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….

 
  by Scott Martindale
  CEO, Sabrient Systems LLC
 

  Here is my take on the early inflation metrics for April. I feel as though I have been shouting into the wind for several months about the deflationary trends that are upon us—as opposed to the worries about resurgent inflation we keep hearing from smart economists and the Fed.

The outgoing administration during its final months juiced its already enormous spending that had long supported GDP and jobs growth. This contributed to the spike in inflation metrics in October-January, with CPI/PPI hitting +3.00%/+3.65% YoY in January, and pushed the budget deficit to $1.3 trillion for the first half of fiscal year 2025 (10/1/24-9/30/25), marking the second-highest six-month deficit on record, which was exacerbated by surging interest payments on surging debt.

Then the new administration came in with the lofty but earnest goal of fixing our unsustainable death spiral of inflation, debt, deficit spending, offshoring, and hyper-financialization. Well, it's so far, so good on the inflation front, which has been falling for the past 3 months, with all March readings back below 3%, and the new April readings falling even further.

As shown in the upper chart below, April CPI and PPI came in at +2.33% and +2.41% YoY, and the real-time blockchain-based Truflation (which historically presages CPI) is at +1.79% today. The middle chart shows the rolling 3-month annualized rates (which I like to follow for a better read on the current trend), which came in at just +1.56% and -0.08% (yes, negative). It is evident that PPI is the most volatile, but the resumption in the downtrend is clear. The third chart shows the correlation among CPI, PPI, and the Global Supply Chain Pressure Index (GSCPI). GSCPI remains subdued, in negative territory (i.e., below its long-term average), which bodes well.

But in my view, maintaining somewhat elevated inflation above 2% might be appropriate to help reduce the giant federal debt by “inflating it away” as part of a 3-prong approach comprising: 1) elevated inflation in the 2.5% range, 2) cost cutting, particularly rooting out waste and fraud, and 3) robust real economic growth through fiscal & monetary policies that foster organic private sector growth (rather than continued overreliance on inefficient government)—leading to gains in productivity, margins, earnings, jobs, wages, GDP, and ultimately tax receipts.

And by the way, here's my take on the impact of tariffs: 1) tariffs are a tax, 2) taxes are deflationary, 3) ipso facto, tariffs are deflationary (in the absence of a commensurate increase in income).

Read on....

 
  by Scott Martindale
  President & CEO, Sabrient Systems LLC

 Overview

 Market indexes regained all of their losses since the president’s “Liberation Day” tariff announcement one month ago, culminating in an historic +10% 9-day rally for the S&P 500 (and +18% from its 4/7 intraday low) that sent it back above its 20-day and 50-day moving averages to test resistance at its 200-day. But was this just a short-covering relief rally as bearish commentators assert? I said in my April post that the $10 trillion that left the stock market was not the “capital destruction” they claimed, like a wildfire burning down homes, but rather a rotation into the safety of bonds and cash that could quickly rotate back. Sure enough, when retail investors swooped in to scoop up the suddenly fair valuations of the capitulation selloff, leveraged algo momentum traders quickly joined in. But while I think the longer term holds promise, the chart became short-term overbought (and is pulling back this week), and macro conditions are still treacherous, keeping investors jittery and headline-driven. So, the market remains fragile even as we wind down a solid Q1 earnings reporting season, with the FOMC policy announcement on tap this week.

Nevertheless, in my view, positive signs are emerging to suggest: 1) the trade war (particularly with China) and the hot war in Ukraine will both find their way to a resolution, 2) the fiscal legislation (“one big, beautiful bill”) with new tax cuts working its way through congress will soon be passed, 3) the size and scope of federal government that has crowded out the private sector is shrinking and making way for re-privatization and de-regulation of the economy to unleash organic private sector growth, 4) corporate earnings and capex commitments remain strong, and 5) the Federal Reserve will ensure liquidity growth and restart its rate-cutting cycle like other central banks—and liquidity leads pricing in risk asset markets, gold, and cryptocurrencies. So, I think the noise will quiet and the clouds will clear, making way for a renewed focus on corporate earnings and global liquidity to power forward the economy and stocks. And don’t forget—the market loves to climb a wall of worry, which means it discounts the future and typically turns well in advance of the economic and sentiment metrics.

Of course, the biggest news that juiced the stock market is the apparent offramp forming for the trade stalemate between the US and China. Publicly, China has been saber-rattling as a Trumpian bargaining tactic, in my view, and to stoke the flames of political division in our country with midterms on the docket next year—something the CCP doesn’t have to worry much about. Indeed, it has been loath to give an inch even though its economy was already struggling with deflation, a long-running property crisis, sluggish consumer demand, overcapacity, and weak business and consumer confidence well before the recent tariff escalation. Its services PMI just hit a 7-month low, its manufacturing PMI has officially fallen into contraction at 49.0, and its new export orders component plunged to the lowest reading since the pandemic at 44.7. And although China insists the US “unilaterally” started the trade war, the truth is we are finally pushing back after years of turning a blind eye to their tariffs, IP theft, forced technology transfers, hacking, state subsidies, dumping of goods, fentanyl trafficking, and currency manipulation.

In my view, the US is in far better position to weather a brief trade war than mercantilist China. As Treasury Secretary Scott Bessent succinctly articulated, “China’s business model is predicated on selling cheap, subsidized goods to the US, and if there is a sudden stop in that, they will have a sudden stop in their economy. So, they will negotiate.” Both governments know that an escalating trade war with big tariffs and a tight US Federal Reserve is especially bad for China. The dollar/yuan exchange rate is crucially important to China, and the dollar today is nearly as strong it has been against the yuan since yuan’s devaluation during the Global Financial Crisis. With its massive dollar-denominated debt, a weaker dollar relieves China’s financial strain by boosting global liquidity to the benefit of both countries. So, despite its theatrical saber-rattling, China needs a trade deal that ensures a weaker dollar to shore up the yuan and reduce capital flight.

Indeed, we are now hearing from China that “the door is open” to trade talks, and its security czar is evaluating ways to address the use of Chinese precursor chemicals by Mexican cartels to produce fentanyl for distribution in the US. Moreover, although the Port of Los Angeles announced that volumes will fall be 1/3 as several major American retailers are halting all shipments from China, in reality, American businesses as usual are finding a way to succeed (and skirt the most onerous tariffs) by rerouting supply chains through 3rd party countries like Vietnam and Mexico (“trans-shipping”) and delivering to bonded warehouses to delay the official receipt of goods. Also offsetting the tariffs is the 10% drop in the dollar index.

Looking ahead, although volatility likely will remain elevated for the next few months, unless something crazy comes out of left field, I think the market has seen its lows, and the path of least resistance is higher. American consumers, corporations, and entrepreneurs are optimistic by nature and are always pushing boundaries and seeking a path forward, rather than sitting on their hands waiting for government to tell them what to do. And of course, President Trump is not one to sit on his hands for one minute in his effort to “fix” our unsustainable “death spiral” of inflation, debt, deficit spending, offshoring, and hyper-financialization.

But then we have the FOMC, whose members have been quite happy to sit on their hands in the face of tariff turmoil, falling inflation, and slowing GDP and jobs growth. Among the 19 FOMC participants (the 7 Board of Governors and 12 Reserve Bank regional presidents, which includes both the 12 voting members and the 7 non-voting members who serve as voting members on a rotating basis), they almost unanimously (18 of 19) agreed at their March meeting that growth and employment risks are skewed to the downside while inflation risks are skewed to the upside. Overall, the Fed has taken a dovish stance but will be reactive to sudden distress in growth and jobs rather than proactive in preventing such distress.

Although Fed Chair Powell often talks about tariffs as being inflationary, in fact tariffs are deflationary like all forms of taxation—i.e., without a commensurate increase in income or credit, they necessitate a rethinking and reallocation of one’s existing disposable income. Furthermore, Powell & Co. seem to be ignoring the deflationary signals of falling oil prices, slowing household consumption, declining savings rates, and rising delinquencies. Inflation metrics are pulling back after being propped up by elevated energy prices and long-lag components (like shelter costs) and the prior administration’s profligate federal deficit spending that overshadowed—and indeed created—sluggish growth in the private sector. I talk more about inflation metrics and expectations for next week’s CPI and PPI releases in my full commentary below.

