“There are two ways to use money. One is as a tool to live a better life. The other is as a yardstick of status to measure yourself against others.” – Morgan Housel
Hi all,
It’s been a little bit since my last update, and the valuation of the S&P 500 remains stretched. It is currently in the 93rd percentile of valuation in history, which is only to say there is a lot of optimism built into the market.
In the last quarter, something amazing occurred. Per the chart below, the amount of AI-related spending as a percentage of the overall economy became larger than all the other consumer spending in the economy. You’ve heard me say it many times to never bet against the American consumer. But in this case, everyone’s betting on artificial intelligence making companies more productive.
At some point valuation matters, and if you’re looking at the numbers in a vacuum, we’re very close to the same valuation metrics we last saw at the height of the tech bubble in 2000.
We continue to believe that the market needs a decent pullback (3-10%) to reset some valuations, and we believe that pullback will occur in the next 60 days. Historical data shows that when the S&P is positive for May, June, and July, the period between August and mid-October is bumpy (to use a nice term). The good news is that the period post-October through mid-January is positive 17 out of 17 times, for an average gain of 7%.
The S&P 500 is up 30% over the last 16 weeks (almost 2% per week). The only thing we know for sure is that it’s not sustainable. We’re still looking for that pullback to put additional money to work and we will stay patient to try and not chase this market where seemingly everything is working.
– Adam