Festive Markets, Thoughtful Positioning
As we approach the beginning of the holiday season, we want to take a moment to pause, reflect, and share an update on the economy, markets, and what it means for your accounts. This time of year naturally brings a sense of reflection, revisiting the past and looking at what’s ahead. It is also a period when markets can become more volatile, investor sentiment can shift quickly, and headlines tend to get louder.
We believe it’s important to provide you with clarity on where things stand today, the risks we see forming beneath the surface, and the steps we’re taking on your behalf. We're thankful the past few years have delivered strong returns and plenty of optimism but remain focused on balancing opportunity with discipline. The S&P 500 is on pace to notch its 3rd straight year of double-digit returns. While you’ll never hear us complaining when markets move higher, it is important to not become complacent.
Let’s begin with markets. US companies have continued to print strong earnings paired with low leverage. In addition, the AI narrative has provided a boost to returns as investors await the expected bottom line growth from improved efficiency and profitability. This all makes sense and will most likely come to fruition over the medium to long term, but the short term appears more choppy to us. S&P 500 valuations are undoubtedly frothy, concentration within the top 10 names is now north of 41%, and investors continue to pile into the AI driven momentum.
Valuations
One of the most commonly used valuation metrics is the Price-to-Earnings (P/E) ratio, which tells us how much investors are willing to pay for $1 of a company’s earnings. While each company has its own appropriate valuation range, examining the aggregate P/E ratio of the S&P 500 gives us perspective on whether the market overall is cheap, fair, or expensive relative to history. The forward P/E multiple has been floating between 21-23x for the second half of this year. If we look at the chart below, we can see that the last 2 times the P/E multiple exceeded 20x was in 1998-1999 (tech bubble) and 2021 (post-COVID boom). Each of these time periods were followed by steep corrections.
Concentration
Market concentration has been another concern mounting this year with 10 companies now making up over 41% of the S&P 500 and 49% of the total return (YTD thru 11/21/25), most of which are heavily influenced by the AI trade. The companies within this sub group like Nvidia, Microsoft, Amazon, Apple etc. have strong earnings, ample free cash flow and low levels of debt but they are all riding the same AI wave.
In the short run, the jury is still out on how quickly AI will translate into meaningful bottom-line growth. If we think back to 2000, everyone understood that the internet would reshape the world, but the challenge was timing. A massive amount of capital flowed into building out the internet, yet it took years before productivity gains showed up. We may be in a similar phase today—heavy investment in AI infrastructure, but no clear timeline for mass adoption or economic payoffs.
If/when the AI wave breaks, these companies will be riding the same wave back to shore. Due to their high concentration within the broad index and contribution to total return, a deterioration of the AI trade would have an outsized impact on the broader market.
Momentum
Investor enthusiasm for AI has only intensified this year, with both large and small AI-related companies attracting significant inflows. The AI rally has enjoyed real momentum, but it can sometimes shift into something else entirely: a fear-of-missing-out (FOMO). As history has shown time and time again, when the music stops and the party ends, it often ends quickly.
One area where this FOMO behavior is becoming especially visible is in the leveraged ETF space. These funds are designed to amplify the daily return—or loss—of an underlying index or security by 2x, 3x, or even 4x. More than 100 leveraged ETFs were launched this year, surpassing the 73 launched last year. As opportunities in the broader market become harder to find, more investors seem to be turning to these high-risk vehicles in search of quick gains.
There may still be room for this rally to run, but when investors begin to chase risk without regard for fundamentals, the red flags become harder to ignore.
This is not meant to sound all doom and gloom; we simply wanted to bring attention to some of the mounting risks. As stewards of your money we feel it is just as important to protect you from the downside as it is having you participate in the upside. With that in mind, we feel it is the prudent decision to take our foot off the gas a bit, set some ‘dry powder’ aside, and see how these risks develop. We rarely cheer for down days in the market, but if they continue, we are positioned to take advantage. As we send this note out on the day before Thanksgiving, here is one more item to be grateful for -- we are able to trim risk with markets near all time highs.