“It was déjà vu all over again,” to quote Yogi Berra, as the final trading week of October was a rerun of the week prior, with the lead for Value over Growth since Halloween 2025 expanding and investors receiving another reminder that it is a market of stocks and not simply a stock market.
True, Friday saw a scary selloff in which the S&P 500 skidded 1.82% and prompted an “It is a stock-pocalypse” posting on X from prominent CNBC personality Jim Cramer. Of course, there have been 1,048 worse trading days since 1928 and that widely followed index, which is still up 11% for the year on a price basis, has sizable drawdowns each and every year,…
…while the latest dip has yet to even register on the downside volatility charts.
Still, we realize that the retreat has been especially brutal for stocks associated with the buildout of artificial intelligence as the 25 AI recommendations in the chart below gave up 13.7% on average last month and the group is now off an average of 33% from the 52-week highs.
Worries about debt (and equity) financing, hyperscaler capital expenditure growth and profitless neocloud companies like CoreWeave (CRWV) continued to spook the fickle traders who have piled into the group, cutting the average total return since the end of 2024 to 164%.
Certainly, folks who own these names cannot expect to enjoy triple-digit gains without accepting that the tide can quickly turn and we continue to believe that our partial sale strategy of trimming big winners along the way is the best way to navigate an environment where traders seem to pay little attention to financial fundamentals.
After all, we doubt that many AI investors care or even know that the list in the chart above now boasts an average Year 2 P/E ratio of 15.2. These reasonable valuations provide us plenty of comfort in keeping the faith that our “picks-and-shovels” approach to the AI trade will continue to pay off. Unlike what was seen with the euphoria and depression that centered on often-profitless companies during the Dot.com boom and bust a quarter century ago, we think the businesses we have invested in will make a lot of money over the next few years from AI infrastructure…and historically stock prices have followed earnings higher over time.
To be sure, there is no assurance that EPS will continue to grow, but the outlook for U.S. economic growth appears favorable, as we learned last week that Q3 real (inflation-adjusted) GDP growth rose 3.4%, better than the 3.2% consensus forecast provided by Bloomberg,…
…while the current estimate for Q4 real GDP growth from the Atlanta Fed stands at a solid 3.2%,…
…and the FOMC Statement,…
The Federal Open Market Committee approved the following statement for release by a 10 – 2 vote:
The Committee decided to maintain the target range for the federal funds rate at 3-3/4 to 4 percent, in support of the Federal Reserve's dual mandate. The Committee is continuing its policy of maintaining ample reserves in the banking system.
Economic activity is expanding at a strong pace. While uncertainty remains elevated owing, in part, to geopolitical developments, domestic spending has been resilient. Productivity growth is strong, and capital investment is robust. Job gains have kept pace with the workforce, and the unemployment rate has changed little.
Inflation remains elevated. The accumulation of more information will help the Committee determine the policy stance appropriate to ensure a timely return of inflation to the Committee's 2 percent goal. The Committee will deliver price stability.
…and Federal Reserve Chair Kevin Warsh offered relatively upbeat commentary in concert with the Federal Open Market Committee’s decision on interest rates last week:
The jobless rate is lower than a year ago, and payroll growth is noticeably above last year’s pace. The four-week moving average of unemployment insurance claims continues to run at the lowest level in generations.
I'll just say this, it is convenient to say that the strength of the economy is all about this new technology wave. In fact, if we look at the data, really including data from the last meeting until this, the CapEx story is not just robust, not just strong, but it is broadening. And so if you wanted to tell the story somehow that this is strength we're seeing only in narrow pockets, that's a much harder story to tell now than it would have been several quarters ago.
No doubt, there are plenty of issues about which to be concerned these days, and though Warsh & Co. left the target for the Fed Funds rate unchanged at a range of 3.75% to 4.0%, which is low by historical standards,…
…market expectations suggest there will be two 25-basis-point rate hikes over the next 12 months,…
…as the Fed’s preferred measure of inflation, the core personal consumption expenditure index (PCE), rose 3.1% in September, but that increase was slightly below the long-term average,…
…while average prices at the pump that have been hitting consumer wallets have been higher on an inflation-adjusted basis under previous presidential administrations.
We also note that a big spike in energy prices, like what we have seen this year, has not been reason in the past for long-term-oriented investors to abandon stocks,…
…and more than five decades of evidence show that Value stocks do not mind higher interest rates.
And speaking of Value, we can't overlook the fact that while October provided chills for many investors, there were thrills for stocks that score well on fundamental valuation metrics, with the list of Higher-Value recommendations gaining more than 10% on average last month.
Of course, since the end of 2024, those stocks are essentially flat in terms of total return, so we might argue that the resurgence has just begun and a century of market history shows that Value has often been a great place to be,…
…especially as valuations for the Value indexes, we think, are still reasonable,…
…while the forward P/E ratio of 20.9 on the overall market, as measured by the S&P 500, is today right at the average over the last 10 years.
So, though we wouldn’t be surprised to see the recent market turbulence continue, we remain optimistic about the long-term prospects of a diversified mix of stocks that we are recommending and we note that today marks the start of the historically seasonally favorable time of year,…
…while those fretting about the midterm elections should take comfort that stocks have performed fine, on average, no matter the control of Congress.
Stocks in the News
