by Scott Martindale
  CEO, Sabrient Systems LLC

Quick note: Sabrient’s new Small Cap Growth 52 Portfolio just launched on 6/17 as a 15-month portfolio holding 43 stocks across a range of sectors. It offers an alpha-seeking alternative to the broad small-cap indexes. Notably SCG 46 is the next to terminate on 7/22, and it currently shows a gross total return of +81% vs. +48% for its benchmark S&P SmallCap 600 Growth (SLYG), as well as 61% for Russell 2000 Small Caps (IWM), and +43% for S&P 500 (SPY), as of 6/22.

Overview

The resilient bull market continues to be powered by a compelling combination of technological innovation, robust corporate earnings, resilient consumer spending (despite energy and supply-driven inflationary pressures), and investor optimism around productivity-driven economic growth, despite ongoing macro uncertainties (there’s always something). Notably, the April rally off the market correction was broad-based, then May saw a marked narrowing with Tech the clear leader while most other sectors struggling (as bond yields surged, which hurts interest-rate sensitive industries), and now June has the market resuming its broadening efforts, as evidenced by price action (including a new high for the Russell 2000 small caps) and a convergence in forward P/E multiples (e.g., cap-weight S&P 500 falling, equal-weight S&P 500 and Russell 2000 small caps rising).

In my full commentary below, I discuss:

1. Relative valuations and the SpaceX-led parade of mega-IPOs on tap
2. GDP, inflation, jobs, and productivity
3. Fed policy in the new Kevin Warsh chairmanship
4. AI backlash, the realities, and how to address it
5. Datacenter power demand and the NIMBY problem
6. My final comments section on government versus private sector capital allocation and ROI
7. Sabrient’s sector rankings, positioning of our sector rotation model, and some top-ranked ETF ideas

As I discussed in my May post, valuations in the broad market indexes have been falling even as the market has surged, as earnings surged at an even faster rate. The equal-weight indexes have outperformed their cap-weight brethren, most notably in the Tech sector, with the MAG-7 badly underperforming the aggregate of everyone else in the sector. Who are the new leaders? Those benefiting from all the hyperscalers’ capex, including names like Sandisk (SNDK), Western Digital (WDC), Seagate Technology (STX), Micron (MU), Broadcom (AVGO), Dell (DELL), Vertiv (VRT), Quanta Services (PWR), EMCOR (EME), Arista Networks (ANET), Bloom Energy (BE), Comfort Systems (FIX), and Sterling Infrastructure (STRL)—many of which have been holdings in Sabrient’s quarterly Baker’s Dozen portfolios.

With the splashy IPO debut of Elon Musk’s SpaceX (SPCX), there are now 12 companies in the $1 trillion market cap club as of 6/19 [including lone non-Tech name Berkshire Hathaway (BRK-B]. And given the rest of the mega-IPO lineup expected this year, some commentators are suggesting a new Big Tech-leadership acronym, such as “MANGOS”—Meta, Anthropic, NVIDIA, Google, OpenAI, and SpaceX. Or the “AI Big 10” that adds Micron, AMD, and Broadcom to the existing MAG-7.

Many of the main headwinds of H1 seem to be finding resolution. The Iran conflict is apparently winding down, and oil price has tumbled from around $105/bbl at its May peak to below $75/bbl (front-month futures contract for WTI on NYMEX), which soon will be reflected in inflation metrics. Consumer spending and retail sales have held up despite falling real wage growth, and now the extremely poor consumer and investor sentiment metrics are showing nascent signs of improvement—although still far from the euphoria or “irrational exuberance” of the dot-com era. Also, the huge SpaceX IPO hit the market without any notable damage.

Overall, I still think fundamental tailwinds outweigh headwinds as investors position for continued AI progress, robust capex for AI, reshoring, and re-industrialization, looser Fed monetary policy, resurgence in global liquidity growth, and One Big Beautifull Bill Act (OBBBA) policies fully kicking in with its pro-growth policies like tax reform, deregulation, smaller government, pro-energy protocols, 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.

