Higher than during the Covid FOMO rally… higher than that during the 1990s tech bubble. Literally the highest its ever been in the multi-century history of the U.S. stock market.

Source: https://dqydj.com/sp-500-ps-ratio/

And not just a little more expensive, mind you. Current estimates put the number between 3.3 and 3.6 times sales. At the peak of the dot-com bubble in 2000, the ratio barely cracked 2.0.

The numbers aren’t quite as extreme for the price/earnings ratio, but they’re close enough. Most estimates put the S&P 500 P/E ratio around 26-30. At the peak of the dot-com bubble, the ratio was around 34.

The Shiller P/E, also known as the cyclically-adjusted price/earnings ratio (CAPE)?

At 40.4, it’s closing in on the all-time high of 43 set back in 2000.

The “Buffett Indicator,” Tobin’s Q, the forward P/E…

Pick literally any common valuation metric and they’ll tell you the same thing. This market is historically expensive.

Yes, the AI revolution is real. And yes, it’s making an ungodly amount of money for the companies selling and building out the infrastructure.

But then, the war in Iran and the ongoing energy crisis is also very real, as is the ballooning national debt, the security risks posed by quantum computing, and the fact that most Americans are living hand to mouth after five years of brutal inflation.

So…

Back to the question I asked in the headline: Who’s buying this rally, continuing to bid prices up?

It appears it’s the companies themselves. Through the end of April, Corporate America had announced plans for $665 billion in new buybacks this year. They’re on pace to top $1.55 trillion by the end of the year, setting a new record.

Apple (AAPL) alone has pledged to buy back $100 billion of its own stock. Even just a couple years ago, $100 billion would have represented the entire market cap of a major American company. Today, that’s just the value of the shares Apple plans to buy and retire.

Here’s Where it Gets Weird

But here’s where it gets weird…

The “usual suspects” aren’t the ones buying. Per Bloomberg,

While tech and communication services represent more than 45% of the S&P 500 by market cap, they were responsible for only 38% of share repurchases, based on the latest completed execution data as of late December. In the meantime, cyclical stocks in the energy, financials, industrials and materials sectors accounted for 44% of the dollar value of buybacks, despite making up only about a quarter of the index.

Tech stocks have been juicing their earnings with buybacks for decades. And it made sense… they were cash cows that generated far more cash flow than they needed to fund growth projects.

That’s different today. All of the major players in tech (minus Apple) are plowing every spare dollar they have into AI infrastructure. So the center of buyback activity has shifted to the Old Economy.

Why Does This Matter?

Buybacks are one of those topics that tends to ruffle feathers. On paper, they look great! Like dividends, they give companies a way to reward their long-term owners. But they’re vastly more tax efficient than dividends. Qualified dividends are generally taxed at 15-20% for the investor.

Buybacks generate zero taxes for the investor (unless they sell their shares, in which case they’d owe capital gains taxes). Corporations pay a nominal 1% excise tax on their buybacks.

Buybacks also give companies flexibility. They can turn them on or off as cash flows allow without upsetting their investors, whereas cutting dividends tends to be jarring for the “widows and orphans” who depended on the quarterly checks.

So… what’s the problem with Corporate America going in big with buybacks?

It turns out their timing is terrible. Companies tend to buy their shares when they are expensive… and then sell them (or seek other financing) when they are cheap. And the buybacks often come at the expense of needed investment and leave the companies dangerously exposed.

Throwing out a few examples…

Between 2013 and 2019, Boeing spent $43 billion on buybacks — 104% of its profits over that period — rather than addressing design flaws in its jet models. That went about as well as you might expect.

Those buybacks drove Boeing’s net equity negative — the share repurchases had literally destroyed the equity on its balance sheet. When the 737 MAX crisis hit and COVID followed, Boeing had to scramble to borrow $10 billion or more just to stay liquid, money that had already been handed to shareholders at elevated prices.

Boeing’s customers were serial offenders too…

The big four U.S. airlines — Delta, United, American, and Southwest — spent a combined $43.7 billion on share buybacks between 2012 and 2019, then turned around and sought a $50 billion federal bailout when COVID hit, having left themselves with minimal cash cushion. They bought their own shares at elevated prices throughout the long bull market, then needed taxpayer money to survive the first serious downturn.

Perhaps the worst case was General Electric. General Electric is a shell of what it once was due in no small part to excessive buybacks.

In the ten years leading up to 2017, GE spent $53.9 billion to repurchase 2.07 billion shares at an average price of $26. By mid-2019, GE’s stock had fallen to $8.38 — meaning the company could have bought back those same shares for roughly $17.4 billion, one-third the cost. Investigative accountant Albert Meyer called it “destruction of capital”: $36.5 billion in shareholder wealth vaporized, a sum equivalent to half of GE’s entire market capitalization at the time.