To be fair, government spending (to the tune of nearly 6.5% of GDP) exacerbated the inflation and private sector malaise it created by making it difficult for the Powell & Co. to justify helping out the private sector with lower interest rates, thus crowding out the efficient capital allocation and high return on investment of the private sector with the inefficient capital allocation of bloated government boondoggles. Economist Michael Howell of CrossBorder Capital reminds us that “public debt is expanding faster than private debt, fueled by welfare commitments and rising interest burdens, ensuring persistent liquidity growth.” Importantly, Howell 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. In his view, “The modern financial system is a fragile, collateral-driven mechanism, and one that requires constant intervention [through proactive management] to avoid collapse.”

As Andrew Lees of MacroStrategy Partners has pointed out, “Economies naturally self-order productively when not constrained by excessive regulation and over-bearing government intervention. The current "financialized" economic system as it is, is dependent on debt and unproductive use of capital (Wall Street vs Main Street).” The private sector has proven to be much better at the efficient and highly productive allocation of capital to maximize ROI. So, as Secretary Bessent has described, the Trump administration seeks to reduce the budget deficit to 3% of GDP and increase real GDP growth to 3%, which would lead to the same kind of small-government/strong-private-sector economy that has turned around a foundering Argentina under President Milei.

The May FOMC meeting convenes this week, so we shall see. CME Group fed funds futures show only 3% odds of a 25-bp rate cut, but increases to 32% at the June meeting, and 78% odds of at least 75 bps (3 cuts) by year-end. In my view, they should be readying for 50 bps in rate cuts by July and a target neutral rate of around 3.25-3.50% by early 2026. Certainly the 2-year Treasury yield (the shortest term that is substantially market driven) at 3.80% (as of 5/6) is signaling to the Fed that rates should be much lower than the current 4.25-4.50% fed funds rate. According to a recent post by AlpineMacro, “…the current 10-2 year spread in the bond market is not sustainable, particularly if the economy slows sharply. Ultimately, the long end of the curve will gravitate to the short end, particularly when investors realize that tariff-induced price increases are temporary.” Notably, projections on bond issuance from Secretary Bessent suggest a gradual return to an 80/20 split between T-bonds & notes (80%) versus T-bills (20%) going forward as opposed to the nearly 100% allocation to T-bills (< 1 year) under his predecessor Janet Yellen.

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. Moreover, today’s DOGE-led spending cuts, trade war uncertainty, and with budget reconciliation and fiscal legislation still in progress have removed much of that artificial stimulus. But regardless of the May FOMC decision, I expect the rate-cutting cycle to restart in June and signed trade deals with our 18 key trading partners beginning this month.

But for the near term, until those things come to fruition, I continue to expect stocks will remain volatile (with VIX above the 20 “fear threshold” but below the 30 “panic threshold”). CNN's Fear & Greed Index just jumped from "Fear” to “Greed” on the dial but remains volatile. The American Association of Individual Investors' ("AAII") Investor Sentiment Survey has shown more than 50% bearish (vs. historical average of 31%) for 10 consecutive weeks, which is the longest streak since 1990. Capital flows reflect a sharp drop in foreign capital flight into US bonds and equities over the past two months in something of a “buyers’ strike,” adding pressure to the US dollar. And last week saw a negative Q1 GDP print, somewhat offset by an upside beat from the jobs report and rising labor force participation.

There are certainly plenty of high-profile bears. One market technician I respect a lot, A.J. Monte of Sticky Trades, still believes stocks will eventually retest their pandemic lows (!). He warned of the dreaded “death cross” when the 50-day moving average crossed down through the 200-day moving average on 4/12. And then we have Christoper Wood of Jefferies, who believes that US stocks saw a permanent (!) peak last December (at lofty valuations) and will never (!) see those levels again—much like Japan’s market peak in 1989. Instead of US stocks, Wood thinks investors should buy Europe, China, Japan, and India. Others have pronounced that the US brand is permanently damaged and that we have witnessed the end of “American exceptionalism.” Heavy sigh.

Call me overly patriotic with rose-colored glasses, but my view is a little different. Capital tends to flow to where it is most welcome and earns its highest returns, so the recent falling tide of foreign capital flight leaving the US will surely return once visibility clears and the dollar firms up. Most any foreign investor will tell you there is no other place in the world to invest capital for the innovation and expected return than the US given our entrepreneurial culture, technological leadership in disruptive innovation, strong focus on building 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, Big Tech titans, which continue to use their piles of cash to seed AI startups and other disruptive technologies. Notably, the US boasts more than 50% of the world’s privately owned late-stage start-ups valued at over $1 billion (aka “unicorns”) and leads in R&D spending and patent applications.

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.”

As Kevin O’Leary has opined, “Our number one export is the American dream. Everyone wants to come to America and start a business and become personally free." And this will not change just because our president seeks to incentivize the private sector to strategically reshore manufacturing with the ultimate goals of reviving the middle class, narrowing the wealth gap, reducing the trade deficit, ensuring reliable supply chains, and reinforcing national security. Moreover, Trump’s federal cost-cutting, tariff regime, and America-First rhetoric does not aim for absolute deglobalization, fiscal austerity, mercantilism, and isolationism as the MSM would have you believe, but rather to simply rebalance a system that had become completely out of balance—and indeed was falling into that aforementioned death spiral of rising inflation, debt, deficit spending, offshoring, and hyper-financialization. The rebalancing involves re-privatization and de-regulation rather than relying on massive government spending—and what I call “smart austerity” to eliminate waste, fraud, abuse, corruption and unaccountability, plus a “peace dividend” from ending the war in Ukraine.

So, I continue to believe the macro uncertainty and jittery market will ultimately give way to a 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.

The early April selloff brought down some of the loftiest valuations among the popular mega-cap stocks, with the forward P/E on the S&P 500 falling to 18.5x on 4/8 versus 22.7x at its February peak and today’s 20.6x (as of 5/5). In fact, many of the prominent names in the Technology and Communication Services sectors saw their valuations retreat such that they are scoring well in Sabrient’s growth models (as shown in our next-gen Sabrient Scorecards subscription product)—including large caps like Taiwan Semiconductor (TSM), Broadcom (AVGO), and Spotify (SPOT) that are in the new Q2 2025 Sabrient Baker’s Dozen portfolio, and small caps like Freshworks (FRSH), QuinStreet (QNST), and RingCentral (RNG) that are in our new Sabrient Small Cap Growth 46 portfolio. These portfolios along with Sabrient Dividend 51 (a growth & income strategy yielding 4.05% as of 5/5) are packaged and distributed quarterly to the financial advisor community as unit investment trusts through First Trust Portfolios.

Indeed, 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 a reminder, the “Size” factor refers to market cap and the Fama French study that showed small caps historically tend to outperform over time. Although that has not been the case for the small cap indexes (like Russell 2000) for most of the past 20 years, I still think the small cap universe is where to find the most explosive growth opportunities, even if the broad passive indexes 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.

For each of our portfolios, we seek high-quality, fundamentally strong companies displaying a history of consistent, reliable, and accelerating sales and earnings growth, rising profit margins and free cash flow, solid earnings quality, low debt burden, and a reasonable valuation. Notably, our proprietary Earnings Quality Rank (EQR) is a key factor in each of our growth, value, dividend, and small cap models, and it is also licensed to the actively managed First Trust Long-Short ETF (FTLS).

Sabrient founder David Brown describes these and other factors as well as his portfolio construction process in his latest book. David describes his path from NASA engineer 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 next-gen versions of Sabrient Scorecards for Stocks and ETFs. You can learn more about both the book and scorecards by visiting: http://DavidBrownInvestingBook.com.

