As Liberty day tariffs[01] rocked equity markets in 2025, the Iranian conflict rocked equity markets in 2026, which raised oil prices and exacerbated inflation. The signing of the Memorandum of Understanding (MOU) has culminated with a fragilecease fire that sent in oil prices plummeting and equity markets rallying to new all-time highs but there are bipartisan concerns over some of the MOU[02] concessions made to the Iranians. However, hostilities are once again on the rise with the possibly of bringing an end to the MOU!
As a result of the equity market rally to new all-time highs, the S&P 500’s top 10 stocks now make up over 40% of the index[03], which makes for a high concentration in a small number of stocks. Strong corporate earnings have lifted the marketto new highs and tariff refunds could help support the market at these levels. However, with margin debt near all-time highs[04], a market swoon could quickly cause a larger unraveling as some margin investors may be forced to sell to cover losses[05] as selling begets more selling[06]. Additionally, a tsunami of bankruptcies threatens the global economy and global equity markets[07].
Some investors may liquidate some of their other richly valued Tech giants, Bitcoin and possibly other highly appreciated investments to participate in SpaceX and other upcoming IPOs. When and if new large IPOs, such as SpaceX, Open AI and Anthropic are added to the S&P 500 index, said additions could significantly skew its sector composition[08].
The Artificial Intelligence mania is eerily reminiscent to the Internet Bubble of the late 1990’s[09] with the notable exception that at least this time the most expensive companies are growing and have earnings[10]. The competition between Artificial Intelligence Models is reminiscent of the WEB Browser competition during the late 1990’s with many of the initial browser winners, such as Netscape, ultimately losing in the end and the same could happen to the Artificial Intelligence Models.
As the Artificial Intelligence mania broadens from “creators” to “adopters”[11] with the Mag-7 transitioning to the Lag-7[12], the winners will be those companies that can unleash productivity enhancements and lower costs by using AI technology. However, the AI buildout may be lifting the stock market while masking a weakening economy[13].
High valuations have NOT been a good predictor of future 1-year returns but is a better indicator of future 10-year returns[14]. Historically, high P/E’s for the S&P 500 has resulted in modest returns over the next decade. That forecast may end up being overly pessimistic, but it does suggest that a prolonged period of double-digit annualized returns, which investors have enjoyed recently, is unlikely.
As is always the case, “Past performance is NO guarantee of future results”!
The new FED chairperson, Kevin Warsh, remarked that inflation has remained stubbornly above the FED’s target level and he’s willing to raise rates to combat inflation as long as the job market remains resilient[15]. If the economy slows and inflation remains elevated, stagflation is another peril not seen since the 1970's[16]. However, if rates get high enough, investors will likely find fixed income to be an attractive alternative to equities, which may cause a market correction[17].
As Warren Bufett so eloquently said, “Be fearful when others are greedy & Greedy when others are fearful”!
With markets at or near all-time highs and richly priced, Caution is the Watchword! The best defense in volatile and richly priced markets is a highly diversified portfolio composed of low-correlated assets[18] used in conjunction with a well-articulated management strategy. If you’re concerned about portfolio volatility, a member of the Iron Belt Partners Team will gladly discuss those concerns and options to lessen volatility with you. We can be contacted via phone at (724) 493-9473 or via Email at:
Lindsay M. Turchetta LTurchetta@lpl.com
John D. Martin JDMartin@lpl.com
Working as a team to better serve our clients!
Iron Belt Partners is a name used by independent advisors associated with LPL Financial.
This communication is meant to be general in nature and should not be construed as investment or financial advice related to your personal situation. You should consult your tax, legal, and/or financial advisor prior to making any financial decisions. The views expressed here are those of the authors, John Martin & Lindsay Turchetta, and not necessarily those of LPL Financial. Information is based on data gathered from what are believed to be reliable sources. The opinions and other information contained in this article are subject to change continually and without notice of any kind. Forward-looking statements are subject to assumptions, risks, and uncertainties, which change over time and may not happen. Past performance does not guarantee future results.
Investments are not guaranteed and are subject to investment risk including the possible loss of principal.
Past performance does not guarantee future results.
Asset allocation does not ensure a profit or protect against a loss.
The index references herein are unmanaged and cannot be directly invested in.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio, and diversification does not protect against market risk.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Investing in mutual funds involves risk, including possible loss of principal. Fund value will fluctuate with market conditions, and it may not achieve its investment objective.
Bonds are subject to credit, market, and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
Securities and Advisory Services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.
[01]Source: “Tariffs and private equity: impact of "Liberation Day"” on Opalesque.com
[02]Source: “Why Trump’s secret and vague MOU is stirring a political storm” on CNN.com by Stephen Collinson
[03]Source: “S&P 500 Market Concentration - 10 Stocks Make Up 41% of the Index” on artoftruth.com
[04]Source: “Margin Debt Jumps 8.5% in May to New Record High” on advisorperspectives.com by Jennifer Nash
[05]Source: “Understanding Margin Debt: Benefits, Risks, and Key Insights” on investopedia.com by Jason Fernando
[06]Source: “Margin debt tops $1 trillion as leveraged funds fuel record binge” on edgen.beta.degen.tech.com by Priya Mehta
[07]Source: “A tsunami of bankruptcies threatens the global economy” on msn.com by Liat Ron
[08]Source: “SpaceX’s $2 Trillion IPO: Why Tech Giants May Face Pressure” on blockonomi.com
[09]Source: “AI Bubble vs. Dot-com Bubble: A Data-Driven Comparison” on institutionlabs.ai.com
[10]Source: “Comparing Today’s Tech Boom to the 1990s Dot-Com Bubble” on bing.com
[11]Source: “A.I. Boom Could Shift from ‘Creators’ to ‘Adopters’” on msn.com by Kevin Gordon
[12]Source: “Mag 7 to Lag 7: Is the Market Broadening?” on ture-share.com
[13]Source: “AI boom is lifting the stock market, but it may be masking a weaker economy” on cnbc.com By Charlotte Morabito
[14]Source: “Forward P/E ratios vs. 10-Year Forward Returns” on DayTrading.com by Dan Buckley
[15]Source: “New Fed Chair Kevin Warsh Is Squarely Focused on Inflation” on Investopedia.com by Polo Rocha
[16]Source: “Stagflation Is Starting to Rear Its Ugly Head” on Investopedia.com by Polo Rocha
[17]Source: “The probability of a Federal Reserve rate hike is soaring” on msn.com by Sean Williams
[18]Source: “Correlated and Non-Correlated Assets” on thebalance.com by Melissa Phip