The worst single year was 2016. Under CEO Jeff Immelt, GE spent $21.4 billion repurchasing shares at an average price of $30.30 — more than double what they’d trade for just two years later.

Much of the capital for these buybacks came not from operating earnings but from asset sales — most notably the $20.4 billion Synchrony Financial spin-off in 2015. GE essentially liquidated parts of its franchise to buy back stock at peak prices, then made two enormous industrial acquisitions — Alstom in 2015 and Baker Hughes in 2017 — that proved poorly timed as energy markets deteriorated. By late 2017, the bill came due: GE slashed its dividend by 50% and began the long dismemberment that would eventually end with the conglomerate splitting into three separate companies by 2024.

Now What?

Excessive buybacks don’t necessarily mean that a market top is imminent. But it does raise questions about the quality of the buying. At the first hint of a slowdown, buybacks tend to dry up.

I’m not recommending you sell everything and hide under a rock. It’s far too early for that.

But you should be careful. Make sure you’re regularly rebalancing your portfolio to trim back appreciated stock. And if your “normal” portfolio allocation is something in the ballpark of a 70/30 stock/bond portfolio, consider dialing back the risk a little to 60/40 or 50/50 (or whatever the equivalent would be for you given your current allocation).

We’re in the late stages of a bubble. There’s still potentially a lot of money to be made, and we want to participate in that, but we do not want to be betting the farm here.

So, again…

Stay invested. But check your overall risk level and be sure that you’re regularly rebalancing.

If that’s something you’d like a little help with, please contact my office. That’s something I do for prospective clients free of charge.

Charles Lewis Sizemore, CFA

If you’ve read me for any time at all, you know I’m a believer in keeping at least a little bit of your net worth in gold and ideally in physical form.

If owning coins or bars of gold is impractical (or if you invest primarily via an IRA), then a low-cost gold ETF like the SPDR Gold MiniShares (GLDM) is a solid option.

This is not ideological or politic…

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For all the talk of decarbonizing the economy over the past 20 years, it’s shocking how rarely nuclear energy was brought up as a zero-emission alternative. Solar and wind, while useful additions, were never viable for base load power. It was absurd to ever pretend otherwise.

Thankfully, that has changed. The U.S. government has accepted reality and aggressively pushed into nuclear energy, pledging to increase nuclear output by 300%.

The impetus for this was the massive power needs of AI.

Frankly, I’m not convinced AI is going to be quite as big of an energy hog as advertised. In every case I can remember, technology has always gotten more energy efficient over time. I don’t know why AI would automatically be different. Somewhere there’s a brilliant engineer out there figuring out how to train and run AI on the cheap. When the incentive exists, competitive capitalism has a way of delivering the goods.

But here’s the thing.

Even if the AI capital spending bubble bursts — and I expect that it will — the nuclear buildout will continue. America was thirsty for energy long before AI because a buzzword. And the plans in place can’t be turned on a dime.

But let’s say I’m wrong about that. Let’s say the AI bubble bursts and all new nuclear energy development grinds to a halt. Well, we’re still looking at fantastic conditions for a durable bull market in uranium. Our existing nuclear energy is already using more uranium than is being mined… and these deficit conditions have been in place for 13 years and counting.

I would go into detail but, frankly, Daniel Doge has already done a better job than I ever could of explaining the factors likely to push uranium prices hundreds of percent higher from here.

You can read his full analysis here, and I strongly recommend you do, as Daniel does excellent work. But I have included a lengthy excerpt below, edited slightly for brevity.

Be sure to read through to the end because I offer a few recommendations on how to play this bull market.

The Last Time This Happened, Uranium Jumped 20X

By Daniel Doge

Uranium has been in a structural supply deficit for thirteen consecutive years.

For thirteen straight years, the world’s nuclear power plants have consumed more uranium than miners have pulled out of the ground.

And during that time, utilities, the people who actually need this fuel to keep the lights on, have only contracted for about 45% of their annual consumption.

They’ve been kicking the can down the road. Drawing down inventories. Assuming someone else will solve the problem.

Grant Isaac, President of Cameco, one of the world’s largest uranium producers, put it bluntly at a recent conference:

“If we had all our fuel buyers in one room, the reality is not a single one of them doubts this gap. They all understand that the uranium price needs to go up. Just 100% of them believe it’s somebody else’s problem.”

Every single buyer knows the price has to rise. Every single one thinks they won’t be the one caught holding the bill.

That’s a game of musical chairs. And the music is slowing down.