In my full commentary below, I discuss earnings, gold, tariffs, inflation, global liquidity, the power of free market capitalism, and the imminent “bullish triumvirate” of tariff resolution, tax cuts, and deregulation. 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. Our model likes Technology, Healthcare, Communication Services sectors, and assuming interest rates indeed come down and liquidity rises as I expect, I also like dividend stocks and gold. HERE is a link to this post in printable PDF format.

I had so much to say this month that I decided to defer until next month my in-depth commentary on the exciting new developments in energy and electrical generation. Please contact me to speak on any of these topics at your event!  Read on….

  by Scott Martindale
  President & CEO, Sabrient Systems LLC

Overview:

The year began with impressive strength and resilience in risk assets despite all the uncertainties around tariffs, trade wars, hot wars, slowing GDP growth, inflation, stagflation, AI impact and capex, and myriad other concerns. The US was considered the rock in a recessionary world, attracting massive foreign capital flight (according to Nasdaq, total foreign holdings of US equities as of June 2024 was $17 trillion—almost double versus 2019). But once the dam broke, stocks, crypto, and the US dollar started melting down in a “waterfall decline” culminating in a “flash crash” on Monday with the CBOE Volatility Index (VIX) nearly hitting 30 before closing at 27.86. As the adage goes, “Stocks take the stairs up and the elevator down.” But I believe this is a valuation-driven correction, as stocks had become “priced for perfection,” and the rapid meltdown ultimately will give way to a gradual melt-up, driven by rising global liquidity, a weaker US dollar, reduced wasteful government spending, lower tax and interest rates, less regulatory red tape, and the “animal spirits” of a rejuvenated private sector and housing market.

Prop desks and algorithmic trading systems hit sell stops to exacerbate the selloff, with many flipping from long to short exposure, and markets imploded as average investors quickly swung from extreme greed to extreme fear. According to Real Investment Advice, “The last time the market was this oversold and 3 standard deviations below the [50-day moving average] was in August of last year during the 10% correction as the Yen Carry Trade erupted.” The AAII weekly sentiment survey hit a bearish extreme of 60% on 2/26, after surging from 40% just one week earlier when the S&P 500 was at an all-time high. However, it’s important to note that stocks have historically recovered quite impressively over the 12 months following such extreme bearish readings.

The rising bond term premium in Q4 suggested that investors were becoming increasingly anxious about rising deficits and inflation, which also pushed gold higher. Meanwhile, the Fed has maintained tight monetary policy—and high real interest rates—given the uptick in inflation and apparently solid employment reports. However, I have consistently argued that the real-time inflation trend (without the lag in key components) has been falling and that massive government spending and hiring masked underlying issues with growth and employment in the private sector. So, this is not due to anything the new administration has done. As Renaissance Macro economist Neil Dutta recently opined, "[President Trump] inherited an economy with deep imbalances and a frozen housing and labor market."

In fact, John Burns Research & Consulting has observed that 3.8 million employees work directly for the government, but an additional 7.5 million workers indirectly receive some or all of their wages from the government—which totals 11.3 million workers or roughly 8% of the total US workforce (134 million) and accounts for much of the jobs growth. This is why I continue to advocate for both smaller government and another 100 bps in Fed rate cuts to achieve a neutral fed funds rate around 3.5% and stimulate private sector growth. As a result, I would expect a 10-year yield to stabilize around 4.0-4.5%, which would justify a forward P/E multiple for the S&P 500 around 20x (i.e., an earnings yield of 5%).

From their highs this year, “the S&P 500 and crypto have erased a combined -$5.5 trillion of market cap,” according to The Kobeissi Letter. The highflyers have led the carnage, most notably semiconductor stocks. Meta Platforms (META) is the only MAG-7 stock still positive YTD, while defensive sectors (like staples, telecom, and utilities), gold and silver miners, low/minimum volatility, value, high dividend payers, REITs, and long-duration bonds are among the best performers. The fact that bonds have caught a bid and credit spreads remain tight are positive signs that investors do not fear recession (or economic collapse). But investors continue to be shy about the amount and duration of tariffs, the aggressive DOGE actions, timing of fiscal policy implementation (tax cuts and deregulation), and Fed monetary policy (a Fed put?), and the collective impact on jobs, inflation, GDP growth, and risk asset prices as they retreat from historically high valuations.

To be sure, the Big Tech darlings had become overvalued, which is why the equal-weight versions of the S&P 500 and Nasdaq 100 have held up significantly better during the selloff. But keep in mind, the first year of a 4-year presidential term is typically the most volatile during the transition to new policies—and Trump 2.0 (“wrecking-ball”) policies are bringing quite a change from the norm. As Treasury Secretary Scott Bessent said, “The economy has become hooked [on government spending], and there is going to be a detox period.”

So, knowing that he must show significant progress before the 2026 midterms, Trump is “ripping off the band-aid” to fully reveal the infected wound and wasting no time in addressing it with what he and his team strongly believes are healing policies that will restructure our nation for long-term prosperity, public safety, and national security. This is why his popularity among younger voters is holding firm. Although not nearly as extreme, it is like what Javier Milei has done to resurrect Argentina. I expect the political, economic, and market fallout will take its course during H1 2025 before giving way to a rapid building process during H2.

Investors have been increasingly scared away from risk assets at least partly due to the constant carping from both the mainstream media (MSM) and social media (usually misleadingly) about a “growth scare” (as the Atlanta Fed’s GDPNow forecast for Q1 plummeted to a recessionary -2.4% annualized growth rate), an “inflation scare” (due to tariffs, chickens, and migrant deportations), an “AI scare” (as China may be usurping our dominance with cheaper models, a “trade war scare” (as we alienate our international allies and trading partners), and various other scares that escape me at the moment (perhaps a “Hollywood exodus scare,” as celebs move out of country?). This diversified fearmongering has finally come to roost leading to the rapid unwinding of crowded long trades.

But no matter what you think of the longstanding system of global trade and whether the US was being taken advantage of, there is no doubting that the fiscal path we were on was unsustainable, with a bloated and intractable bureaucracy, wasteful boondoggles, entrenched interests, and funding of corruption, graft, fraud, racketeering, cronyism, kickbacks, and obfuscation both at home and around the world. Until now, no president has been willing or able to adequately address it, including Trump 1.0. But the new Trump 2.0 administration came in well prepared (and with a voter majority mandate) to tackle it head on. I have come to appreciate the method to our president’s apparent madness, as I discuss in my full post.

So, is this selloff likely to become a buyable dip rather than the start of a bear market? I would say yes. Although there might be some further volatility into the 4/2 tariff implementation date and perhaps the 4/15 Tax Day, I expect higher prices ahead. Why? First, from a short-term technical standpoint, the S&P 500, Nasdaq 100, and Dow Jones Industrials have diverged well below their 20-day moving averages, and they seem to have found support around their critical 300-day moving averages. Second, from a longer-term standpoint, despite all this chaos and turmoil from an administration emboldened to reverse and repair decades of neglect (and a continual “kicking the can down the road” for future generations to suffer the consequences), I remain optimistic that after some short-term pain during this transition period—including upticks in inflation, debt, and market volatility and a downtick in economic growth—the private sector will be equipped and unleashed to drive robust economic growth through productive, high-ROI investments and hiring.

In addition, as DataTrek Research recently observed, stocks have only fallen more than 10% in a given year in just 12 of the past 97 years, and each was driven either by a new hot war, recession (generally related to an oil price shock), or a Fed policy mistake—none of which are likely. So, don’t be too bearish. And as for a long entry point, the VIX can provide some guidance. It closed above 27 this week, which DataTrek considers to be a “capitulation” signal to consider getting back into stocks. And don’t forget all the cash sitting in money market funds earning those juicy risk-free rates. As money market rates recede, some of that cash may finally find its way into stocks at these more favorable valuations. Indeed, the rising price of gold may be signaling a global dovish pivot and massive liquidity support, as I discuss in my full post.

