One week / one topic: Ouroboros

What happened?

For all the talk about sky-high Tech stock valuations and increasing evidence of a cooling US labour market, it’s not clear at all that one should rein in equities positions.

While global stocks are up ~25% since summer 2024, we did experience a sharp (albeit short-lived) pullback in April.

Furthermore, the prevailing mood among institutional investors is still fairly cautious – which is not really consistent with what you usually see around market tops. (Retail investors are much more bullish though)

That said – while recent wobbles in equities only amount to a tiny 2-3% retracement from all-time highs – investors have nonetheless been reminded that, after six consecutive months of strong equities performance, perhaps one shouldn’t assume this will continue forever?

At the same time, 10yr US yields have been coming down – possibly signaling increasing concerns about a slowdown – and markets are also pricing in a significantly more dovish Fed going forward.

Recent data is showing a notable uptick in job cuts, and – perhaps even more importantly – once you look at the detail of the announcements, there is a strong hint that many of these job cuts are related to AI and automation.

To take an example, Amazon is reportedly targeting 30,000 corporate job cuts. While this only represents a small portion of Amazon's 1.55 million total employees, it is almost 10% of its roughly 350,000 corporate employees.

We have long known that the stock market is not the economy, but historical evidence and common sense still inform two biases:

1. In the medium-to-long term, stocks follow earnings – and earnings growth should in theory loosely follow GDP growth

2. When people lose their jobs, they are unlikely to maintain a record-high portion of their net worth in stocks – i.e. they will likely sell

(Un)fortunately, there are valid counters for each of the point above.

As equity indices become more and more dominated by a small number of global, immense Tech companies who are racing each other in the quest for AGI, it’s reasonable to expect the link between the ‘real’ economy and stocks to become even more tenuous.

Secondly, the top 10% of US households by income own approximately 93% of all stocks. It’s still party time at the top, no need to sell…

And so, voila – a cooling labour market might soon help bring about more rate cuts, while US profit growth continues unabated thanks to unbridled AI-related capex, potentially propelling stocks to new highs before year-end.

But can we count on it?

Our observations

• Fundamentals: As is usually the case, there is clear scope for a healthy debate between bulls and bears at the current junction. Perhaps trying to list in advance the main potential vulnerabilities is a fruitful exercise to prepare for what’s next, but this very anomalous cycle doesn’t make things easy…

• Price action: The equities bull trend remains intact for now, and recent wobbles might even prove to be a healthy development if they signal the absence of blind exuberance?

• Investor beliefs: The sense of caution still prevalent among institutional investors bodes well for the future, but – if we are indeed in a ‘new world’ – we should be skeptical of any rules-of thumb and keep challenging consensus anyway.

So what?

Ouroboros is an ancient symbol depicting a serpent or dragon eating its own tail, and – if I am allowed the poetic license – it’s a good metaphor for where markets are today.

Sure – stocks are expensive, job cuts are ticking up, AI might well be a historic development but also not work out well for investors… you know the bearish script.

But – the Fed is coming to the rescue even before the distress call has gone out, the retail and corporate bid for stocks is still strong and healthy… and this might be enough to further extend the bull market into the sunny uplands for another few years?

As we wait to find out what is what, we remain invested with a strong degree of diversification – while resisting the temptation of any ‘hero trades’ in the absence of great odds.

Mood music: Lady Gaga – The Edge of Glory

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