Market Comment - September

Equity markets once again were able to defy September’s seasonality of weak performance and traded up, making it the sixth month up in a row for the MSCI World Index. The Nasdaq 100 is doing the same, raising the voices of the “Bubble Gospel Choir” once more. From our point of view, as mentioned in the previous monthly report, the market could well be in a bubble. But the important question is: in what stage are we currently trading?

If we look at statistics, scanning previous instances where the Nasdaq traded up 6 months in a row, 3 months later it never reported a negative performance. While the S&P 500 is getting close to our multi-year and short-term targets, the Nasdaq 100 has a higher target to fulfill. Don’t forget, the S&P 500 has the option to re-accumulate.

Looking at macro data, the current framework for risky assets is not bad at all. First, the US Central Bank (FED) is cutting rates. Earnings of corporations are rising, and we are seeing upside revisions. Bond markets behave surprisingly well, despite an increased supply from governments. Credit spreads remain low, and the G20 Leading Economic Indicator is rising. This framework supports rising equity prices.

On the other hand, we have the people of crazy town — also called politicians. Those are certainly a source of risk but hard to predict. Valuations remain high, which is also a constraining factor for long-term investors. But we view valuations as a sentiment indicator. High valuations reflect investors’ optimistic outlook for the economy. Trading based on valuations can lead to a major mistake when it comes to investing.

From April 1999 until October 2000, GAAP earnings for the S&P 500 rose a stunning 42.40%, while the S&P 500 rose 17.37%. This resulted in a meaningful drop of 28.15% in GAAP P/E, from 35.26% to 25.33%. Suddenly, the stock market was not as expensive anymore, and those who wanted to buy cheap, got it cheap. Unfortunately, the S&P 500 lost 42.11% in the ensuing 2 years, punishing those who wanted to buy the market at cheaper valuations.

Falling valuations over an extended period of time while markets continue to rise are a flashing warning sign. A continuous drop in valuations means that investors are less upbeat about the future of the economy, hence do not want to pay high multiples.

The fact that “free cash flow” at the major AI cloud computing providers, known as hyperscalers, is turning negative may put the brakes on their stellar performance we have seen in the past years. Morgan Stanley estimates it could shrink around 16% over the next 12 months. When free cash flow growth for the market’s most highly valued companies slows or turns negative, valuations come into question, and investors tend to become more cautious. We could argue that without the “Mag 7,” the Nasdaq will not work. Certainly something to keep in mind — and time will tell.

Gold is approaching our next price target range of USD 3,900.00–4,000.00 per ounce with seven-mile boots. It will attract even more media attention and also, certainly, dumb money, as some “experts” are hiking their ridiculous price targets. We have argued for a long time that gold is following the debt cycle. If government debt continues to grow on its current path, and correlation holds up, gold should trade at USD 10,000.00 in the year 2030. While this could be possible, there will be a lot of volatility in between.

We continue to rely on our strategy’s data, which has no higher price target than USD 4,000.00. According to Tarda Grada, Platinum, Palladium, and Silver currently have more potential than Gold. Short term, those price charts are starting to look stretched as well.