Note Precis May 13 2025: Momentum and Valuation, Fraught Politics

Note Précis May 13,2025: Momentum and Valuation, Fraught Politics – Capital markets and businesses usually abhor political uncertainty. Presently fraught global politics (including thrusts and feints on trade and locale) still have equities dominated by momentum over valuation – to us abnormal or at best unusual.Fixed income yields have risen, with U.S. Treasury bonds for instance close to 5% compared to a low of around 1%. Capital market corrections can occur over time or be a precipitous catharsis. After the era of the “nifty fifty”, abear market as infamously took place over the 1970s had both valuation and earnings delivery being affected.  Amid fervor for momentum, we see market potential as being one of elevated volatility. Bifurcation has also emerged within erstwhile favored coteries and sectors. With valuation that remains elevated in equities and fixed income, diversification is called for.

In around 3% annual global GDP growth, there are risks in espousing momentum fervor stoked even by miniscule tariff level reductions from the United States. Elections from Australia, Canada, France, Germany, Japan, and the U.K. have had a center left or fragile coalition hue. Among large economies, China and India face substantive employment challenges as well. Many governments are under pressure to also deliver “meaningful employment”. For political and business reasons,  company managements are likely to experience more fractured revenue growth even within sectors. It is dissimilar to the prior momentum even for information technology or social media.

A dispersion of central bank policy has been chalked up. Meantime, the Federal Reserve referred obliquely to an inflation, employment, and fiscal policy nexus. We assess U.S. Fed Funds rates could remain at 4 ¼% through mid-2026. A veritable rainbow of sovereign yields does not seem high nor do risk premium spreads in the corporate fixed income markets. Signs of political and/or trade tensions could easily flow into currency markets. We would prefer short to medium term fixed income duration. Precious metals have a role continuing in asset mix.

In corporate releases, bifurcation of delivery exists even in the small coterie of information technology/social media leading momentum forays. Strapped consumers appear favoring necessities. Purveyors of luxury have not been spared bifurcation, notwithstanding the disposable income of the well to do. In markets at large, for stress in upcoming quarters, we would closely monitor loan loss provisioning by the banks. Valuation such as for the S&P 500 appears incorporating elevated long-term growth expectations. The present earnings cycle even in recovery since 2008 has been one of high aspirations early in a year then morphing into more sedate delivery. Operating Management and managing government relations are likely to be crucial. We would emphasize diversification, espousing quality of delivery. E.o.e.  Copyright Reserved