Yes, liquidity is key to keeping us out of a recession and a bear market in risk assets. Lower interest rates and a weaker US dollar are long-term economic tailwinds, while debt reduction is a short-term headwind until a rejuvenated (and turbocharged) private sector makes up for the lower deficit spending.

I expect the S&P 500 to rise above 6500 before year-end with a modest double-digit gain. Could it take longer for the expected fiscal stimulus (lower tax and interest rates, less red tape, and smaller government) to serve alongside the incredible promise of AI (on productivity, efficiency, and speed of product development) to boost the GDP such that the 6500 mark isn’t achieved until next year? Sure. But I think ultimately an economy driven by organic private sector growth is stronger and more reliable and sustainable than one driven by government (deficit) spending bills. As Elon Musk opined, “A more accurate measure of GDP would exclude government spending… Otherwise, you can scale GDP artificially high by spending money on things that don’t make people’s lives better.”

In the view of Treasury Secretary Scott Bessent, we have “a generational opportunity to unleash a new economic golden age that will create more jobs, wealth and prosperity for all Americans.” Indeed, if the fed funds rate begins to come down toward my 3.5% target, today’s slightly elevated valuations can be justified given solid corporate earnings growth, a high ratio of corporate profits to GDP, and the promise of continued margin growth across all industries due to the promise of rising productivity, efficiency, and product development speed from Generative AI, Large Language Models (LLMs), and Big Data. AI investment is not slowing down but simply shifting from a singular “builder” focus to a broader focus on AI applications. This is where productivity enhancement will shift into gear. And don’t forget energy, as affordable power is the lifeblood of an economy. Costs must stay low, and Trump 2.0 is prioritizing energy independence and lower energy costs.

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. 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), Arista Networks (ANET), Fortinet (FTNT), Palo Alto Networks (PANW), Palantir (PLTR), Microsoft (MSFT), and Taiwan Semiconductor (TSM). Our models focus on high quality and fundamental strength, with a history of consistent, reliable, and accelerating sales and earnings growth, positive revisions to Wall Street analysts’ consensus forward estimates, rising profit margins and free cash flow, solid earnings quality, and low debt burden. These are factors Sabrient employs in selecting our portfolios and in our SectorCast ETF ranking model. And notably, our Earnings Quality Rank (EQR) is a key factor in each of these models, and it is also licensed to the actively managed, absolute-return-oriented First Trust Long-Short ETF (FTLS).

Sabrient founder David Brown describes these (and other) factors and his portfolio construction process in his new book, How to Build High Performance Stock Portfolios, which is available on Amazon for investors of all experience levels. David describes his path from NASA engineer on the Apollo 11 moon landing project to creating quant models for ranking stocks and building stock portfolios in four distinct investing styles—growth, value, dividend, or small cap growth. You can learn more about David's book, as well as the companion subscription product (Sabrient Scorecards) that does most of the stock evaluation work for you, by visiting: https://HighPerformanceStockPortfolios.com.

As you might expect from former engineers, Sabrient employs the scientific method and hypothesis-testing to build quantitative models that make sense. We 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.

Click HERE to continue reading my full post (and to sign up for email delivery). I examine in greater detail the “growth scare,” inflation, tariffs, and DOGE shock, equity valuations, and what lies ahead. 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. Also, here is a link to this post in printable PDF format.

  by Scott Martindale
  President & CEO, Sabrient Systems LLC

Overview:

The stock market continues to chop around within a 2-month sideways trend, as uncertainty about fiscal and monetary policies confront elevated (some might say extreme) valuations, risk premia, and market cap concentration (with the top 10% of stocks by market cap now accounting for about 75% of the total), as well as slowing growth among the MAG-7 stocks. Uncertainty ranges from DeepSeek’s implications on the massive capex spending plan for AI, to DOGE’s rapid discovery of the shocking array of wasteful spending and corruption, to President Trump’s starling proposals regarding Gaza, Greenland, and Canada, to the frantic protests of Democrats and injunctions from federal judges on his dizzying array of executive orders.

Nevertheless, investors seem broadly optimistic about Trump 2.0 policies in the longer term but are concerned about near-term pain (which he has warned them about) from things like tariffs, trade wars, widespread job cuts across the federal government (from DOGE), and civil unrest and political dysfunction from those pushing back on the new policies—and the near-term impact on geopolitical tensions and the trajectories of GDP, the budget deficit, federal debt, inflation, the dollar, interest rates, and new issuances of Treasuries. As a result, gold has gone parabolic and seems determined to challenge the $3,000 mark. Bond investors may be rewarded handsomely when economic fundamentals normalize and the term premium fades. Until then, sentiment rather than data has been the key driver of bond yield rates.

Since the Fed started its rate cutting cycle, the fed funds rate is 100 bp lower while the 10-year Treasury yield jumped as much as 100 bps mostly due to short-selling “bond vigilantes,” although it has receded quite a bit of late. But more important than the fed funds rate is bringing down the 10-year Treasury yield, which has a much greater impact on long-term borrowing costs—like home mortgages—but is primarily driven by market forces and sentiment. So, other than direct intervention via QE (buying longer-term Treasuries and MBS on the open market), all the Fed and Trump administration can do is try to shore up investor confidence and expectations for economic growth, jobs, inflation, deficits, interest rates, productivity, and earnings.

Indeed, new Treasury Secretary Scott Bessent says the president believes, “if we deregulate the economy, if we get this tax bill done, if we get energy down, then [interest] rates will take care of themselves.” To that end, Bessent has espoused a “3-3-3” economic plan to increase GDP growth to 3%, reduce the budget deficit to 3% of GDP, and boost oil production by 3 million bbls/day (and according to Ed Yardeni, you might throw in 3% productivity growth as a fourth “3”). In Bessent’s view, we have “a generational opportunity to unleash a new economic golden age that will create more jobs, wealth and prosperity for all Americans.”

The recent uptick in US inflation has not been due to supply chain disruptions, as the Global Supply Chain Pressure Index (GSCPI) is negative (below its long-run average) at -0.31 (Z-score, or number of standard deviations from the mean). Instead, it seems to be more about: 1) money supply and velocity both rising in tandem, and 2) heavy foreign capital flight into the US (much of which remains outside of our banking system and is not captured by M2 money supply metrics) and interest payments on US debt (which goes primarily to wealthy individuals and sovereign governments) going toward asset purchases, which creates a consumer "wealth effect." This surge in foreign capital into the US is driven by our strong dollar, innovative public companies and start-ups, higher bond yields, desirable real estate, property rights, and business- and crypto-friendly policies.

Many commentators have called current stock valuations “priced for perfection.” Much like China’s mercantilist economy facing falling growth rates—as it has become so large it simply can’t find enough people to sell to maintain its previous trajectory—the MAG-7 stocks also seem to be hitting limits to their growth rates from sheer size. In fact, according to the The Market Ear, the “big four” richest executives (Musk, Bezos, Zuckerberg, Ellison) have seen their combined wealth explode from $74 billion in 2013 to $1.1 trillion today—nearly as much as the total US trade deficit ($1.2 trillion), or our total annual imports from China, Canada and Mexico ($1.3 trillion). Insane. But because of the extreme level of market concentration among the market juggernauts that distort the valuation multiples of the broad market indexes, I believe there are still many smaller “under-the-radar” stocks offering fair valuations for attractive growth, which is what Sabrient’s models seek to identify. I discuss this further in my full commentary below.

For 2025, my view is that, after a period of digestion and adjustment to this current flurry of activity (and likely a more significant market correction than most investors expect), we will see the stimulative and transformational impacts of: 1) business-friendly fiscal policies and deregulation, 2) less anti-trust enforcement and lawfare, 3) massive cuts to wasteful/unproductive government spending (including on illegal migrants and foreign wars), 4) tame supply chain pressures and labor, oil, and shelter costs all stabilizing, and 5) supportive monetary policy and a steepening yield curve (through normalization in interest rates and the term premium). Collectively, this promises to unleash our private sector and recharge economic growth.