The Demand Tsunami

Six years ago, the World Nuclear Association estimated that global reactors would need about 260 million pounds of uranium annually by 2040.

In 2023, they revised that number to 328 million pounds. Their latest estimate? 390 million pounds.

A 50% increase in projected demand in six years. And what’s driving this demand is real policy commitments from the world’s largest economies:

• The U.S. aims to begin construction of at least eight large reactors by 2030 and quadruple nuclear capacity by 2050.

• China is targeting 400 GW of nuclear capacity by 2060 — 26 reactors under construction, 42 more planned.

• Japan is restarting reactors and targeting 20–22% of energy from nuclear by 2030.

• South Korea reversed its nuclear phase-out entirely.

• The UK is planning 16 GW of new capacity.

We’re witnessing a global policy stampede toward nuclear power driven by AI’s insatiable appetite for electricity, the need for energy security, and the reality that you cannot decarbonize a modern economy without nuclear baseload power.

Every single one of those reactors needs uranium to run. And the supply side? It’s a mess.

The Supply Side Is Broken

Global uranium production last year came in around 165 million pounds.

Annual demand from the existing reactor fleet, before any new builds come online, runs between 190 and 200 million pounds.

That’s a deficit of 25 to 35 million pounds per year, right now, today.

And it’s getting worse.

Kazakhstan has supplied roughly 40% of the world’s uranium for years. Now its largest mines are nearing peak output.

Niger, historically an important supplier to Europe, saw its elected government overthrown by a military junta in 2023. The junta seized control of the country’s main uranium mine. Last year, production was zero.

In Canada, the McArthur River mine lowered its 2025 output due to development delays. In the U.S., in-situ recovery mines have resumed operations but are running behind schedule.

Only two large-scale mines could come online in the next few years… Denison’s Wheeler River and NexGen’s Arrow deposit.

Wheeler River just got its final permit, but won’t produce before mid-2028.

Arrow, the highest-grade uranium deposit on the planet, is still in permitting and might not start until 2031 or 2032.

Meanwhile, the cumulative production deficit through 2040 is estimated at 1.125 billion pounds.

During the last uranium bull market, the price ran from $7 to $137 per pound, roughly $200 in today’s dollars.

And that was without a structural supply deficit. The price spiked purely on fear of a shortage after a major mine flooded.

Today, the deficit is real. The demand acceleration is real. The supply constraints are real.

Why This Is a National Security Problem

The U.S. government issued a Section 232 proclamation on critical minerals, specifically naming uranium as a national security vulnerability.

The numbers should keep policymakers up at night.

America currently produces less than one million pounds of uranium per year, against a domestic need of roughly 50 million pounds. Half of our supply comes from Russia, Uzbekistan, and Kazakhstan.

If the U.S. follows through on its plan to quadruple nuclear capacity, it would need to increase uranium enrichment capacity twelvefold, assuming all fuel is domestically sourced.

Jean-Luc Palayer, CEO of Orano USA, flagged that number. Twelvefold. In an industry where it takes a decade to permit and build a single mine.

The Section 232 proclamation directs the U.S. to negotiate with trading partners and consider remedies such as price floors and trade restrictions.

The Department of Energy has already committed $2.7 billion to strengthen domestic uranium-enrichment services over the next decade.

As it stands, this is a structural repricing that could take years to fully play out.

The last time fundamentals were even remotely this tight, and they weren’t nearly this tight, uranium went from $7 to $137.

Charles here again…

So, are we looking at another 20X move in uranium prices?

I won’t hazard a guess on that. I don’t make a habit of making precise price forecasts because there are always too many variables to consider.

But I will say this…

I do believe that the conditions are in place for a major bull run in both the price of uranium and in the shares of the companies that mine it. Some of these companies aren’t particularly easy to invest in. I’m sure Kazakhstan is a lovely country, but I don’t particularly like the idea of buying stock there.

There are a small handful of American ETFs that offer exposure to uranium. Let me share my favorite one with you now.

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This is geeking out. It’s allowing our minds to wander for a moment.

Don’t dismiss it

We’re already watching science fiction become closer to reality with every passing day. Even 10 years ago, driverless cars felt lik…

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Today, we celebrate the 45 fine, upstanding gentlemen who have led us over the past quarter millennium of our existence as a (mostly) free country.

It’s no easy feat to spend us close to $40 trillion into debt… write an estimated 270,000 pages of regulations… and bluff and bluster our way into 123 military conflicts… only five of whi…

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18 months ago, I was convinced Google was doomed. Their entire business model revolved around search advertising… and then this little upstart called ChatGPT made traditional internet search obsolete.