Furthermore, this should continue to attract foreign capital into the US (“shadow liquidity,” much of which is not counted in M2), cut the debt and deficit-to-GDP ratio, and unleash organic private sector growth. Today’s valuations are reasonable, particularly given rising corporate earnings forecasts (now at +23% YoY for CY2026), but future stock valuations likely will be driven more by rising earnings and ROI than by AI hope-driven multiple expansion, particularly given the lingering macro uncertainties and the risk of higher interest rates.

In addition, aside from the oil and supply-driven disruptions that have temporarily goosed inflation metrics, many disinflationary trends are still in place, including the secular implementation of AI and automation, rising productivity, falling shelter costs, the deflationary impulse from a struggling China, a stable/rising dollar (up nearly 5% YTD), and slow M2 growth (about 4.7% vs. last year and 3.5% annualized over the past 3 years, vs. 6.0% pre-pandemic average since 1960). So, as supply chains are repaired and rerouted (as I discussed in my April post) and as oil prices and inflation recede, we could see some multiple expansion—to perhaps as high as 24x on the S&P 500 (after the recent contraction to below 22x on a next-12-months basis)—which would further support stocks. Indeed, the market seems to be setting up the next up leg. Every dip has been a buying opportunity. According to InvesTech Research, “Margin Debt as a percentage of nominal GDP shot up 9% in May, reaching a new all-time high.”

Q1 earnings reporting season was stellar, with robust YoY earnings growth, margins, and productivity, plus rising forward guidance and analyst earnings forecasts. Blended EPS growth across sectors was up 28% in Q1, led by Tech sector at 54%. Revenue growth was 11%, led by Tech at 16%. Profit margins were 15%, led by Tech at 29%. But because EPS growth has exceeded price performance, the P/E multiple has shrunk. The S&P 500 started the year at 6,845 and closed last week at 7,500. The latest Wall Street consensus for S&P 500 operating EPS is about $339 for 2026 (implied P/E of 22.1x based on $7,500 price) and $392 for 2027 (forward P/E of 19.1x on current price). Both are roughly 10% higher than at the start of the year. An official resolution to the Iran conflict and supply shock could allow for some multiple expansion, perhaps pushing the forward P/E to 24x—which implies the S&P 500 Index hitting 8,000 by year-end 2026 and potentially 9,300 by year-end 2027. Are these realistic targets? Not out of the question, in my view, although bouts of volatility along the way surely should be expected—perhaps severe pullbacks as price stretches from moving averages (like a rubberband).

As the S&P 500’s concentration in Big Tech has grown, its dividend yield has compressed to below 1.0%—reminiscent of the late-1990s and well below its multi-decade average around 1.7%—mainly because those high-growth Big Tech companies that dominate the cap-weight index don’t need to pay dividends to attract investors. Instead, investors are willing to pay up for strong growth and high margins, increasingly discounting a world in which AI becomes deeply embedded in business operations in a long-term secular investment cycle rather than short-term cyclical trend. And this is in spite of the elevated benchmark 10-year Treasury yield around 4.5%, which normally would suppress valuation multiples (on a discounted cash flow basis). Although Big Tech is largely immune to interest rate volatility, the smaller companies—into which the market is seeking to broaden—are not.

Furthermore, many uncertainties remain. Investors are concerned about the worrisome inflation prints, Fed policy under the new chairmanship, and the concise-but-vague MOU with Iran. Moreover, the long stretch of years in which demand for US stocks has far outstripped supply (“scarcity”) seems to be suddenly reversing. The line-up of mega-IPOs this year, pre-IPO shares coming out of lock-up, and Big Tech’s shift from using its massive cash flow for share buybacks to supplementing cash with new share issuances to instead fund historic levels of AI-related capex for datacenters, advanced compute hardware (chips, memory, servers), networking, and power infrastructure. According to Michael Gayed, the four largest hyperscalers (Meta, Alphabet, Microsoft, Amazon) spent $416 billion on capex in 2025 and have projected 2026 capex of $725 billion.
 
