Since the beginning of the 2nd quarter when President Trump announced his global tariffs, how many of us would have thought the stock market would be where it is today? Probably very few of us. This highlights the unpredictability of investing and the importance of humility. As the predictions of tariffs causing the markets to implode has seemingly come and gone, it is an important reminder to all of us that we need a resilient and disciplined investment strategy. Exiting the markets in early April would have been a fool’s errand. The idea that humility is essential to success in the market can be evident in Howard Marks writings that “what’s clear to the broad consensus of investors is almost always wrong” because a widely held, positive view often means the investment is overpriced.
Our consistent view has been that there are pockets within the market that are, in fact, fundamentally overpriced. Oftentimes, those securities have significant momentum behind them for various reasons. The behavioral factors driving that momentum are the current investor psychology and market dynamics. Particularly, the advent of artificial intelligence (AI) has created an investment craze that we view as similar to the “dot.com” bubble back around the year 2000. While we hold securities that we believe will benefit from the buildout and usage of artificial intelligence, it is almost impossible to know which ones will have lasting value. AI technology is still in its infancy so discerning and identifying which companies will be able to monetize the usage of AI will be our goal. It is imperative for us to monitor those securities and to take profits in due time to keep a healthy balance in client portfolios.
Being overconfident in this market will at some point hurt investors. The question is when. The market is currently expensive by many metrics, with the S&P 500’s price-to-earnings (P/E) ratio around 23. The late 1990’s tech bubble and the post-Covid period are similar to where we are now. This may suggest lower future returns once the momentum dissipates. As we have mentioned in the past, we will continue to take profits on the “expensive” stocks and shift to those with more attractive valuations that should participate as the market’s breadth widens out.
