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"It’s not supposed to be easy. Anyone who finds it easy is stupid."

— Charlie Munger, on investing

Friday easy charts

What’s priced in?

After all the election excitement, it feels like financial markets have settled into a state of equilibrium representing our best guess about the investing implications of Trump 2.0.

NVDA shares, for example, were little changed this week despite another astounding set of results in which the company reported making more in earnings this quarter than it made in revenue in the same quarter just last year — but growing earnings 110% year on year is no longer enough to move the expectations needle for AI stocks.

The rest of the Magnificent 7 seems to have stalled as well, with valuation multiples looking full, the DOJ threatening to bust up Google and doubts rising about the pace of progress in AI.

The market has also gotten more discerning in its enthusiasm for Trump, with health care stocks underperforming, "Trump trades" cooling off and Ken Griffin warning that tariffs could lead to crony capitalism.

This week’s news was unhelpfully dominated by the drama around cabinet nominations; these provide good fodder for Thanksgiving debates with extended family but few clues as to the direction of markets.

The Senate’s resistance to some of this news might be a signal that Congress won’t be rubber-stamping Trump’s full policy agenda, but we’re still waiting to find out who will run the Treasury Department, which might be the only government post markets truly care about.

Personally, I take Trump’s unconventional nominations — of which there were many this week — as yet another sign that things are about to get weird.

News on significant advances in quantum computing, AIs that speak their own languages, robot dogs running marathons, the first AI that will haggle with you and AI eyeglasses for the blind suggest that the range of possible outcomes over the next few years (investing and otherwise) is wide and getting wider.

(And if that’s not bananas enough for you, this week also featured an edible banana selling for $6.2 million and a plush banana being launched into space.)

President-elect Trump is reportedly in favor of letting AI rip, and if so, that may turn out to be the most consequential decision of his second term (for investors, at least).

NVDA’s price action this week shows there’s already a lot of optimism priced in, so whatever happens, it’s not likely to be an easy ride for investors.

But it’s not supposed to be easy.

Let’s check the charts. 

Hoping for the best?

Record inflows into US equities may suggest that a lot of good news is already priced in.

USA first:

Flows into US equities are accelerating while they stagnate elsewhere.

Too much?

Asset managers have never been as long equity futures as they are right now.

Not everyone is bullish:

Warren Buffett’s growing cash horde suggests he’s having trouble finding things to buy. The last time he found it this difficult, the financial crisis shortly followed. The time before that, it was the dotcom bubble that followed.

Dry powder?

There is now $6.5 trillion hiding out in money market funds. If nothing else, it’s a reminder that in markets, there’s a seller on the other side of every buyer.

The never-landing US economy:

Analysts appear to be underestimating US GDP growth yet again, with the Atlanta Fed GDPNow model expecting 2.6% in Q4, well above the 1.9% consensus. The analysts at Goldman Sachs think consensus estimates are too low for all of next year too.

Correctly priced?

Goldman thinks the S&P 500’s elevated valuation is correctly pricing in the favorable investing environment. Its valuation model sees fair value at 21.5x forward earnings, almost exactly in line with the S&P’s current 21.7x multiple.

Why stocks are expensive…or cheap:

US corporate profits are nearly 12% of GDP. If that number reverts to the mean, stocks are very expensive. If that number is sustainable, they’re not.

It’s a good time to be an American tourist:

The euro crashing back toward parity is a reminder that the rest of the world needs to prepare for Trump 2.0 as well. Even at 1.04 to the dollar, analysts at Deutsche Bank think the euro has only priced in 30% of Trump’s likely impact on exchange rates.

Too easy?

With the S&P 500 up 26% year to date (and minimal volatility), the performance of US equities is shaping up to be one for the record books. 

Will it be this easy again next year?

Probably not.

Even if the market has accurately priced things in for now, the range of potential investment outcomes is too broad to assume smooth sailing for Trump 2.0.

Prepare for more volatility ahead and keep in mind that investing is a marathon, not a sprint.

Any robot dog would tell you that.

Have a great weekend, priceless readers.

— Byron Gilliam

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