Concurrently, there is concern about Big Tech earnings quality and circular financing (e.g., NVIDIA investing in its customers who in turn buy NVIDIA’s GPUs), not to mention speculation on how soon all this massive AI spend will pay off (i.e., ROI) and what happens if and when the capex firehose dials down or shuts off. However, as the engraving in every convex passenger-side car mirror reminds us, “Objects in the mirror may be closer than they appear,” which certainly seems to be the case with AI as fundamentals are evolving much faster and impacting workflows much sooner than most anyone expected.

As for the Fed’s increasingly hawkish stance and rising odds of a rate hike (like the ECB just instituted), my view is that a hike won’t reduce the oil or food prices that are driving up the inflation metrics unless it induces an economic recession, which is not what the Fed or anyone wants to see. Assuming the Iran conflict is indeed coming to an end, inflation and interest rates likely have topped, with disinflationary structural trends resuming control and bonds catching a bid.

I remain of the belief that interest rate-sensitive segments of the economy, including housing, homebuyers, small businesses, and lower-income consumers, are already struggling with current financing and mortgage rates, offset only by the locked-in low interest rates from 2020-21, in a K-shaped economy, with higher income people doing well and spending, while lower income is being squeezed. For instance, higher income households have not reduced their driving habits at all, while most others have, and teenagers are having a hard time finding summer jobs due to all the older workers who have re-entered the workplace to supplement their retirement income. Moreover, the still-solid GDP growth metrics have been overly reliant on the combination of the AI race and its massive infrastructure spending, financed mostly on Big Tech cash flow than debt, plus unsustainable levels of fiscal deficit spending—i.e., around $1.9 trillion or 5.8% federal deficit-to-GDP, which includes $1 trillion in interest payments on 100% publicly held federal debt-to-GDP (and 123% total debt-to-GDP).

Notably, if you look solely at the primary deficit (excluding interest on debt), the ratio to GDP is 2.6% (20.1% spending minus 17.5% total revenue), which exceeds the 50-year historical average of 1.7% primary deficit-to-GDP ratio. If any of this spending slows, recessionary conditions might follow. In other words, we need all segments of the economy to flourish, and that can be supported by lower rates. And by the way, elevated inflation helps “inflate away” the debt as long as growth in real (after-inflation) GDP is positive (preferably strongly positive, like 2.5% or more) and exceeds growth in deficit spending, and interest rates remain contained (including any financial repression or yield curve control).

Having a hyper-financialized global economy means that rising rates could cripple debt-addicted businesses, governments (including our own federal government), and the housing market (which is critical for a healthy consumer). Sure, mortgage rates have been much higher in the past, but home prices today are based on a lower baseline of post-GFC easing and low rates. And given recent strengthening of the dollar, some emerging market economies with dollar-denominated debt may be forced into default. In other words, today’s global financial system simply can’t handle higher US interest rates.

Given the market broadening beyond the Big Tech titans, and assuming the Fed does not become overly hawkish, we continue to see opportunities in active stock selection, small caps, and bond-alternative dividend payers. Indeed, Sabrient’s Baker’s Dozen, Forward Looking Value, Small Cap Growth, and Dividend portfolios have been largely outperforming their benchmarks. Our latest Q2 2026 Baker’s Dozen Portfolio launched on 4/17 as a 15-month portfolio with a mid-cap bias and a diverse group of 13 stocks across eight business sectors. After two months, it is already off to a good start, up +9.5% vs. +5.1% for SPY and +3.6% for equal-weight S&P 500 (RSP), as of 6/22. Notably, last year’s Q1 2025 Baker’s Dozen terminated on 4/20 with a gross total return of +46.7% vs. +20.3% for SPY, and the next-to-terminate Q2 2025 portfolio is up +61% vs. +43% for SPY and +32% for RSP. 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. FTLS now has $2.4 billion in AUM.

