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On any given Friday, it's not a great idea to label Isaac Newton a failure. I mean, the guy invented calculus.1
But even Isaac couldn't predict the markets, and he got swept up in irrational exuberance and lost a fortune in the South Sea Bubble.2 If you didn't like calculus in high school or college, this might make you somehow feel better. But I want you to remember this the next time someone opines to you on the level of the market: the guy who invented calculus had no insight into the great bubble of his day. Markets cannot be predicted.
But you have to know something, right? We can't all be Socrates walking around saying "All I know is that I know nothing." This Socratic Paradox is fun when you're a sophomore in college but no way to plan for retirement.
The market is close to its all-time valuation high, going back 230 years.3 We know this. We don't know whether it is worth this amount or not, as that requires a perfect prediction of the future business state of the United States and the world. With billions of "votes" per day, the markets have settled on the idea that the future looks bright. And the aggressive rise in the market could continue for some time. It could continue for a long time.
But we don't know, and optimism can fade to pessimism quickly. It would certainly be historically normal for the market to go flat or down for the next three to five *years*. Note that I didn't say "minutes" in this era of immediacy, I said "years." This is something you should think about now, as it almost certainly will happen. We just don't know when.
If you are reading this and thinking "this is not helping me, you just said two different things," you are correct. The point is that market predictions are worthless.
So what to do? We turn to what is controllable.
This is a critical thing to know about investing: whatever your risk allocation in your portfolio is, it is independent of time. In a well-structured portfolio, the risk you are willing to take now is the same risk you should be willing to take in a future time period, regardless of time, and regardless of what is happening around you.
If you are comfortable with, say, 70% of your assets in stocks now, and stocks decline 30%, you should still feel the same level of comfort with 70% of your assets in stocks after the decline. The frenzied activity of the business world, the markets, and the political world should not affect the asset allocation reasoning.
Life events, age, working status, and your capital level may change the risk profile of the portfolio (and we prefer to do this gradually, in a premeditated way). But the level of the market, and the events of the world, should not affect portfolio construction. If they do, you'll start to make decisions in hindsight, much like Isaac Newton.
Dan Cunningham
1. German mathematician Gottfried Leibniz was working on calculus at the same time as Newton, and arguably deserves more credit for the form used today.
2. Newton was rich before the bubble, and had been a cautious investor his entire life. But he lost a good chunk of his fortune, around $20 million today, in the collapse. He still died wealthy due to his prior success. Extended history.
3. Market valuation source: Burton Malkiel, NYT, 8/15/25.
I know, I know. You're heading to the beach this weekend and you want pictures, not words. You can't see all those words on a screen in the bright sunlight, and anyway it's summer.
Before I dive into a visual festival of charts, I want you to keep in mind the risk of fitting the story to the data you are looking at. It is very easy these days, in finance (or politics) to believe something, and then just find some data that matches that belief.
In his 2012 annual letter, Buffett wrote about this problem:
I ask the managers of our subsidiaries to unendingly focus on moat-widening opportunities, and they find many that make economic sense. But sometimes our managers misfire. The usual cause of failure is that they start with the answer they want and then work backwards to find a supporting rationale. Of course, the process is subconscious; that is what makes it so dangerous.
Let's get the negative out of the way. People are in a terrible mood, with consumer confidence hitting it's lowest level in 35 years (including the Global Financial Crisis) across income groups both below and above $100k:
This is spending momentum, from VISA. Below 100 on the chart means spending momentum is below its long-term average rate.
But the spending isn't always paid for. Here is a chart of debt types, more than 90 days delinquent. Note the surge in credit card debt not being paid, as well as student loans:
Onto rates. We have a "positive butterfly twist" yield curve. (Throw that term out at tonight's lobster bake on the beach.) The green line is as of June 30th. The dip in the three-five-year yield shows that investors expect rate cuts in the relatively near future. They are buying in the three to five year range to lock in rates, without exposing themselves fully to the duration risk further out the curve.
