Market Update

Introduction In my last publication, I said I was amazed at the resiliency the market had shown through the summer. We saw an all-time V-shaped rally off the April lows, and the market has just continued to climb higher. As we embark on autumn, this market has reminded me of a very important lesson that investors should pay close attention to: trades often last much longer than anyone expects. This is true on both sides. In other words, just when it seems stocks can’t go any higher, they do—and just when it seems they can’t go any lower, they do.

Peter Lynch expertly identified this concept in One Up on Wall Street, pointing out that investors often sell their winning stocks too soon and hold their losing stocks too long. In recent publications, I’ve characterized this market as resilient. We’ve now moved beyond resiliency—we are in the fear-of-missing-out (FOMO) stage. This phase of a bull market is exciting, but it can also be dangerous.

If you’ve been a long-term investor, or decided to buy back in April when everyone was crying doom, you are likely reaping impressive gains. I, myself, have reached considerable all-time highs. The question now becomes: how much longer can this run persist? In this publication, I’ll discuss where I think we’re headed and what you can do to be a prudent investor in what seems like an unshakable market.

A Tale of Two Risks This market is being supported almost single-handedly by A.I. Unprecedented spending by companies to modernize their operations for the largest technological shift in modern history is the main reason we’ve been able to sustain current levels. Spending—particularly on chips, data centers, and infrastructure—has led to incredible revenue and earnings growth for a multitude of companies.

This spending has benefited not only technology firms, but also industrial, energy, and infrastructure companies. The market has heavily rewarded businesses with a connection to A.I., while it has been much harder to find winners outside of this trade. Healthcare is rebounding slightly off multi-year lows, consumer-oriented companies are struggling to find footing, and traditional energy companies remain weak.

The macroeconomic picture is murky, to say the least. Unemployment and slowing job growth are becoming concerning. The bottom half of consumers are struggling due to lingering inflation and modest wage growth. For now, tariffs are being absorbed by corporations. The housing market remains soft, as falling interest rates have not yet kickstarted the sector.

Make no mistake: there are plenty of risks in the macroeconomic environment that could spook investors if the A.I. trade falters, even slightly. That said, the A.I. trade still seems to be rolling full steam ahead, with some companies seeing exponential growth as a result.

As many downside risks as there may be, there is equal risk of missing out on the fruits of the biggest technological revolution since the internet. This is a market in which every new position must be taken with high conviction. The only way I can condone entering new positions here is if a strong multi-year bull thesis exists for the company, and you don’t mind being a long-term holder.

Generally, I don’t like buying at all-time highs, but there is legitimate reason to believe we can continue to push significantly higher if the A.I. trade remains strong. There is also legitimate reason to believe it wouldn’t take much to trigger a significant correction. If you initiate a position here, you need to have a clear reason why and be willing to hold through downturns. As always, I emphasize the importance of being a long-term investor.

Where I’m Looking for Opportunity As I’ve said, the A.I. trade is full steam ahead. I’m looking for companies that are reasonably priced and stand to benefit greatly from the build-out of A.I. One must be cautious, because not all companies claiming to be winners in this space will be. Furthermore, some companies that I believe are true winners have already seen multiple years of success baked into their valuations, making them expensive and risky buys.

Nonetheless, there are still companies that stand to gain as we are likely still in the early stages of this revolution. One company I own, and have liked for some time, is Micron. I’m already up over 100 percent on Micron, but it is still trading at a fairly cheap valuation while experiencing exponential growth. As always, I’m not recommending you buy any particular stock—I’m simply giving examples of the types of companies I own and what I’m watching.

Beyond A.I., I’m always searching for great companies at great value. Healthcare is a sector I’m paying close attention to. It has struggled as policy uncertainty, high costs, and investor inattention have dragged it down. However, I believe there are some great companies here that warrant serious attention during this downturn.

It hasn’t been often that healthcare has seen a sector-wide decline, as it has historically been one of the fastest-growing segments of the economy. Spending is usually consistent and capable of weathering downturns. A couple of companies I’ve been watching and building positions in are Elevance Health, Regeneron, and Novo Nordisk.

• Elevance Health is one of the largest health insurers in the nation and a provider of the coveted Blue Cross and Blue Shield plans. It’s trading at dirt-cheap prices and has consistently grown revenue.

• Regeneron posted a surprise earnings beat this past quarter and had positive results in its phase 2 weight-loss study. It’s another example of a stock trading at a discount with several possible catalysts ahead.

• Novo Nordisk continues to be a leader in its space, with strong growth prospects.

Beyond that, I’m increasingly convinced that Republicans will make some sort of compromise surrounding healthcare funding to end the current government shutdown, which may help add positive sentiment to the sector—something that has been lacking. Furthermore, if the A.I. trade cools off and we see a correction, investors may rotate into healthcare for safety.

Beyond healthcare and A.I., several retailers have been struggling and may present value. Despite the booming stock market, consumers are not in the best shape—especially the bottom half. Stocks such as Target, Lululemon, Chipotle, and Dutch Bros. have been under pressure. These aren’t the only consumer-oriented stocks worth watching, but they’re a few on my radar.

I’m not overly excited about buying these names, as I don’t see any major near-term catalyst for the consumer. However, some may be getting cheap enough that there’s room for upside. Again, these are just my thoughts, not recommendations.

Summary This market has been red-hot, and if you’ve been a long-term investor, now is the time to reap the rewards. It may also be a good time to lock in gains if you feel valuations are stretched. I believe many of the stocks performing well will continue to do so in the near term.

As always, the playbook is the same: identify great companies at reasonable prices and adopt a long-term investment strategy. Don’t chase stocks out of fear of missing out. Likewise, don’t be deterred from buying great companies at reasonable valuations just because we’re at all-time highs.

There’s no telling how much longer this run can last. I encourage you not to focus on timing the market, but rather on identifying great companies. If you commit to this approach with a long-term mindset, you can always cost-average down if you get the timing wrong.

My message is the same in bull markets, bear markets, and sideways markets: do your own research, identify great companies, and stay invested.

Until next time—cheers! Main Street Investor Eric Patterson