Sabrient employs a variety of fundamental financial factors in our quantitative models and portfolio selection process. Sabrient Scorecards for Stocks and ETFs are investor tools that provide access to several of our proprietary models for idea generation and portfolio monitoring. To learn more, I invite you to visit https://MoonRocksToPowerStocks.com where you can download founder David Brown’s latest book (an Amazon international bestseller) and 2 bonus reports (on investing in the Future of Energy and Space Exploration)—all in PDF format—and start subscribing to the Scorecards, which make David’s process easy for idea generation and portfolio monitoring. They include our Top 30 stocks each week for 4 distinct investing strategies—Growth, Value, Dividend, and Small Cap. To go straight to the Scorecard subscription, go to: https://www.moonrockstopowerstocks.com/sabrient-scorecard

Here is a link to the 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!  Click here to continue reading my full commentary....

 
  by Scott Martindale
  CEO, Sabrient Systems LLC

Quick note 1: Sabrient’s new Dividend 56 Portfolio just launched on 5/6 as a 24-month portfolio holding 46 dividend-paying stocks across a range of market caps and sectors. It employs a Growth & Income strategy, offering a bond-like current dividend yield of 3.36% while seeking capital appreciation potential. Notably, the next-to-terminate Dividend 48 ends on 5/22 and currently shows a gross total return of +55% vs. +26% for S&P 500 High Dividend ETF (SPYD) and +44% for S&P 500 (SPY), as of 5/15.

Quick note 2: Sabrient employs a variety of fundamental financial factors in our quantitative models and portfolio selection process. Sabrient Scorecards for Stocks and ETFs are investor tools that provide access to several of our proprietary models for idea generation and portfolio monitoring. I invite you as well to visit https://MoonRocksToPowerStocks.com to immediately download founder David Brown’s latest book (an Amazon international bestseller) and 2 bonus reports (on investing in the Future of Energy and Space Exploration)—all in PDF format.

Overview

The market has been in parabolic mode—and it’s all about earnings, pricing power, and ROI (current and forward) rather than multiple expansion (or hope and prayers). As Bespoke Investment Group observed last week, following a 70% gain just since 3/31 the PHLX Semiconductor Index (SOX) was trading 36% above its 50-day moving average for only the third time in the past 30 years, with the other two occurring during the dot-com bubble. Moreover, the Nasdaq 100 (QQQ) was trading 15% above its 50-day moving average for the first time since 2009 (coming out of the GFC). However, today’s enthusiasm differs from prior speculative technology cycles in several ways. For instance, revenue growth tied to AI infrastructure has been tangible and substantial, particularly with datacenter businesses that fulfill the insatiable compute demand by housing high-density servers, GPUs, and networking equipment that act as the infrastructure backbone for cloud computing and AI training workloads. In other words, the rally is not being driven solely by narrative momentum like the dot-com boom—it is also driven by accelerating revenue generation and real cash flow and earnings.

Indeed, Q1 corporate earnings season has been particularly strong, beating even the most optimistic forecasts and providing big increases in forward guidance. Approximately 84% of S&P 500 companies have exceeded analyst profit expectations, representing the highest beat rate since 2021, according to FactSet. Large-cap companies, especially within Technology and Communications Services, continue to demonstrate operating leverage and strong margin resilience despite elevated interest rates and lingering inflationary pressures. According to DataTrek, “US Big Tech (ex-Nvidia) generated $183.4 bn in cash flow in Q1 2026 and spent $183.7 bn on CapEx and strategic investments….” We are entering a productivity boom, which is driving an historic earnings boom. Forward estimates are growing faster than they did in the mid-90s or late dot-com bubble years—and without having economic recovery comps to artificially boost them.

FactSet data shows that for Q1, with 89% of companies having reported, the S&P 500 in aggregate is showing a YoY earnings growth rate of +27.7% (the highest since +32.0% in Q4 2021). The sectors seeing the biggest increases are Information Technology (+50.7%); Communication Services (+48.8%); and Materials (+43.2%), while Healthcare trails with a negative growth rate of -3.1% (the only one negative). As for revenue growth, the aggregate is +11.4% YoY (the highest since +13.9% in Q2 2022), led by InfoTech at +29.2% and Comm Services at +15.0%. Moreover, analysts have increased their S&P 500 earnings estimate for CY2026 to $333.25—implying a P/E of 22.2x based on the closing price on 5/15. Thus the CY2026 EPS forecast suggests +21.3% YoY growth over CY2025 (vs. +17.1% expected as of 3/31, before the latest reports and guidance came out), and Tech is now indicating +38.7% YoY EPS growth (vs. +23.4% expected on 3/31).