Furthermore, I think recent signs of resurgent inflation and fears of a ballooning deficit will both recede, as I discuss in greater depth in my full post, which will allow the Fed to make two-to-three 25-bp rate cuts on its path toward what I believe is a terminal (aka neutral) rate around 3.50%...and the 10-year yield likely settling into the 4.25-4.50% range (i.e., a term premium of 75-100 bps)—particularly given that many of our global trading partners likely will be forced to cut rates to stave off recession (in Europe) and deflation (in China). Of course, what happens outside our border impacts us. China’s deflationary economy is still slowing and the CCP remains reluctant to use broad stimulus, but rate cuts have been signaled. Japan finally decided to increase its policy rate from 0.25% to 0.50% (still quite low), which strengthened the yen, as it tries to stave off stagflation. Europe is a basket case, especially the manufacturing sector, with recession expected in its largest economies, Germany and France. The ECB will likely cut rates several times and further weaken the euro.

Keep in mind, Treasury yields tend to be self-correcting in that as they rise investors become more defensive and drawn to the higher yields, which increases demand for bonds and brings yields back down. Of course, fiscal policy, deficit spending, inflation, and corporate earnings all come into play as well. But regarding interest rates alone, as long as the Fed is not raising the fed funds rate or tightening liquidity, the environment for stocks is supportive.

Overall, I think this all bodes well for banks, mortgage services, and indeed the whole financial sector, as well as for IPOs/M&A (after a steep downtrend over the past 4 years), small-mid-cap stocks, solid dividend payers, and longer-duration fixed income. Top-ranked sectors in Sabrient’s SectorCast rankings include Technology, Healthcare, and Consumer Discretionary. However, other market segments that don’t rank very high right now but may gain traction in the Trump 2.0 economy include oil & gas, nuclear, and transports, as well as industrials and utilities involved in building out the AI infrastructure and power grid. I also think there is turnaround potential in the beaten-down homebuilders and REITs. And I continue to like gold, silver, and cryptocurrencies as uncorrelated asset classes, market/dollar hedges, and stores of value.

So, rather than the high-valuation MAG-7 stocks, investors are advised to focus on high-quality, fundamentally strong companies displaying a history of consistent, reliable, and accelerating sales and earnings growth, positive revisions to Wall Street analysts’ consensus forward estimates, rising profit margins and free cash flow, solid earnings quality, and low debt burden. These are factors Sabrient employs in selecting our portfolios and in our SectorCast ETF ranking model. And notably, our Earnings Quality Rank (EQR) is a key factor in each of these models, and it is also licensed to the actively managed, absolute-return-oriented First Trust Long-Short ETF (FTLS).

Sabrient founder David Brown describes these (and other) factors and his portfolio construction process in his new book, How to Build High Performance Stock Portfolios, which is available on Amazon for investors of all experience levels. David describes his path from NASA engineer on the Apollo 11 moon landing project to creating quant models for ranking stocks and building stock portfolios in 4 distinct investing styles—growth, value, dividend, or small cap growth. You can learn more about David's book and the companion subscription product we offer (that does most of the stock evaluation work for you) by visiting: https://DavidBrownInvestingBook.com

As a reminder, our research team at Sabrient leverages a process-driven, quantitative methodology to build predictive multifactor models, data sets, stock and ETF rankings, rules-based equity indexes, and thematic stock portfolios. As you might expect from former engineers, we use the scientific method and hypothesis-testing to build models that make sense—and we do that for growth, value, dividend, and small cap strategies. We have become best known for our “Baker’s Dozen” growth portfolio of 13 diverse picks, which is packaged and distributed quarterly to the financial advisor community as a unit investment trust, along with three other offshoot strategies for value, dividend, and small cap investing.

Click HERE to continue reading my full commentary (and to sign up for email delivery). I examine in greater detail the DeepSeek and DOGE shocks, AI spending, equity valuations, GDP, jobs, inflation, tariffs, and what lies ahead for 2025. 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. Also, here is a link to this post in printable PDF format.

  by Scott Martindale
  President & CEO, Sabrient Systems LLC

Monthly commentary on the economy, inflation, Fed policy, stock valuations, global events, Sabrient’s SectorCast rankings, sector rotation model positioning, and top-ranked ETF ideas.

Summary:

1. I remain skeptical of the official, government reports on jobs, GDP, and inflation, which are not passing my “smell test” and what I consider to be the illusion of a robust economy and jobs market, as GDP and jobs growth have been overly reliant on government deficit spending and hiring, which is both unhealthy and unsustainable.
    
2. Rising asset prices have been largely driven by a strong dollar, rising global liquidity, and capital flight into the US (most of which does not show up in M2 money supply), which comes at the expense of the rest of the world’s growth. It also creates a “wealth effect” here that lifts US consumer price inflation even though global supply chain pressures are low.
    
3. Somewhat elevated inflation in the 2-3% range can be desirable to help address our enormous federal debt as part of a 3-pronged attack:  inflate away the debt, cut government waste and spending, and grow our way out of debt by stimulating organic private-sector-led productivity and economic growth with business-friendly Trump 2.0 fiscal policy and deregulation.
    
4. Overall, Trump 2.0 policies combined with a dovish Fed should be good for stocks, but bond prices will be more stagnant, in my view, with yields staying around current levels. I continue to suggest investors buy stocks in high-quality businesses at reasonable prices, hold inflation and dollar hedges like gold and bitcoin, and be prepared to exploit any market correction for further gains through 2025 and beyond, fueled by massive capex in blockchain and AI applications, infrastructure, and energy.
    
5. Sabrient’s latest fundamental-based SectorCast quantitative rankings of the ten U.S. business sectors is topped by Technology, Financials, and Consumer Discretionary. I also discuss the current positioning of our sector rotation model and several top-ranked ETF ideas.
    
6. Sabrient is best known for our “Baker’s Dozen” portfolio franchise and our process-driven, growth-at-a-reasonable-price methodology, which Sabrient founder David Brown describes in his latest book, How to Build High Performance Stock Portfolios, along with his value, dividend, and small cap portfolio strategies.

   Each Baker’s Dozen is designed to be held for 15 months as a unit investment trust. Notably, although the mega-cap-dominated S&P 500 has been so tough to beat, the next Baker’s Dozens to terminate will be the Q4 2023 portfolio on 1/21, which is up about +49% (vs. +47% for SPY), and the Q1 2024 portfolio on 4/21, which is up about +95% (vs. +27% for SPY), as of 12/6.

   To learn more about both the book and the companion subscription product we offer (which does most of the stock evaluation work for you), please visit: https://DavidBrownInvestingBook.com

Click HERE to continue reading my full commentary online or to sign up for email delivery of this monthly market letter. Also, here is a link to this post in printable PDF format. I invite you to share it as appropriate (to the extent your compliance allows).

Sabrient CEO Scott Martindale just posted a 13-minute video update that provides an overview of some of the economic metrics he follows and has been discussing in his monthly “Sector Detector” market commentaries and blog posts.

He discusses, in his words, "...my skepticism with the official, government publications on jobs, GDP, and inflation not passing the 'smell test' and what I consider to be the mirage or illusion of a robust economy and jobs market, when in fact it has been overly reliant on government spending and hiring."

He thinks the incoming administration's business-friendly fiscal policies of "...lower corporate tax rates, unleashing domestic energy production, incentivizing the buildout of AI infrastructure to speed up disruptive innovation and productivity growth, and...slashing government waste, red tape, and bloated headcount ... [will lead to] organic growth in the private sector, which means much more sustainable economic growth and hiring. During this period of government overhaul, I expect we will see elevated market volatility as well."

Scott also gives his views on the three ways we must address the large and growing federal debt; where GDP growth, the fed funds rate, and longer-duration Treasury yields will end up; and what it all means for the stock market.

