Markets are climbing a wall of worry. Valuations are historically high. The geopolitical environment is changing every day. Is the Administration bullying the Fed? The President is demanding a 10% cap on credit cards. Societal pressures are at levels not experienced since the early 1970s. The national debt and the interest coverage on it is surging. The tariff debate.
Those who doom scroll can probably list an infinite number of concerns—some realistic and others that are more fiction than reality.
With the above written, the economy is strong. From an economic growth perspective, the range of Q4 GDP estimates is wide from S & P Global’ s 1.9% to the Atlanta Fed’s GDP Now estimate of 5.3%. Anywhere in between still means the 4Q and 2025 was quite positive.
A major driver of this growth has been AI CAPEX. Will AI CAPEX decline in 2026? Is this surge in AI CAPEX a major reason as to why productivity is surging?
There is a positive setup from the standpoint of easing financial conditions. QT ended in December and QE commenced again this month. Expanding Fed balance sheets is historically a positive event, which is now happening in conjunction with the Fed lowering interest rates. And then there are the expected tax cuts and financial deregulation via the easing of bank capital requirements.
Is the above all priced in the markets and will the litany of negatives become the primary market catalyst?
There are always an infinite number of variables that could impact the markets with the significance of each variable changing on a moment’s notice.
Earnings season accelerates this week. If the economy is expanding around a 5% pace, the odds of upside earnings surprises increase.
Changing topics, 10 stocks in the S & P 500 now account for roughly 40% of the index’s total market capitalization. According to Bloomberg, from 1880-2010, the top 10 averaged about 18% of the index.
Writing it differently, if one invests $100,000 in an S & P 500 index fund, roughly $40,000 goes into just 10 companies concentrated in just one sector. The remaining $60,000 gets spread across the other 490 companies and 10 sectors.
Bloomberg further writes, according to State Street, only 44 stocks are driving the index’s returns—the lowest number in over 35 years. One thinks an S & P 500 index fund is diversified but in reality, it is not where only 44 stocks are delivering the return with a heavy exposure to one sector and a handful of mega tech names. The S & P 500 PE ratio stands at a lofty 28.2.
Wow.
What will happen this week?
The economic calendar is comprised of the monthly PCE data, personal income and spending, the Index of Leading Economic Indicators and final print of third quarter GDP.
Last night the foreign markets were down. London was down 1.07%, Paris down 1.19% and Frankfurt down 1.55%. China was down 0.02%, Japan down 1.11% and Hang Seng down 0.29%.
Dow and NASDAQ futures are down 1% and 1.85%, respectively, on Greenland and the rout in Japanese longer dated debt.
The 10-year is off 15/32 to yield 4.28%. The yield curve is steepening as a fierce selloff in Japanese debt has spilled over into the global debt markets. The Japanese 40-year benchmark “rocketed” above 4% for the first time in history. There is also concern that European holders of Treasuries could weaponize their positions in retaliation to Trump’s Greenland threats. The question is how realistic is this concern for a myriad of reasons.