Furthermore, according to FactSet, Q1 2026 net profit margin for the S&P 500 (aggregated bottom-up) is tracking toward a record high (since data began publication in 2009) of 13.9% vs. the 5-year average of 12.3%, as illustrated in the chart below from Phil Rosen of Open Bell Daily. Notably, 6 of the 11 sectors are tracking above their 5-year average. And looking ahead, net margin is expected to climb to 14.6% by Q3. According to DataTrek Research, ““Earnings growth drives the narrative around price/earnings ratios, but it is trends in structural profitability that actually change investors' perceptions of underlying value…. Index valuations are increasing as a result, a natural if underappreciated outcome related to these improvements…and supports the argument for a ‘recession proof’ US economy.”

The Buffett Indicator (total US stock market cap divided by GDP) has reached 230% of GDP, far beyond even the 2000 dot-com bubble. And yet because of extraordinary earnings reports and optimistic forward guidance, P/E multiples are actually falling. For example, the next-12-months forward P/E for the Technology Select Sector SPDR (XLK) is 27.6x, down from its peak above 31 last October. Meanwhile, the S&P 500 trades at only 22.0x, down from 23.5x in October.

As for inflation and interest rates, I continue to believe the Fed is missing the mark and should be more accommodative. Incoming Fed chair Kevin Warsh will confront an FOMC that largely believes monetary policy should be tighter, with higher fed funds rate in the face of rising inflation readings. However, as I explain in my full commentary below, the latest inflationary surge is an event-driven supply shock—i.e., supply chain disruptions in the Strait of Hormuz and the resulting oil price spike (illustrated by the surging Global Supply Chain Pressure Index)—rather than structural (i.e., an overheated economy and excess consumer demand), many interest-rate-sensitive segments of the economy are still struggling. I believe that the fed funds rate should be 3.0% and that the 10-year Treasury note yield will eventually retreat back down to around 4.0%.

In my full commentary below, I discuss stock patterns and valuations, the AI-driven earnings boom, the 4-layer AI “stack” and its major players, GDP, productivity, inflation, liquidity, and Fed policy. And in my Final Comments section I discuss why the Iran oil supply shock is a reason to better diversify oil supply routes and pursue nuclear energy—not give license to ramp up solar, wind, and batteries. Then I close with my usual update on Sabrient’s sector rankings, positioning of our sector rotation model, and some top-ranked ETF ideas.

Despite narrow market breadth, Big Tech remains a must-own for its amazing growth and safe haven sentiment among investors. Still, 2026 should continue to be a good year for active stock selection, small caps, and bond-alternative dividend payers (particularly since the dividend yield on the S&P 500 is down to just 1.03%). Indeed, Sabrient’s Baker’s Dozen, Forward Looking Value, Small Cap Growth, and Dividend portfolios have been largely outperforming their benchmarks. Each is packaged and distributed as a unit investment trust (UIT) by First Trust Portfolios (https://ftportfolios.com).

By the way, our new Q2 2026 Baker’s Dozen Portfolio just launched on 4/17 as a 15-month portfolio with a mid-cap bias and a diverse group of 13 stocks across 8 business sectors (InfoTech, Financials, Industrials, Healthcare, Consumer, Comm Services, Energy, and Materials). Notably, last year’s Q1 2025 Baker’s Dozen terminated on 4/20 with a gross total return of +46.7% (vs. +20.3% for SPY), and the next-to-terminate Q2 2025 portfolio is up +56% vs +42% for SPY (as of 5/15). 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. It has over $2.3 billion in AUM.

Sabrient’s models and selection process seek high-quality companies with strong growth trends and expectations. Specifically, it identifies stocks that are fundamentally strong with 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 “quantamental” portfolio selection process. You can learn how to access several of our proprietary models for idea generation and portfolio monitoring through Sabrient Scorecards, as well as download Sabrient founder David Brown’s latest book (an Amazon international bestseller), by visiting this link: Moon Rocks to Power Stocks

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
  President & CEO, Sabrient Systems LLC

 Key Points:

 1. The country’s 40-year path into a debt & deficit spending spiral was not working and had to change dramatically, not gradually, and the process to fix it is scary and uncomfortable.

