind in this AI infrastructure-driven economy, and why I urge the Fed not to hike rates any further—and in fact should cut back toward a 3.0-3.25% fed funds rate (FFR). Look, I understand the argument that today’s rates are simply normalizing to pre-GFC levels. And I am not talking about a return to ZIRP (zero interest rate policy), which created essentially “free money” leading to plenty of malinvestment in unworthy, highly speculative companies, products, and ventures—including non-fungible tokens (NFTs) and special purpose acquisition companies (SPACs).

I just want to see a more broad-based economy (i.e., more boats lifted) in which most if not all industries are participating. Keeping floating-rate debt manageable is a step in that direction. So, I’m thinking that a funds rate of 3.25% at the top end plus an historical average spread of 125 bps for the 10-year Treasury should put 10-year at about 4.5%. This suggests nominal GDP growth (with today’s growth-to-yield spread of 0.7%) of around 5.0-5.2%. With the GDP deflator falling to 2.0%, we would have sustainable real GDP growth at a solid 3.0%.

Overall, I see the US economy as more recession-resistant, more technology-efficient, more services-oriented (meaning less energy-intensive and less at risk of inventory buildup that must be dumped cheaply into the market, like China does), and thus less cyclical. So, a steadier, more predictable economy means structurally higher corporate margins, earnings, cash flow, and capex consistency, which supports higher valuation multiples, lower credit spreads, a subdued VIX, and a buy-the-dip investor mentality. It seems that only a resurgence in bond yields, an AI-related credit crisis, or a harsh political disruption could derail it.

As such, I still think the S&P 500 has a shot at hitting 8,000 by year-end. But it largely depends on the ongoing Q3 earnings reports and forward guidance, which have illuminated some concerns among juggernauts—including Meta (META), Alphabet (GOOGL), and Amazon (AMZN) all spending well beyond their monstrous cash generation on their AI buildouts and pushing each company into deep, historically unprecedented negative free cash flow. Expectations are becoming challenging. As the GMO Asset Allocation team observed, “For the first time in twenty years, with the brief exception of the Global Financial Crisis, we are seeing net dilution in the U.S. stock market (i.e., share issuance exceeding share buybacks) as the hyperscalers continue their capital expenditure spree.”

Moreover, I expect a continuation of the market broadening beyond just the AI trade, and I continue to see opportunities in active stock selection, equal-weight indexes, value stocks, cyclical sectors, small caps, and bond-alternative dividend payers. Indeed, Sabrient’s quant-based, actively selected (“quantamental”), equal-weight 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 holds more than $2.6 billion in AUM.

Lastly, with a highly consequential election upon us, I hope you vote for policies over personalities, and long-term success and prosperity over short-term band-aids. There are those among us who are blissfully ignorant of and unburdened by our ancestors’ centuries of accumulated wisdom, trial and error, what works and what doesn’t, who think they know better how to maximize the potential and wellbeing of both individuals and society as a whole despite the harsh lessons of history and despite many candidates never having managed a successful enterprise themselves, much less a nation. Worse, many voters simply go for “the other guy” if they aren’t happy with their lives today, no matter how impractical the other guy’s proposed solutions. I have more to say about this in my Final Comments section below.

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

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….