Inflation is not back to the Fed's 2% target yet, adding some uncertainty to the rate cut debate:
In the S&P 500, concentration is the highest it has been in 35 years. Note that the market is not necessarily wrong. The "Magnificent 7" tech firms have done a magnificent job creating high-growth monopolies for themselves that are difficult for competitors to attack, and the market reflects this. Profits are not quite as dominant as index share, primarily due to: 1. Spending on AI infrastructure is suppressing profits in the Magnificent 7 and, 2. The price-earnings ratio of the Magnificent 7 as a group is higher than that of the S&P 500. (For more reading on this, here is a 2023 newsletter I wrote.)
Ok, last chart. Here are the potential operating earnings of the S&P 500 for 2025 (y-axis) and the potential price-earnings trailing multiple (x-axis). Currently analysts expect 2025 earnings in the $260 to $270 range, and the current trailing multiple is about 26. Today the S&P trades at $6,307. You can play some visual checkers on this chart to see how a change in either the earnings or the multiple will affect the price of the S&P 500.
Ok that was a lot to absorb! Have a nice, hot weekend!
Dan Cunningham
Graph Sources:
1. Consumer Sentiment: Apollo Mid-Year Outlook 2025.
2. VISA Momentum: Visa via FRED.
3. Credit cards delinquent: Apollo Mid-Year Outlook 2025.
4. Treasury Yield: U.S. Treasury
5. Inflation: Sifma U.s. Economic Survey Mid-Year 2025.
6. Concentration: Apollo.com June 2025
7. S&P Operating Earnings and Multiple: S&P Global
Before we get to the main event, I wanted to point out this nugget that showed up in the Wall Street Journal yesterday: more than 8 in 10 investment advisors are now outsourcing investment decisions for at least some of client assets.1 This seems odd to me, that the core purpose of an investment firm is now being outsourced to someone else.
This brings up an interesting thought though, as One Day In July favors passive indexed investments. Somewhere in the investing process, there are active decisions made, always. It's just a matter of at which level in the investing stack the decision becomes active. We feel like an optimal approach is at the fund level. This allows us to garner the performance and low costs of passive investing while maximizing diversification, risk reduction, and customization.
Before we get to the bond market, I want to discuss how information enters One Day In July. Many of you have asked about this. Let's look at the media business: there are three reliable ways to make money in the media industry. 1. Be named Google or Facebook, and either scrape the Internet to get free seed content or get your users to do it for you, aggregate that content, and sell ads on it. 2. Play to already-established political partisanship of your readership and use ads or get paid a relatively low monthly fee so users can keep seeing/reading things they already believe or 3. Be in financial media and get paid a premium subscription rate because subscribers need to know what is happening to make decisions.
These have been pretty good business models, especially #1. We have used #3 in the form of Bloomberg and Wall St Journal subscriptions (in addition to other sources, generally individuals or analysts posting on their own). Both firms clearly break out news from opinion (one tilts left, one right on the opinion side) and are considered reliable sources. But financial news headlines, even a bit in these publications, seem to be increasingly sensationalized.
The Treasury market is a good example. Many headlines this year implied doom was at hand. But if you look at the actual data, that's not the case. Here is Treasury auction demand from the spring of 1999 to the spring of 2025 on the 10-Year Treasury note:
The vertical lines on this graph show the size of the auction, defined by the numbers on the right side of the graph, and the squiggly line is the bid-to-cover ratio, defined by the numbers on the left side of the graph. The bid-to-cover ratio is the total of number of bids received divided by the total number of securities sold. Notice that recent demand for Treasuries has been rising, even on substantially bigger debt offerings! And that story all over the Internet about foreign buyers abandoning Treasuries? Well, a tiny bit, but not in any material way. Demand was over 65% from foreign investors, up 6% from May, and around the one-year average. Though about 2% below the long-term average of 67% foreign demand.
This doesn't mean there are not structural long-term risks in the U.S. government's balance sheet. But in the near term, with over 2.5 buyers for every bond being offered, we are not seeing either domestic or foreign appetite wane.
Dan Cunningham
1. More Financial Advisors are Outsourcing Investment Decisions - WSJ - 6/12/25
2. Graph & Demand Data: U.S. Treasury
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