2. The president’s “Liberation Day” tariff regime is at once simplistic and perplexing, but the selloff seems overdone, in my view, although the market remains fragile.

3. After an initial price shock, tariffs are deflationary like any tax; and countries are already coming to the table to negotiate them down.

4. The US is much less dependent on trade, less vulnerable to trade disruptions, and in far better position to weather a brief trade war than any other country, including mercantilist China, which is saber-rattling as a Trumpian bargaining tactic and to stoke the flames of political division in our country, in my view.

5. The $10 trillion that left the stock market was not lost like a wildfire burning down homes; it simply rotated into bonds and cash and can quickly rotate back if the outlook does not change and we have fiscal stimulus, supportive Fed, and rising global liquidity.

6. Volatility (up and down) may be sticking around through H1 until clarity improves later in the year.

7. For those still contributing to a 401(k), the selloff has presented a long-awaited opportunity to “buy low.”

8. Investors may be better served by active stock selection, such as Sabrient’s Baker’s Dozen, Small Cap, and Dividend portfolios.

Overview:

The news has been dominated by President Trump’s announced “Liberation Day” regimen of draconian tariffs, which are intended to induce both fairer trade policies from our trading partners and the onshoring of manufacturing. As his words moved from a 10% across-the-board baseline tariff (a nominal amount that initially sent stocks higher) to the gory details of his broader plan, the swan dive commenced. Negative volume went through the roof. Margin calls rained in. Algorithmic trading systems switched from leveraged long to either leveraged short or out of the market completely (thus removing critical liquidity), tripping stop losses and creating a cascade of selling pressure. The next day’s weekly AAII Sentiment Survey hit an extreme 62% bearish reading and will likely fall lower in this week’s survey. IPOs are being put on hold. The Polymarket odds of an emergency rate cut surged to 285, as did the odds of a rate cut meeting (36% at the May FOMC meeting but a 92% lock by the June meeting).

As of Monday morning’s open, the stock market had essentially given back all last year’s gains. Chartists are lamenting the failure of scary-bearish chart patterns (like the dreaded inverse flag pattern) that could potentially send stock indexes all the way down to their pandemic lows. The CBOE Volatility Index (VIX) surged above 45 on Friday 4/4 and then touched 60 in the pre-hours on Monday 4/7, which is reminiscent of the pandemic lockdown five years ago.

But are things today really as bad as that, when global supply chains were paralyzed and people were falling ill (and/or dying) en masse? I would say no, and in just a couple of blood-red, gap-down days, the rapid market meltdown already seems overdone, as I discuss further in today’s post. As famed value investor Ben Graham once said, “In the short run, the market is a voting machine, but in the long run it is a weighting machine.”

Although the VIX certainly could still go higher (perhaps a lot higher) and stocks lower, Friday looked to me a lot like capitulation and perhaps the start of a bottoming process leading to a great (and long-awaited) buying opportunity for long-term investors. Just be careful about “catching a falling knife.” Many countries (reportedly more than 50) have apparently reached out to fix their trade arrangements, although the biggie, China, is still in saber-rattling mode, at least for now.

Of course, the current selloff also was exacerbated by “priced for perfection” valuations and a complacent “buy every dip” mentality, largely driven by AI exuberance (and its promise of transformation disruption and rapid growth in productivity) and the massive capex allocated for AI infrastructure and datacenters. Furthermore, during the run-up to all-time highs in 2024, hedge funds had become more heavily leveraged long in US equities than at any time since the pandemic lockdown (as much 300% leveraged), essentially pulling forward gains from 2025 based on strong earnings expectations. So, there might be some similarities to the dot-com bubble bursting in 2001 in that respect. But even at its recent high, the overvaluation was nowhere near 1999 levels of the dot-com mania, and we don’t have the systemic credit and accounting issues leading into the 2008 Global Financial Crisis. Company balance sheets are quite sound, and although credit spreads have spiked, they remain low on a historical basis.

