Tuesday, October 14, 2025
I know what you are thinking: After two +20% returns for the S&P 500 in 2023 and 2024 and after our current +15% run-up so far this year, will we repeat the 1997, 1998 and 1999’s +20% per-year run-up that created the dot-com tech-bubble crash? Many analysts are saying our current stock market situation rhymes with that era. For example, artificial intelligence (AI) has been the latest driver of lofty stock market prices just like the internet craze drove dot-com stocks to ultra-high levels in the late 1990’s. Today’s Nvidia is selling specialized AI computer chips that are feeding the current frenzy just like Cisco Systems and the telecom stocks were selling the parts that fed the internet craze back in the 90’s. At some point corporate executives and shareholders will be demanding a return on their AI investment and that is when the proverbial punch bowl will be taken away. The stock market could struggle after that – just like investors demanded returns from the dot-com investments starting in the year 2000. There are some similarities and differences between these two distinct eras. I hope to address a few of them in this letter.
It is true that we are in “expensive” territory when it comes to the S&P 500. For example, the current forward P/E ratio for the S&P 500 is about 22.1 according to Ed Yardeni’s charts. This means that if prices remain constant and earnings stay the same as they are now, it would take 22 years of next year’s S&P earnings to pay for the current price of the S&P 500. In the late 1990’s and early 2000, the forward P/E for the S&P 500 was about 26 (Note: The current Magnificent 7 names have a forward P/E of 29. If you strip those seven names out of the S&P 500, the P/E drops to 20). The difference between what is taking place now and what took place in the late 1990s is that while the prices for certain stocks have been bid up (e.g. Magnificent 7), for the most part the Mag 7 financial statements are on much more solid ground now compared to the dot-com companies of the late 1990’s. Sure, AI stocks could take a tumble, but keep in mind that there are 493 other names within the S&P 500 that are not as expensive. Moreover, the P/E ratio for the S&P 400 (mid-cap) index is 15.7 and the S&P 600 (small-cap) index is 14.9 right now – about 30% less than large-caps. Remember that your portfolio is heavily invested in the total stock market index and, therefore, has 20-25% of that index is in mid and small caps. We also have another 10% of our equity model in mid and small companies. As the Federal Reserve drops rates, we are hoping the smaller, indebted companies will be able to refinance any debt they have on their books at lower rates, which in turn would help boost their bottom line.
If the stock market goes south on us over the next few months, I want clients to know that we have some built-in defensive holdings that should kick into gear. For example, last Friday the markets plunged after President Trump threatened China with retaliatory tariffs when China restricted their rare earth material exports. The S&P 500 dropped 2.7% in one day. Some of our defensive plays like Berkshire Hathaway, First Eagle Overseas, Vanguard Dividend Growth and Vanguard Global Wellington were down approximately half of that 2.7%. That is what I want to see out of our defensive stock investments.
With all of that said, we have had a great year so far and many analysts believe the fourth quarter will be a strong one. I would like to encourage each of you that if you want to take some dollars off the table for upcoming expenses (a new car, a trip, gifting) or if you want to trim your equity exposure in general, NOW IS THE TIME TO CONTACT US. Give us a call to schedule a meeting. We would love to hear from you.