by Scott Martindale
  CEO, Sabrient Systems LLC

  Overview

As we close out H1 2025, markets seem eager to press higher on optimism about imminent fiscal stimulus and monetary policy support during H2—plus perhaps a “peace dividend” thrown in. Of course, investors at home and abroad know that President Trump will pull out all stops to demonstrate meaningful successes in raising organic economic growth and jobs creation, fostering an affordable and reliable energy supply for an electricity-hungry future, and leveraging trade negotiations to open up overseas markets while shrinking the debt/GDP and deficit/GDP ratios over the next 12 months. Otherwise, he risks a catastrophic loss in the mid-term congressional elections—which means his political opponents will be impeding him every step of the way in an effort to make that loss happen.

I had been expecting elevated volatility during H1 as the economy faced a gauntlet of challenges before surging to new highs in H2, but sanguine retail investors (with a healthy dose of FOMO) have been too eager to wait it out. Instead, they bought the April dip and never looked back, seemingly confident that my optimistic scenario would play out. And then the momentum-driven algos jumped in, followed by the institutional money. The Invesco S&P 500 High Beta ETF (SPHB) is up nearly 50% since the “Liberation Day” selloff, reflecting major risk-on behavior. Foreign capital is returning as well after a brief period of rebalancing, hedging, and “tariff paralysis.”

But, with lingering macro uncertainties and valuations seemingly “priced for perfection,” caution is warranted. Inflation and jobs metrics have been softening, in spite of what the headline numbers and MSM might suggest, as I discuss in greater depth in today’s post. The current inflation trend, as illustrated by the rolling 3-month annualized month-over-month (MoM) metrics rather than looking back 12 months to last year’s price index, shows Personal Consumption Expenditures (PCE) and Consumer Price Index (CPI) falling to just +1.08% and +1.01%, respectively. And regarding jobs growth, if you look under the hood of last week’s reports, private sector hiring has been quite weak, with the headline numbers bolstered by government hiring (at the state and local level, while federal jobs shrink) and government-supported sectors, like healthcare and education.

Of course, some of this reluctance to hire can be chalked up to the lack of clarity around trade deals, tariffs, inflation, the One Big Beautiful Bill Act (OBBBA), and Fed policy, but much of this is clearing up. For example, now that the OBBBA has been signed into law, we know the new rules on tax rates, subsidies, and incentives. Moreover, the trade deals are gradually coming to fruition. However, the FOMC might continue to lay low in “watch and wait” mode to see how the economy and inflation respond rather than cut rates, which leaves Fed policy intentions murky.

I discuss both inflation and jobs in greater depth in my full commentary below, and I again make the case that the FOMC should have a terminal/neutral fed funds rate 100 bps lower than today’s 4.33% effective rate. Bond yields have normalized with the 10-year Treasury now around 4.40%, which is back to its levels last November to flatten the yield curve, and the 2-year is around 3.90%. Both rates are signaling to the FOMC they should cut, and in fact the Fed’s own long-run estimate for the fed funds rate is 3.0%. The market needs lower interest rates in tandem with business-friendly fiscal policy, including a 5.0% 30-year mortgage rate and a weaker dollar, to support US and global economies, to allow other central banks to inject liquidity, to avert global recession and credit crisis, and to relieve indebted consumers and businesses.

As Real Investment Advice has opined, “…if interest rates drop by just 1%, this could reduce [federal] spending by $500 billion annually, helping to ease fiscal pressures, [and] the coming strategic investments, workforce development, and sustainable energy policies could improve economic outcomes while resolving deficit concerns.” I agree.

So, I believe the Fed remains behind the curve as it worries about tariffs and phantom inflation—which the FOMC sees as a lurking boogeyman, like frightened children lying wide-eyed awake in their beds at night, expecting it to pounce at any moment. But as I continually pound the table on, tariffs are actually disinflationary (in the absence of a commensurate and offsetting increase in income). And more broadly, I believe inflation has resumed its 40-year (1980-2020) secular downtrend, as I discuss in my market commentary below.

Famed investor, co-founder of PIMCO, and “Bond King” Bill Gross argues that the growing federal deficit, elevated bond supply, and a weak dollar likely will keep inflation above 2.5% and create headwinds for bonds. However, while we both like US equities (even at today’s valuations, which I discuss in greater detail below), I see the outlook for bonds differently. Now that we have some clarity on the OBBBA and the debt ceiling, foreign investors and US consumers and businesses know much more about the rules they will be playing under.

Capital tends to flow to where it is most welcome and earns its highest returns, so I think the recent tide of foreign capital flight leaving the US will reverse, helping the dollar find a bottom and perhaps strengthen a bit, which based on historical correlations would suggest higher bond prices (lower yields, despite elevated issuance in the near term) and perhaps lower gold prices. However, without the de facto boost to global liquidity of a weakening dollar, the Fed will have to step up and provide that liquidity boost, such as by lowering interest rates and implementing “stealth QE” (such as through reduced bank reserve requirements) to encourage lending and boost velocity of money (M2V), which has recently stagnated.

Most any foreign investor will tell you there is no other place in the world to invest capital for the innovation and return on shareholder capital than the US, given our entrepreneurial culture, technological leadership in disruptive innovation, strong management and focus 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. So, I continue to like US equities over international equities for the longer term (other than a simple mean-reversion trade).

Hindered by its quasi-socialist policies, Europe doesn’t come close to the US in producing game-changing technologies, opportunities, and prosperity for itself and the world at large. In my view, it lacks our level of freedom, openness, dynamism, and incentive structures. And as for China’s unique “capitalism with Chinese characteristics,” although its authoritarian rule, homogenous society, and obedient culture helps ensure broad unity and focus on common goals, its system is still far inferior when it comes to freedom of thought, entrepreneurship, and innovation, in my view. Despite America’s inequalities and inadequacies, there is no better country on earth for tolerance and opportunity for economic prosperity, and we continue to grow ever more diverse and inclusive—without government programs forcing it to be so.

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.”

Indeed, 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 displays a history of consistent, reliable, resilient, durable, and accelerating sales, earnings, and free cash flow growth, rising profit margins, a history of meeting/beating estimates, high capital efficiency and ROI, solid earnings quality, a strong balance sheet, low debt burden, competitive advantage, 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. (By the way, the new Q3 Baker’s Dozen and Small Cap Growth portfolios are launching late next week, so these are the final several days to get into the Q2 portfolios launched in April—both of which are performing well versus their benchmarks so far.)

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. In fact, we have launched our next-generation Sabrient Scorecards, which are powerful digital tools that rank stocks and ETFs using our proprietary factors. You can learn more about them by visiting:
http://HighPerformanceStockPortfolios.com.

In my full commentary below, I discuss in greater depth the trends in inflation, jobs, GDP, and stock valuations, as well as 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, my in-depth discussion of energy and electrical power generation (that I keep teasing) will be released soon. As always, please email me 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

  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
  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

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).

  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).