Even before the 4/2 tariff announcement, stocks were already looking shaky. It was fascinating to watch the charts of the major indexes like the S&P 500 ETF (SPY) and Nasdaq 100 ETF (QQQ) as they struggled for several days to hold support at the 300-day simply moving average, like a sloth hanging from a tree branch, until ultimately losing grip in dramatic fashion following the big tariff announcement. I opined in my March post that it might be time to create a shopping list of stocks but that volatility would likely continue into the tariff target date (4/2) and perhaps into Tax Day (as liquidity draws down for making tax payments). But few (including me) expected the cataclysmic selloff. Volatility may be sticking around for a while until clarity improves, particularly as Q1 earnings season (and forward guidance) kicks off this week.

To be sure, the reality of the new administration’s aggressive policies to fix many long-festering trade issues has caused much consternation and gnashing of teeth, drawn swift retaliation (particularly from China), disrupted global supply chains, lowered corporate earnings estimates, and raised recession risk (both domestically and globally). In response, just like when the so-called “bond vigilantes” short Treasury notes and bonds (or go to cash) in protest of rising budget deficits and total debt, the “stock vigilantes” went to work shorting stocks (or defensively moving to cash or Treasuries, removing market liquidity and briefly driving the 10-year yield below 4.0%) in protest of the uncertain impacts on the economy and corporate earnings. Or as former Democrat turned Trump supporter Batya Ungar-Sargon sees it, “Suddenly, everybody is sitting around saying, ‘Oh, no, the stock market!’ Yeah, the stock market looks like that because the rich [i.e., Wall Street institutional investors and hedge funds] are punishing Trump for siding with the neglected and humiliated American working class over them.” Indeed, the top 10% of Americans by income own 88% of stocks, the next 40% own 12%, and the bottom 50% are shut out.

So, yes, stock portfolios, IRAs, and 401(k) plans are way down, as the evening news keeps telling us. According to Bespoke Investment Group, the Russell 3000 has seen well over $10 trillion in lost market cap since Inauguration Day (1/20). However—and this is an important point—this is not “capital destruction” in the same sense that a wildfire can destroy homes and businesses. The capital pulled from the stock market didn’t vanish from the earth. It simply rotated into cash and bonds. And it very likely will return to stocks once trade situations are ironed out and visibility improves. It might take several months…or it could come back in a hurry. Be prepared. Perhaps start nibbling at stocks now. If you’re like me, you probably received a slew of low-price alerts for your target list. Some speculative investors might be going all-in at current levels. Regardless, for those still contributing to their IRA or 401(k) and not yet drawing on it, this selloff is a gift to be appreciated, in my view, restoring some value back into the market. After all, when you are in long-term accumulation mode, you want to “buy low.”

Of course, no one knows for sure how low it can go and when the selloff will bottom—and the bottoming process may be lengthy and volatile. The wild card for stocks going forward is uncertainty around the severity and duration of tariffs, which seem designed by their sheer audacity to induce a swift resolution. After all, there is no underlying malady in the economy that prevents business leaders and entrepreneurs from adapting like they always do, and only pride and prejudice can prevent a quick resolution to most of the trade arrangements.

Political, economic, and market volatility will surely continue during H1. But even if we get a larger correction than I expect, I continue to believe stocks will soon find support and ultimately give way to a gradual melt-up, sending the market to back near its highs of Q1 by year-end or early-2026, driven by rising global liquidity, a weaker US dollar, reduced wasteful/reckless government spending and regulatory red tape, lower interest and tax rates, massive corporate capex, and the “animal spirits” of a rejuvenated private sector and housing market. So, if you have been hoping and praying for lower prices in risk assets (including stocks and crypto) or for a lower mortgage rate to buy a house, you are getting them now, with the forward P/E on the S&P 500 at 18.7x as of 4/4 (before any significant downward revisions to earnings estimates), versus 22.7x at its February peak. As the poet Virgil once said (in Latin), “audentes Fortuna iuvat” — i.e., “fortune favors the bold.”

