Is the Stock Market Getting Ahead of its Skis?

July is usually a positive month for the US stock market. Lots of investors are on summer vacation, trading volume is light, and in the absence of significant news stock prices tend to move marginally higher. In this context, the S&P500 enjoyed a 2.16% gain for the month, with 10 All-Time-High (ATH) daily closings.

Part of this performance can be explained by companies reporting solid second quarter earnings, meeting or exceeding the admittedly low expectations they set for themselves last quarter. A weaker dollar also helped large companies with international revenues gain from the translation of foreign earnings to weaker dollars.

Another factor contributing to the positive index performance was the passing of the One Big Beautiful Bill Act (OBBBA), which removed budgetary uncertainty by raising the debt ceiling by $4 Trillion. Uninterrupted fiscal spending is very supportive of rising stock prices. Speaking of fiscal spending, despite DOGE’s recommendations for serious cuts to the Federal budget, the House and the Senate were able to agree to only a minuscule reduction of $9 Billion of spending. Ignoring the self-congratulatory statements by our elected representatives about their monumental success bringing fiscal discipline in Washington DC, the budget cuts represent an amount equivalent to what our federal government spends in about 11 hours! No doubt Elon Musk is furious with the Republicans in Congress. Because of his involvement in DOGE, he lost more personal wealth than the $9 Billion budget cuts, as the price of his Tesla stock holdings tanked. Another stark reminder to never trust politicians.

An additional factor supporting the stock market gain in July was that the economy seems to be growing at a decent pace. Despite the first quarter GDP recording a negative growth rate (-0.5%), the second quarter GDP growth rate was +3.0%. We commented in previous newsletters that the Q1 GDP figure was probably an aberration due to massive imports ahead of possible higher tariffs. Imports are subtracted from GDP figures, thus the negative growth rate. So, if we average the Q1 and Q2 GDP growth rates we get a US economy growing between 1% and 2%. Not great, but a far cry from the recession that the financial media pundits were peddling in the spring. Also, we are not close to stagflation (recession plus high inflation) that the same fear-mongers were broadcasting. While inflation is above the Federal Reserve’s (FED) 2% target, the June 2.7% Consumer Price Index and 2.6% Personal Consumer Expenditures (both annualized) mean we are not exactly at the point of reverting to the barter system for our transactions.

Lastly, the sentiment of market participants has been boosted by the recent trade deals of the Administration. The most significant ones are with the EU, Japan, South Korea (all get a 15% tariff rate), Indonesia and Philippines (get a 19% tariff rate), and Vietnam (gets a 20% tariff rate). While the extreme vagueness of the trade details makes it almost impossible to figure out the actual effect of these deals on prices, investors must have felt relieved that an outright trade war with the rest of the world was not in the cards anymore.

With all that said, let us review the key factors we believe will determine the future path of the US economy and stock market:

First, the self-imposed August 1^st deadline for all trade deals is now upon us, and as of this writing, there are still no deals with some of our biggest trade partners, like Canada, Mexico, and China. Notably, there are no deals with any of the BRICS countries (Brazil, Russia, India, China, South Africa), which coincidentally lead the effort to end the US dollar’s status as the reserve currency of the world. Maybe just a coincidence? No matter the number of deals completed in future months, it is clear tariff rates going forward will be higher than they were last year. Who will absorb the tariffs? Either businesses will absorb the cost and suffer reduced profit margins, or they will pass the cost to consumers and suffer reduced sales volume. Neither outcome is good for earnings and stock prices.

Second, the FED’s tone has not yet turned dovish. The FED, citing a resilient labor market and possible inflationary pressures from the new tariffs, did not cut interest rates during the most recent July 30^th meeting nor did it provide any clarity about its intentions for the September meeting. As a matter of fact, the odds today for a September rate cut stand at just 39%. While there were two FED governors (Christopher Waller and Michelle Bowman) who dissented and voted for a rate cut in July, their votes are perceived as positioning for FED Chair Powell’s replacement next year.

Third, the key 10-year Treasury yield stands at 4.34% today. It hasn’t dropped below the critical 4% level which would cause mortgage loan and car loan rates to decrease accordingly, thus boosting the economy, along with the stock and bond markets.

Fourth, deregulation, which if done properly can remove production constraints and increase GDP, has had no meaningful impact yet. In fact, the new Executive Orders (EO) aimed at moving things along, seem to be counterproductive. For instance, the EO to promote A.I. investment seems completely unnecessary, as it doesn’t remove any existing production constraint to grow economic output. On the contrary, building more data centers faster (filled with power hungry processors) will stress the power grid beyond its capacity. Electricity prices already have increased by more than 1% monthly for the last 5 months. Data centers seem to be draining the power supply, raising the cost of electricity for all businesses and households.

