A few observations on the market currently

My colleague made a very good point to me yesterday while we were discussing the market moves, stock prices, and all the usual stuff we do. It’s interesting how investors are happy to rush into companies that are pouring money into capex in the hope of future returns, while selling companies that are already making high returns today. – Apple, NVIDIA, Microsoft, Amazon, Tesla, Alphabet, and Meta – which currently hold a combined 32.2% weighting in the S&P 500 Index- accounted for 41.8% of the Index’s 14.8% total return in the first three quarters of 2025. In contrast, one can find high-quality companies in the S&P 500 with historic returns on capital of 30% that have underperformed the S&P 500 by circa 40% in the past year. The strength of this rotation is starting to feel a bit like the early 2000s.

The Federal Reserve minutes revealed that the Fed focused on weakening employment reports as its justification for September’s rate cut. Stocks continue to bounce around the all-time highs. Yesterday, the S&P 500 may have hit another small bump, but not before both it and the Nasdaq touched their highest intraday levels on record. US stocks have reacted well to the pro-growth strategy the Trump administration has pursued since coming to office.

We then went on to discuss what could do more than provide the occasional investor pothole, but something that could send us off the road. Investor sentiment is clearly getting more bullish; the AAII retail investor revealed that bulls rose to 57.7 from 53.7, while Bears fell to just 15.4 from 16. According to the September Merrill Lynch Fund Manager survey, fund managers’ cash levels are at the historic lower end. Investor sentiment getting ahead of itself may be more of a pothole than an oil slick.

Earnings season starts next week, and it always has the potential to be an oil slick; earnings are expected to grow this quarter compared to the same quarter last year. There will always be those companies that disappoint, but overall, one would expect a positive outcome. So one would feel this earnings season is unlikely to provide a fundamental reset of investor expectations. Tariff fears for now have subsided, and geopolitical risks seem to be easing. Valuations of US stocks, in particular, are high, but that is more of an excuse than a reason to sell. Bond markets seem to have calmed down. So far, the government shutdown has done little to dampen sentiment. The collapse of First Brands last week highlighted the growing risks of money flooding into the opaque world of private financing, yet it was treated merely as another pothole. What could provide more of an oil slick, possibly further weakness in the PMI data, which may provide concerns that economic growth is slowing, or a pickup in inflation, or both.

Gold, you point out, is trading at all-time highs, an asset that investors buy as a safe haven, considered a store of value in times of trouble. What does that tell us? Good question. Is inflation coming back? What history does tell us is that if there is an oil slick on the road ahead, it won’t be from somewhere we expect.

Finally, there is a very good series on BBC 2 on Margaret Thatcher’s premiership. I watched the one on her coming to power, to see how she battled to stabilise the economy against the greatest of opposition.