Because this market correction was led by the bull market-leading MAG-7 stocks and all things AI related, investors now have a second chance to get positions in some of those mega-cap titans at more attractive prices. There remains a persistent sense among global investors of “American exceptionalism” based on ouir entrepreneurial culture, a tenacious focus on building shareholder value, and the mesmerizing appeal of our Big Tech companies that offer disruptive innovation, huge cash positions, reliable and consistently strong earnings growth, free cash flow, margins, return ratios, low interest-rate exposure, global scalability, and wide protective moats.

So, the initial recovery may well be led by the Big Tech titans that are now much more fairly valued, such as NVIDIA (NVDA) at a forward P/E of 21x (as of 4/4). Notably, some of these names have seen their valuations retreat such that they are once again scoring well in Sabrient’s growth models (as found in our next-gen Sabrient Scorecards subscription product)—including names like Amazon (AMZN), NVIDIA (NVDA), Salesforce (CRM), Alphabet (GOOGL), Meta Platforms (META), Microsoft (MSFT), Broadcom (AVGO), Oracle (ORCL), Arista Networks (ANET), Fortinet (FTNT), Palo Alto Networks (PANW), Palantir (PLTR), and Taiwan Semiconductor (TSM)—two of which (TSM and AMZN) are in the Q1 2025 Sabrient Baker’s Dozen.

But longer term, rather than 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 and undervalued gems primed for explosive growth—many of whom could coattail on the Big Tech names and provide greater returns. 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.

As for small caps, which as pointed out by Fama French used to outperform large caps over the long haul (higher risk, higher reward), the small cap indexes have been consistently lagging large cap indexes over the past 20 years, mostly due to their much lower allocation to the Technology sector. For example, the S&P 500 has a massive 17.6% relative overweight to the Tech sector (30.3%) versus the Russell 2000 (12.7%). And if you include the Tech-adjacent MAG-7 names that are categorized as Consumer Discretionary (i.e., Amazon and Tesla totaling 5.3%) and Communications (Alphabet and Meta Platforms totaling 6.4%), the S&P 500 allocation to the MAG-7 is 30.5%, and the combined Tech plus Tech-adjacent allocation is a whopping 42.0%—or a 28.9% relative overweight versus the Russell 2000!

Some might say that small caps are due for a mean reversion versus the S&P 500, but it seems its relative overweight to cyclical sectors like Industrials, Financials, Real Estate, Materials, and Energy (with only noncyclical/secular growth Healthcare having an overweight of 5.9%) rather than to secular growth Technology would make any attempt at mean reversion temporary. Nevertheless, I still think the small cap universe is where to find the most explosive growth opportunities (with the notable exception of large cap names like NVDA), even if the broad passive indexes (like Russell 2000) can't keep up. So, insightful active selection is important for small cap investing—which is easier to do given the relative lack of analyst coverage and institutional ownership of small caps.

We at Sabrient have become best known for our “Baker’s Dozen” portfolio of 13 diverse growth-at-a-reasonable-price (GARP) stocks, which is packaged and distributed quarterly to the financial advisor community as a unit investment trust through First Trust Portfolios, along with three other offshoot strategies based on Value, Dividend, and Small Cap investing. By the way, our Q1 2025 Baker’s Dozen remains in primary market until 4/16, after which time the Q2 portfolio launches. Also, our Small Cap Growth 45 portfolio remains in primary market until 4/21, followed by the launch of Small Cap Growth 46, and Dividend 51 is in primary market paying a 4.25% yield on new purchases.

As a reminder, Sabrient founder David Brown’s new book, How to Build High Performance Stock Portfolios, is available in both paperback and eBook versions on Amazon. And as a companion product to the book, we have launched next-gen versions of Sabrient Scorecards for Stocks and ETFs. You can learn more about the scorecards book and, download a sample scorecard, and sign-up for a free trial subscription—by visiting: http://DavidBrownInvestingBook.com/

In today's post, I examine in detail the new tariff regimen, the case for reducing (but not eliminating) the trade deficit, the liquidity challenge and “debt maturity wall,” and the case for tariffs and trade realignment. You won’t regret reading it through! 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. Here is a link to this post in printable PDF format.  Read on….