Another Executive Order pushing for deregulation of investments allowed in retirement accounts not only seems unnecessary but also dangerous. The Executive Order would allow Private Equity and Private Credit Funds to be offered as investment options for 401(k) and IRA accounts. Typically, Private Funds are only offered to accredited (wealthy) investors and endowments/foundations to invest in illiquid assets like commercial real estate and non-publicly traded businesses. These Funds are run by companies like Blackrock and KKR, they promote their funds as “low volatility and high yield”. It sounds good, but it isn’t. The “low volatility” is because the assets in these Funds are not traded publicly, thus there is no price discovery nor “marked-to-market” reporting. And the “high yield” is because these Funds make high yield (junk) loans to borrowers who cannot access lower rates. These Private Funds have been facing redemption demands from their investors for the past 3-4 years, but they cannot return the investors’ money. The value of the assets in these Funds like commercial real estate (office buildings, shopping centers) has been decimated. Trying to sell these assets now would only reveal the extent of their massive losses. For example, the “Ameriprise Financial Center” office tower in Minneapolis was purchased in 2016 for $200 Million but fetched a sale price of only $6.25 Million in 2025. That’s a 97% loss! Given the building size of 960,000 square feet, the building was valued at only $6.5 per square foot, or what it would cost to replace the carpet in the building. This is not an isolated incident. The “Forum Office Building” also sold in 2025 for a 91% loss from its price 5 years ago, while the “Wells Fargo Center” sold this year at a 73% loss from its price 6 years ago. The trick to these Private Funds is that since the assets are not publicly traded daily, there is no price discovery, investors cannot see the decline in value. Therefore, investors feel ‘safe’ their investments are always worth exactly what they pay for them. Unfortunately, they’re not worth anything close to the original value. So, what is now being pitched to the public in the name of democratizing “opportunities” for the average investor, feels more like a bailout for these Private Funds. The government allowing people’s 401(k)’s and IRA’s to provide the exit liquidity for rich investors, endowments, and foundations should not be the goal of deregulation.

**Finally, **the biggest issue for the stock market at this point may not be tariffs or interest rates. It is the extreme valuation of the technology sector, which given its large capitalization, it moves S&P 500 higher because it is a capitalization-weighted index. Essentially, this means price movements of large companies affect the index more. We now have two companies (Nvidia and Microsoft) each with a market capitalization exceeding $4 Trillion! That’s the size of Germany’s GDP, which is the third largest economy in the world! And the aggregate market capitalization of the top seven companies in the S&P 500 index (Magnificent 7) exceeds the entire GDP of China!

So, while the stock market, minus the technology sector, may still be offering some investment opportunities, the technology sector is currently at speculative bubble levels. Bubbles are fun while they last but typically end up ugly.

Here are some signs we are dealing with a speculative bubble:

• Margin debt (borrowing to buy shares) hit $1 Trillion in July (too much).
• The cash level at asset management firms is below 4% (accounts are fully invested).
• Retail investors now contribute 14% of trading volume (highest ever).
• The VIX (fear) index is now at 16 (meaning, no fear among investors).
• Meme stocks are back (failing businesses with big upswings in their stock prices).
• Companies report positive earnings, but their stock prices fall (already overpriced).
• There is a new fad called “Labubu” which has overtaken Asia and most of the world. Grown ups carrying overpriced little dolls. (Very reminiscent of the Beanie Baby fad from 20 years ago.)
• Seemingly insatiable demand for AI chips and data centers.

Investors seem to overlook the fact that the chip business is cyclical. Every couple of years we go from shortages to excess inventories and price collapses. Nvidia and AMD cannot seem to make chips fast enough and their stock valuations are at All-Time-Highs (ATHs). However, their largest customers (Microsoft, Alphabet, Amazon) are building their own AI chips and will soon become Nvidia and AMD’s biggest competitors.

Meanwhile, Amazon, Alphabet, and Meta (Facebook) continue announcing more capital expenditure to build more data centers. When everybody pushes to build data centers, eventually we’ll end with excess supply. Too much competition could drive prices below cost and the payoff from such capital expenditure could be far lower than expected. In 1907 there were 1,564 railroad companies in the United States. A century later, we are down to just a handful of them, competition killed the rest.

Recently, at a White House event, Softbank and Open AI (Chat GPT) announced a $500 Billion investment for more data centers (Project Stargate). The stock prices of chip makers went parabolic after the announcement. Open AI also committed spending $30 Billion per year for the next 3 years on Oracle cloud services. Shortly thereafter, Oracle’s stock price reached All-Time-Highs (ATHs). Unfortunately, no one takes the time to investigate if these investment “commitments” are feasible. It’s doubtful they are. Neither Softbank nor Open AI have half-a-Trillion dollars between them to implement Project Stargate. Open AI doesn’t seem to generate enough revenue (let alone earnings) to pay Oracle for even one year of service. It seems to be all hype (or worse, it may be considered market manipulation). Bubbles feed on this hype.

We don’t buy hype. Critical thinking and experience have taught us to question big promises and projections. Reality is often a pale reflection of hype. We not only question whether these A.I investment projects will ever take place, but also if they did take place whether they would ever pay off. The problem with competition is that somebody wins and everybody else loses. If you cannot tell which of the many operators of data centers will win, given how absurd their valuations are, you may be better off sitting this one out.

Instead of chasing bubbles, we are trying to find investment value in industries and companies that are not overhyped and overpriced. Right now, industrials, pharmaceuticals, energy, utilities and emerging markets seem to offer the best value. We also like Treasuries to balance the portfolios. We also prefer income generation to pure capital appreciation. Income generation is the very nature of investing. Appreciation, if it comes, it is a welcomed gift, but by itself is mostly speculative. It depends on others’ willingness to pay more for an asset/security. We prefer to generate income for our client accounts without depending on the speculative fervor of others to constantly push prices higher.

If done correctly, investing is a boring and long term activity. Speculation is always more exciting, but so is gambling. There are plenty of casinos and online gambling sites for those who want the thrill of betting. They all offer the same oxymoronic disclaimer “Gamble Responsibly”. However, there is no such thing.

Looking forward, August and September are typically weak months for the US stock market. Considering this seasonality along with current high valuations, it may not make sense to chase the next +1% when a -5% to -10% correction could be around the corner.

We are always available to share our thoughts and analysis to assist you in your investment journey.

Stay Fierce!