One week / one topic: Gaslighting

What happened?

US equities keep partying like it’s 1999, but when does the music stop?

(Self-reminder: this might not be a bubble yet, and the best way to deal with it is to maybe try to participate while keeping an eye on the exit door…? Easier said than done)

To illustrate this point, we can use the "hopes and dreams" ratio (h/t Cameron Crise) to break down equity market valuations into three parts:

1. Book value

2. The net present value of expected earnings over the next three years

3. Future earnings projections that are not yet forecast

The third item is what’s plotted below. You know, ‘unicorns and rainbows’… that kinda stuff.

As you can see – while we are at levels approaching the late 90s (Prince had it right) – I think that the comparison with the Dot Com bubble is still outright misleading, as the impact of AI could well be much more tangible.

If that was not enough, this week investors also absorbed $150bn+ of newly issued corporate debt like it ain’t no thing.

Meanwhile – looking at the other obvious, big macro piece of the puzzle – 10+ years of negative returns have relegated government bonds to somewhere between “Ok, boomer” and proper pariah status.

Of course, the fact that bonds have not even really cushioned the blow during the recent (if short-lived) equity drawdowns doesn’t help…

As noted previously, equities/bonds correlations have flipped higher since Covid – with no sign of remorse.

Perhaps then – if macro analysis offers no joy at the moment, and all that matters is policy announcements and advancements in AI – looking at the equity market through the lens of ‘themes’ might offer more inspiration?

Acknowledging the fact that there is an infinite number of ways to slice and dice equities into themes – just look at the ever-growing number of ETFs being launched, usually chasing the latest flavor of the month – looking at what’s worked best in each main region should be interesting nonetheless.

In summary, so far in 2025 the market has rewarded a seemingly unrelated group of themes.

But is there a common thread here, or perhaps some insight that we can gain as we look forward?

Our observations

• Fundamentals: Using global sectors as a possibly simpler lens, Health Care stocks stand out as cheap and underperforming… but it has been the case for a while, so what might change the picture here?

• Price action: In a market that seemingly cares little for fundamentals, momentum becomes even more powerful as a factor. Watch out below.

• Investor beliefs: Unsurprisingly, equity fund managers are overweight Health Care and underweight Tech. The Sage of Omaha also recently stepped in… after selling his Apple shares.

So what?

When going through a dry spell creatively, many artists try to focus on just running the process and putting in the work every day nonetheless…

Keep writing/painting/composing, and at some point the spark will come.

Extending the analogy, it feels like at the moment we should also stay true to our investment philosophy and keep running our process.

As frustrating as things can get – which, I would argue, should be part of the job description of a fund manager – we still need to strike a balance between staying true to our philosophy and also evolving and improving at the same time.

With that in mind, it feels like the above thoughts might be distilled into observations about the price action in gold.

As fiscal concerns are by now a global theme (US, UK, Japan, France…), currency pairs should perhaps cede the stage to gold as the ultimate hard asset (and central bank hedging tool) to gauge what’s really going on.

While the question of ‘how do you value gold?’ remains very hard to answer, perhaps we should think of it in terms of what it’s not – i.e. a fiat currency that can be printed at will.

The chart below could hardly be sending a clearer message, then…

Seen through that lens, it’s hard to argue with the ‘hold on to your real assets’ narrative – and consequently we have recently increased our positions in US and UK 30yr inflation-linked bonds, as valuations offer more of a margin of error given real yields are at multi-decade highs.

Mood music: Maggie Rogers – Alaska