As a reminder, the new book by Sabrient founder David Brown, How to Build High Performance Stock Portfolios, is available in both paperback and eBook formats on Amazon. You can learn more about David’s book and the companion subscription product we offer that does most of the work for you by visiting:
http://DavidBrownInvestingBook.com/

  by Scott Martindale
  President & CEO, Sabrient Systems LLC

It would be an understatement to say that last week was particularly eventful, what with the elections and FOMC policy decision, plus some impressive earnings announcements. Election Day is finally behind us, and the results sent investors into a fit of stock market FOMO—in one of the greatest post-election rallies ever—while dumping their bonds. Much like the day after President Trump’s win in 2016, the leading sectors were cyclicals: Industrials, Energy, Financials. And then on Fed Day, markets got their locked-in 25-bp rate cut, and the rally kept going across all risk assets, including strengthening the US dollar on the expectation of accelerating capital flight into the US as Trump’s policies, particularly with support from a Republican-led congress, should be quite business-friendly, with lower tax rates and red tape and much less focus on anti-trust lawfare.

So, there was a lot for investors to absorb last week, and this week brings the October CPI and PPI reports. Indeed, the whole world has been pining for clarity from the US—and they got it. And I’m sure no one misses the barrage of political ads and bitter electioneering. Hopefully, it marks the peak in election divisiveness our society will ever see again. Notably, inflation hedges gold and bitcoin have suddenly diverged, with gold pulling back from its all-time high while bitcoin—which can be considered both a dollar hedge and a risk asset for its utility—has continued its surge to new highs (now over $85k as I write!) on the added optimism around Trump’s crypto-friendly stance.

Besides expectations of a highly aggressive 15% earnings growth in the S&P 500 over the next couple of years, venture capital could be entering a boom following four years of difficulty in raising capital. In an interview with Yahoo Finance, Silicon Valley VC Shervin Pishevar opined, “I think there’s going to be a renaissance of innovation in America…It’s going to be exciting to see… AI is going to accelerate so fast we’re going to reach AGI [Artificial General Intelligence, or human-like thinking] within the next 2-3 years. I think there will be ‘Manhattan Projects’ for AI, quantum computing, biotech.”

It all sounds quite appealing, but there’s always a Wall of Worry for investors, and the worry now is whether Trump’s pro-growth policies like reducing tax rates, deregulation, rooting out government waste and inefficiency (i.e., “drain the swamp”) combined with his more controversial intentions like tariffs, mass deportations of cheap migrant labor, and threats to Big Pharma, the food industry, and key trading partners (including Mexico)—in concert with a dovish Fed—will create a resurgence in inflation and unemployment and push the federal debt and budget deficit to new heights before the economy is ready to stand on its own—i.e., without the massive federal deficit spending and hiring we saw under Biden—thus creating a period of stagflation and perhaps a credit crisis. Rising interest rates and a stronger dollar are creating tighter financial conditions and what Michael Howell of CrossBorder Capital calls “a fast-approaching debt maturity wall” that adds to his concerns that 2025 might prove tougher for investors if the Global Liquidity cycle peaks and starts to decline.

But in my view, the end goals of shrinking the size and scope of our federal government and restoring a free, private-sector-driven economy are worthy, and we can weather any short-term pain along the way and perhaps fend off that looming “debt maturity wall.” Nevertheless, given the current speculative fervor (“animal spirits”) and multiple expansion in the face of surging bond yields (i.e., the risk-free discount rate on earnings streams), it might be time to exercise some caution and perhaps put on some downside hedges. Remember the old adage, “Stocks take the stairs up and the elevator down” (be sure to read my recent post with 55 timeless investing proverbs to live by).

In any case, at the moment, I believe the stock market has gotten a bit ahead of itself with frothy valuations and extremely overbought technical conditions (with the major indexes at more than two standard deviations above their 50-day moving averages). But I think any significant pullback or technical consolidation to allow the moving averages to catch up would be a buying opportunity into year-end and through 2025, and perhaps well into 2026—assuming the new administration’s policies go according to plan. As DataTrek Research pointed out, there is plenty of dry powder to buy stocks as cash balances are high (an average of 19.2% of institutional portfolios vs.10-15% during the bull market of the 2010’s).

This presumes that the proverbial “Fed Put” is indeed back in play. Also, I continue to believe that rate normalization means the FOMC ultimately taking the fed funds rate down to a terminal rate of about 3.0-3.5%—although I’m now leaning toward the higher side of that range as new fiscal policy from the “red wave” recharges private-sector growth (so that GDP and jobs are no longer reliant on government deficit spending and hiring) and potentially reignites some inflationary pressures.

This is not necessarily a bad thing. Although inflation combined with stagnant growth creates the dreaded “stagflation,” moderate inflation with robust growth (again, driven by the private sector rather than the government) can be healthy for the economy, business, and workers while also helping to “inflate away” our massive debt. Already, although supply chain pressures remain low, inflation has perked up a bit recently, likely due to rising global liquidity and government spending, as I discuss in detail in today’s post.

So, my suggestions remain: Buy high-quality businesses at reasonable prices, hold inflation hedges like gold and bitcoin, and be prepared to exploit any market correction—both as stocks sell off (such as by buying out-of-the-money put options, while VIX is low) and as they begin to rebound (by buying stocks and options when share prices are down). A high-quality company is one that is fundamentally strong (across any market cap) in that it displays consistent, reliable, and accelerating sales and earnings growth, positive revisions to Wall Street analysts’ consensus estimates, rising profit margins and free cash flow, solid earnings quality, and low debt burden. These are the factors Sabrient employs in selecting the growth-oriented Baker’s Dozen (our “Top 13” stocks), the value-oriented Forward Looking Value, the growth & income-oriented Dividend portfolio, and Small Cap Growth. We also use many of those factors in our SectorCast ETF ranking model. And notably, our Earnings Quality Rank (EQR) is a key factor in each of these models, and it is also licensed to the actively managed, absolute-return-oriented First Trust Long-Short ETF (FTLS).

Each of our key alpha factors and their usage within Sabrient’s Growth, Value, Dividend, and Small Cap investing strategies (which underly those aforementioned portfolios) is discussed in detail in Sabrient founder David Brown’s new book, How to Build High Performance Stock Portfolios, which is now available to buy in both paperback and eBook formats on Amazon.com.

And in conjunction with David’s new book, we are also offering a subscription to our next-generation Sabrient Scorecard for Stocks, which is a downloadable spreadsheet displaying our Top 30 highest-ranked stock picks for each of those 4 investing strategies. And as a bonus, we also provide our Scorecard for ETFs that scores and ranks roughly 1,400 US-listed equity ETFs. Both Scorecards are posted weekly in Excel format and allow you to see how your stocks and ETFs rank in our system…or for identifying the top-ranked stocks and ETFs (or for weighted combinations of our alpha factors). You can learn more about both the book and the next-gen Scorecards (and download a free sample scorecard) at http://DavidBrownInvestingBook.com.

In today’s post, I dissect in greater detail GDP, jobs, federal debt, inflation, corporate earnings, stock valuations, technological trends, and what might lie ahead for the stock market with the incoming administration. 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. And be sure to check out my Final Thoughts section in which I offer my post-mortem on the election.

Click HERE to continue reading my full commentary or to sign up for email delivery of this monthly market letter. Also, here is a link to this post in printable PDF format. I invite you to share it as appropriate (to the extent your compliance allows).

  by Scott Martindale
  President & CEO, Sabrient Systems LLC

The S&P 500 rose 20.8% during the first three quarters of 2024, which is its best start since 1997 and the best for any presidential election year in history. Moreover, for perspective, the ratio of US stock market capitalization to the global stock market has risen from 30% in 2009 (following the GFC) to almost 50% today. This has happened despite escalation in multiple wars, numerous catastrophic weather events ravaging the country, a highly contentious election tearing apart friends and families, strapped consumers (after 25%+ cumulative inflation over the past few years), falling consumer confidence, and jobs and GDP growth over-reliant on government deficit spending, with national debt approaching $35.7 trillion and rising $2 trillion/year (as debt carrying costs alone cost over $1 trillion/year). Even over the past several days when oil prices spiked above $75/bbl (on sudden escalation in the Middle East conflict) and bond yields surged (with the 10-year reaching 4.05%), the major indexes continue to hold near their highs.

