30 Jun 30th June 2025
Index Movement Last Week
| S&P500 | +3.5% |
| Nasdaq | +4.2% |
| Aussie ASX200 | +0.1% |
We are back to all-time highs. Despite uncertainty over tariffs, geo-political conflict, questions over valuations and concerns over debt levels, US stocks are at all-time highs.
To understand why we need to understand how traders think. Traders don’t think about impacts today, they are always thinking about how things look in six months time. Clearly they think conditions improve from here on.
They could well be correct. After all, inflation is coming down and the only thing stopping the Fed lowering rates is the strong employment market and uncertainty over tariffs. Iran have had their claws pulled out. Countries are forming new agreements over tariffs and earnings are forecast to grow.
The question I always ask is – if I am 100% invested right now, what do I do? The answer to that one is simple – stay 100% invested.
But what if I have cash on the sideline? Do I buy stocks now?
To answer that let’s consider the two alternatives.
Option 1. Stay in cash. That should earn me 4% over the next 12 months
Option 2. Buy stocks.
Can buying stocks outperform staying in cash?
The S&P500 is now at 6172. Can you see it getting to 6420 in 12 months? (that would be a 4% increase)
Sounds pretty plausible as it is only 247 points. It only took from May 28th to now to do that move. Call it the last month. Given 12 months it can easily do it again.
But that ignores the extra risk that comes from owning stocks
NYU Professor Aswath Damodaran says stock investors need at extra 4.2% to compensate themselves for the extra risk of stocks. I can’t tell you where the 4.2% comes from but we all agree he is far more intelligent than me so let’s run with it
That means we need the index up at 6679 to make us buy more stocks here. That’s another 506 points which the market has done since May 2nd. Call it the last two months.
Is 6679 realistic?
Well, 2026 earnings are forecast at $285 per share.
At 6679 it suggests a PE ratio of 23.31
The long run average is 19. The top of the dot-com bubble in 1999 was 24.
Oh no. Panic and fear! We are getting to the same valuations as the top of a bubble therefore everything is going to crash!
Not so, and this is the mistake everyone who compares to the past makes.
The index back in 1999 was not 40% tech companies with 50% margins growing at 20% per year.
NVDA trades on a PE of 50, Apple on 31. Microsoft on 38. These are the companies that make up the majority of the index
I argue then that the index PE of today should be higher than the past because the stocks that make up the index trade on higher multiples today than the stocks back in 1999.
Therefore, yes, it certainly can get to 6679.
Where to focus your Buying
Now that we have decided stocks can move higher from here, where should we focus buying.
This also applies to you more active guys. After this piece you can review and rebalance your portfolio to focus on what is working, as the deliniation is clear.
To show you what I mean, I am going to look at the Year-to-Date performance of the Magnificent Seven (plus Broadcom so the Magnificent Eight)
The current Bull market we are in kicked off in October 2022 with the release of ChatGPT. Looking at the numbers above you can clearly see what is driving this market now is the same thing that kicked it off.
Stocks with the greatest exposure to AI are where you want to be.
Plain and simple. Rebalance your portfolios to put your focus there. Or miss out.
One other thing. Apple. What a wealth generator this stock has been for 20 years. But I just don’t think it will continue. When Jobs was around it was the disruptive innovator. Since his passing it has become a boring blue chip. It hasn’t innovated anything new. At the recent yearly development announcement the big announcement was a change to the operating system of the iPhone. No new products or big changes. Those days are gone. And when there is nothing new, nothing new happens to the stock price.
Happens to all companies. Take IBM as an example.
In the 1990’s IBM was the computer market. It was knicknamed Big Blue. Without IBM there basically would be no internet. It started the whole thing and dominated in the space
As you would expect the stock price grew substantially.
In the year 2000, the stock hit a high around $130. Guess where the stock price was in 2023?
Yup, the same $130.
23 years of nothing. Because the company changed from the innovator and disruptor to a big boring Blue Chip.
Apple is likely to do the same. Unless it can make a significant change to its business model. Tim Cook needs to go away and chase rainbows. They need to put someone new in who changes things up.
After all, even IBM did it. They changed CEO in 2020 and the stock has more than doubled since. Because the new CEO knows things need to change.
Until Apple makes a similar change, I am a seller.
Warning
Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.