As investor Howard Lindzon (of StockTwits fame) said the other day, “There is a fear trade happening (e.g., gold and bitcoin) while there is growth trade happening. It’s really mind-boggling.” Indeed, many of the most prominent investors are wary, including the likes of Warren Buffett, Jamie Dimon, and Jeff Bezos, and corporate insider buying has slowed.

I’m not an economist. I started my career as a structural engineer with Chevron Corporation, then earned an MBA in night school and moved into the business side of the company before venturing into the world of investment research. But as a long-time student of the economy and capital markets, combined with my critical-thinking nature and engineering training, I’ve developed a healthy skepticism of numbers presented to me, even from supposedly objective sources like the government. They have to pass the “smell test.”

Of course, the Fed has been basing its monetary policy primarily on metrics calculated by federal agencies regarding inflation, jobs, and GDP. But headline YoY numbers can be illusory—particularly when they are propped up by massive government deficit spending. So, I like to look beyond the headline numbers. For inflation, my skepticism of official numbers (with the long lag times of key components, like shelter cost, and distorted metrics like “owner’s equivalent rent,” which is highly subjective and based on surveys of homeowners) is why I seek alternative metrics like: 1) the annualized rolling 3-month average of month-over-month price changes (which better reflects current trends), 2) a European method (quietly published by the BLS since 2006) called the Harmonized Index of Consumer Prices (HICP), and 3) the real-time, blockchain-based Truflation, which is published daily.

My skepticism was further elevated when I saw the jobs, retail sales, and ISM Services metrics all suddenly perk up in September—right before the election after a lengthy period of decline and contrary to several negative developments like a record divergence between rising consumer credit card debt and falling personal savings and The Conference Board’s Consumer Confidence dropping to the bottom of its 2-year range and showing increasing pessimism about labor market conditions.

On the other hand, it is notable that Truflation also has risen quickly over the past couple of weeks to nearly 2.0% YoY, so could this be corroborating the apparent rise in consumer demand? Could it be that the Fed’s dovish pivot and 50-bps rate cut has suddenly emboldened consumers to start spending again and businesses to ramp up hiring? Or are my suspicions correct such that we are in store for more downward revisions on some these rosy metrics post-election? After all, the last set of major revisions in early September showed not just an over-reliance on government jobs and government-supported jobs (through targeted spending bills), but the August household survey showed 66,000 fewer employed than in August 2023, 609,000 more “”part-time for economic reasons,” and 531,000 more “part time for noneconomic reasons,” which implies 1.2 million fewer full-time jobs in August 2024 versus August 2023.

Then along came the big 254,000 jobs gain in the September report that made investors so giddy last week, and the household survey showed 314,000 more employed workers than in September of last year. However, digging into the numbers, there are 555,000 more “”part-time for economic reasons” and 389,000 more “part time for noneconomic reasons,” which suggests 630 million fewer full-time jobs in September 2024 versus September 2023, so it’s no surprise that the average weekly hours worked also fell. Furthermore, government spending (and the growing regulatory state) continues to account for much of the hiring as government jobs have soared by 785,000 (seasonally adjusted) over this 12-month timeframe, which was the largest month-over-month (MoM) gain on record. Also, workers holding multiple jobs hit an all-time high. And notably, native-born workers have lost 1.62 million net jobs since their peak employment in July 2023 while foreign-born workers have gained 1.69 million over the same period.

Hmmm. I continue to see the GDP and jobs growth numbers as something of a mirage in that they have been propped up by government deficit spending (which our leaders euphemistically call “investment”). As you recall, leading into the September FOMC announcement I had been pounding the table on the need for a 50-bps rate cut, which we indeed got. Many observers, and at least one Fed governor, believe it was a mistake to go so big, but as I discussed in my post last month, recessionary pressures were mounting despite the impressive headline numbers, and the pain felt by our trading partners from high US interest rates and a strong dollar essentially required some agreement among the major central banks, particularly Japan and China, to weaken the dollar and thus allow an expansion in global liquidity without inciting capital flight to the US. And the PBOC soon did exactly that—slashing its reserve requirement ratio (RRR), cutting its benchmark interest rate, and loosening scores of rules regarding mortgages and the property market—which has restrengthened the dollar after its summer decline.

Of course, cutting taxes and regulation is the best way to unleash the private sector, but it's often argued that a tax cut without a corresponding reduction in spending only serves to increase the budget deficit and add to the federal debt. In fact, I saw a Harris campaign commercial with an average guy named “Buddy” lamenting that it’s “not cool” with him that Trump would give “billionaires” a tax break because they should “pay their fair share.” But Buddy and Harris both need to know what DataTrek Research has observed—i.e., since 1960, regardless of individual and corporate tax rates, federal receipts have averaged 17% of GDP. This means that raising taxes stunts GDP growth while cutting taxes boosts GDP growth by leaving more money in the pockets of consumers, business owners, and corporations to spend and invest with the wisdom of a free and diverse marketplace (Adam Smith’s “invisible hand”). In other words, the path to rising tax revenues is through strong economic growth—and the best return on capital comes from the private sector, which has proven itself much more adept at determining the most efficient allocation of capital rather than Big Government’s top-down picking of winners and losers, like a politburo.

Nevertheless, given the Fed’s dovish pivot (and despite the “heavy hand” of our federal government), I continue to expect higher prices by year end and into 2025. Bond credit spreads remain tight (i.e., no fear of recession), and although the CBOE Volatility Index (VIX) is back above the 20 “fear threshold,” it is far from panic levels. So, I believe any “October surprise” that leads to a pre-election selloff—other than a cataclysmic “Black Swan” event—would likely be a welcome buying opportunity, in my view. But besides adding or maintaining exposure to the dominant MAG-7 titans—which provide defensive qualities (due to their disruptive innovation and wide moats) as well as long-term appreciation potential—I think other stocks may offer greater upside as the economic cycle continues its growth run and market rotation/broadening resumes.

So, my suggestions are to buy high-quality businesses at reasonable prices on any pullback, hold inflation hedges like gold and bitcoin, and be prepared to exploit any credit-related panic—both as stocks sell off (such as by buying out-of-the-money put options while VIX is low) and before they rebound (when share prices are low). Regardless, I continue to recommend high-quality, fundamentally strong stocks across all market caps that display consistent, reliable, and accelerating sales and earnings growth, positive revisions to Wall Street analysts’ consensus estimates, rising profit margins and free cash flow, solid earnings quality, and low debt burden. These are the factors Sabrient employs in selecting the growth-oriented Baker’s Dozen (our “Top 13” stocks), the value-oriented Forward Looking Value, the growth & income-oriented Dividend portfolio, and Small Cap Growth, which is an alpha-seeking alternative to a passive position in the Russell 2000.

We also use many of those factors in our SectorCast ETF ranking model. And notably, our Earnings Quality Rank (EQR) is a key factor in each of these models, and it is also licensed to the actively managed, absolute-return-oriented First Trust Long-Short ETF (FTLS).

Each of our key alpha factors and their usage within Sabrient’s Growth, Value, Dividend, and Small Cap investing strategies (which underly those aforementioned portfolios) is discussed in detail in Sabrient founder David Brown’s new book, How to Build High Performance Stock Portfolios, which is now available for pre-order on Amazon at a special pre-order price.

And in conjunction with David’s new book, we are also offering a subscription to our next-generation Sabrient Scorecard for Stocks, which is a downloadable spreadsheet displaying our Top 30 highest-ranked stock picks for each of those 4 investing strategies. And as a bonus, we also provide our Scorecard for ETFs that scores and ranks roughly 1,400 US-listed equity ETFs. Both Scorecards are posted weekly in Excel format and allow you to see how your stocks and ETFs rank in our system…or for identifying the top-ranked stocks and ETFs (or for weighted combinations of our alpha factors). You can learn more about both the book and the next-gen Scorecards (and download a free sample scorecard) at http://DavidBrownInvestingBook.com.

In today’s post, I discuss in greater detail the current trend in inflation, Fed monetary policy, stock valuations, technological trends, and what might lie ahead for the stock market. 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. And be sure to check out my Final Thoughts section with a few off-topic comments on the imminent election and escalating Middle East conflict.

Click here to continue reading my full commentary online or to sign up for email delivery of this monthly market letter. Also, here is a link to this post in printable PDF format. I invite you to share it as appropriate (to the extent your compliance allows).

  by Scott Martindale
  President & CEO, Sabrient Systems LLC

Falling inflation, weak manufacturing activity, cautious consumer sentiment, and sluggish GDP and jobs growth have conspired to elicit a dovish tone from the Federal Reserve and the likely start of a rate cut cycle to avert recession and more jobs losses. I continue to pound the table that the Fed is behind the curve and should have begun to cut at the July meeting.

Why? Well, here are my key reasons:

1. Although official inflation metrics still reflect lingering “stickiness” in consumer prices, my research suggests that real-time inflation is already well below the Fed’s 2% target, as I discuss in detail in today’s post.

2. Last week’s BLS jobs report shows 66,000 fewer employed workers in August 2024 versus 12 months ago after massive downward revisions to prior reports. And if you dig deeper into the August household survey it gets worse, indicating a whopping 1.2 million fewer full-time jobs (yikes!), partially offset by a big growth in part-time jobs.

3. The mirage of modest GDP and jobs growth has been temporarily propped up by unhealthy and inefficient government deficit spending (euphemistically called “investment”) rather than true and sustainable organic growth from a vibrant private sector that is adept at efficient capital allocation. Thus, despite government efforts to “buy” growth, recessionary signals are growing at home and abroad.

4. The burden caused by elevated real interest rates on surging debt across government, business, consumers at home and emerging markets abroad, and the impact of tight monetary policy and a relatively strong dollar on our trading partners must be confronted.

So, a 50-bps cut at the September FOMC meeting next week seems warranted—even if it spooks the markets. As Chicago Fed president Austan Goolsbee said, “You only want to stay this restrictive for as long as you have to, and this doesn’t look like an overheating economy to me.”

A terminal fed funds neutral rate of 3.0-3.5% seems appropriate, in my view, which is roughly 200 bps below the current range of 5.25-5.50%). Fortunately, today’s lofty rate means the Fed has plenty of potential rate cuts in its holster to support the economy while remaining relatively restrictive in its inflation fight. And as long as the trend in global liquidity is upward (which it is once again), then it seems the risk of a major market crash is low.

Regarding the stock market, as the Magnificent Seven (MAG-7) mega-cap Tech stocks continue to flounder, markets have displayed some resilience since the cap-weighted S&P 500 and Nasdaq 100 both topped in mid-July, with investors finding opportunities in neglected market segments like financials, healthcare, industrials, and defensive/higher-dividend sectors utilities, real estate, telecom, and staples—as well as gold (as both a store of value and protection from disaster). However, economic weakness, “toppy” charts, and seasonality (especially in this highly consequential election year) all suggest more volatility and downside ahead into October.

Of course, August was tumultuous, starting with the worst one-day selloff since the March 2020 pandemic lockdown followed by a moon-shot recovery back to the highs for the S&P 500 (SPY) and S&P 400 MidCap (MDY), while the Dow Jones Industrials (DIA) surged to a new high. However, the Nasdaq 100 (QQQ) and Russell 2000 SmallCap (IWM) only partially retraced their losses. And as I said in my August post, despite the historic spike in the CBOE Volatility Index (VIX), it didn’t seem like the selloff was sufficient to shake out all the weak investors and form a solid foundation for a bullish rise into year end. I said that I expected more downside in stocks and testing of support before a tradeable bottom was formed, especially given uncertainty in what the FOMC will do on 9/18 and what the elections have in store.

In addition, September is historically the worst month for stocks, and October has had its fair share of selloffs (particularly in presidential election years). And although the extraordinary spike in fear and “blood in the streets” in early August was fleeting, the quick bounce was not convincing. The monthly charts remain quite extended (“overbought”) and are starting to roll over after August’s bearish “hanging man” candlestick—much like last summer. In fact, as I discussed in my post last month, the daily price pattern for the S&P 500 in 2024 seems to be following 2023 to a T, which suggests the weakness (like last year) could last into October before streaking higher into year end. Anxiety around a highly consequential election on 11/5 (with counting of mail-in ballots likely to last several days beyond that once again) will surely create volatility.

Many commentators believe the Fed is making a policy mistake, but it goes both ways. Some believe the Fed is turning dovish too quickly because inflation is sticky, the jobs market is fine, and GDP is holding up well, so it risks reigniting inflation. Others (like me) think the FOMC is reacting too slowly because the economy, jobs growth, and inflation are weaker than the mirage they seem, masked by inordinate government deficit spending, misleading headline metrics, and political narratives. As Fed Chair Jerome Powell said at the July meeting, “The downside risks to the employment mandate are now real,” and yet the FOMC still chose to hold off on a rate cut. Now it finds itself having to commence an easing cycle with the unwanted urgency of staving off recession rather than a more comfortable “normalization” objective within a sound economy.

Indeed, now that we are past Labor Day, it appears the “adults” are back in the trading room. As I discuss in detail in today’s post, economic metrics seem to be unraveling fast, stocks are selling off, and bonds are getting bought—with the 2-10 yield curve now “un-inverted” (10-year yield exceeds the 2-year). So, let’s get moving on rate normalization. After all, adjusting the interest rate doesn’t flip a switch on economic growth and jobs creation. It takes time for lower rates and rising liquidity to percolate and reverse downward trends, just as it took several months for higher rates and stagnant liquidity to noticeably suppress inflation. Fed funds futures today put the odds of a 50-bps cut at about 27%.

Nevertheless, stock prices are always forward-looking and speculative with respect to expectations of economic growth, corporate earnings, and interest rates, so prices will begin to recover before the data shows a broad economic recovery is underway. I continue to foresee higher prices by year end and into 2025. Moreover, I see current market weakness setting up a buying opportunity, perhaps in October. But rather than rushing back into the MAG-7 stocks exclusively, I think other stocks offer greater upside. I would suggest targeting high-quality, fundamentally strong stocks across all market caps that display consistent, reliable, and accelerating sales and earnings growth, positive revisions to Wall Street analysts’ consensus estimates, rising profit margins and free cash flow, solid earnings quality, and low debt burden. These are the factors Sabrient employs in selecting the growth-oriented Baker’s Dozen (our “Top 13” stocks), the value-oriented Forward Looking Value, the growth & income-oriented Dividend portfolio, and Small Cap Growth, which is an alpha-seeking alternative to a passive position in the Russell 2000.

We also use many of those factors in our SectorCast ETF ranking model. And notably, our Earnings Quality Rank (EQR) is a key factor in each of these models, and it is also licensed to the actively managed, absolute-return-oriented First Trust Long-Short ETF (FTLS) as an initial screen. Each of our alpha factors and their usage within Sabrient’s Growth, Value, Dividend, and Small Cap investing strategies is discussed in detail in Sabrient founder David Brown’s new book, How to Build High Performance Stock Portfolios, which will be published shortly.

In today’s post, I discuss in greater detail the current trend in inflation, Fed monetary policy, and what might lie ahead for the stock market as we close out a tumultuous Q3. 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. And be sure to check out my Final Thoughts section with some political comments—here’s a teaser: Democrats have held the presidency for 12 of the past 16 years since we emerged from the Financial Crisis, so all these problems with the economy, inflation, immigration, and global conflict they promise to “fix” are theirs to own.

Click here to continue reading my full commentary online or to sign up for email delivery of this monthly market letter. And here is a link to it in printable PDF format. I invite you to share it as appropriate (to the extent your compliance allows).