But then a funny thing happened. Google quietly became the leading name in AI… and is now positioned at the fro…

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For those uninitiated in AI-speak, artificial general intelligence (AGI) is the point where AI can effectively replace a human. Rather than doing one-off tasks at a command prompt, an AGI agent can think across disciplines, transferring knowledge from one domain to another and actua…

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But for younger and working class Americans, it’s a very different story. Incomes haven’t kept up with inflation, and high pric…

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The margins were a rather unimpressive 14%. Oracle’s legacy software and services businesses generate margins of around 70%.

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The hyperscalers — Microsoft (MSFT), Meta (META), Alphabet (GOOGL) and Amazon (AMZN) — are transforming from uber profitable software companies into something more resembling lumbering public utilities or oil majors.

Well, it seems that Wu isn’t the only person beating that drum today.

Per Bloomberg,

For two decades, the playbook for Big Tech was simple and successful: Create disruptive innovations, deliver blinding growth rates and keep a lid on spending.

A handful of behemoths like Alphabet, Amazon, Meta Platforms and Microsoft used this formula to seize market share from legacy businesses and power the US stock market to record after record. Now, a key part of the program — the relatively small amount of capital required to generate those huge profits — is increasingly under threat from the race to develop artificial intelligence.

“They’re some of the best business models the market has ever seen,” said Jim Morrow at Callodine Capital Management. “Now you’ve seen this explosion in capital intensity to the point where it’s now the most capital intensive sector in the market. That’s just a radical change.”

Microsoft is — or at least was! — a software company. And yet today, the company’s capital spending as a percentage of sales is more than double that of ExxonMobil (XOM), traditionally one of the asset-heaviest companies in the world.

Extracting, refining and transporting oil and gas is incredible capital intensive. Think about the massive amount of infrastructure needed for that undertaking.

And yet Microsoft spends more than double what Exxon does in capital spending relative to its sales.

That’s neither “bad” nor “good.”

Some companies require a lot of property, plant and equipment… others don’t.

But here’s the thing.

Software companies trade at premium valuations precisely because they are capital light.

Microsoft trades at a P/E ratio of 34, or exactly double that of Exxon. Does a premium like that still make sense in a world where Microsoft is a more expensive and cumbersome business to operate… and one in which brutal competition from Amazon, Google and others will likely put pressure on margins?

Learning the Wrong Lessons from 1999

I remember the 1990s dot-com bubble.

It was fun!

Right up until it wasn’t.

But what strikes me today is how poorly most investors remember that period. We remember the absurd excesses… profitless companies with no viable business model priced based on “eyeballs” rather that profits… and that obnoxious Pets.com sock puppet that made it to the Super Bowl.

But what they forget is the massively inflated prices of legitimate and highly profitable businesses.

Intel (INTC) may be a joke today, but it was the Nvidia (NVDA) of the 1990s and 2000s. It supplied the critical hardware that made the PC and internet revolution possible.

It was a fantastic company that regularly generated returns on equity in the 30% to 40% range.

It didn’t matter. When demand couldn’t keep up with the unrealistic expectations built into stock prices, the stock cratered by more than 80% and, 25 years later, is still below its old dot-com-era highs.

So when you hear a glassy-eyed tech pollyanna saying that it’s different this time because AI stocks are actually profitable…

It’s not different this time.

Code Red for ChatGPT

I can’t tell you what will be the eventually straw that breaks the camel’s back and causes the bubble to implode. It could be any of an infinite number of things.

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Centuries before the letters “AI” started popping up everywhere, technology was automating jobs away, just as it has been since the dawn of the Industrial Revolution.

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I’ve reproduced his letter, slightly edited for brevity.

Buffett has been a hero of mine for the past quarter century, and his wit an…

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I don’t know if this is “it.” I can’t tell you with any certainty that this recent bout of market weakness is the start of a real rotation out of hypergrowth AI stocks and into more tangible “old economy” stocks.

And I’m even less confident that this is the start of a broader bear market. By this time tomorrow, it’s entirely possible that investors rediscover their animal spirits and send tech stocks to new all-time highs.

But the market narrative today — that tech stocks are expensive and that investors are overpaying for growth that may or may not ever materialize — is spot on. It’s a rare moment of relative sobriety in a market where investors have had zero appreciation for risk.

Japanese investment firm SoftBank — which is about as close to a pure tech permabull as you’re ever going to find — really set the mood this morning when it announced it has liquidated its entire position in Nvidia (NVDA).

SoftBank founder Masayoshi isn’t bearish, per se. He claims to be freeing up cash to fund other AI projects. But it’s still the sort of headline that gets your attention. If one of tech’s biggest permabulls is finding better opportunities elsewhere… maybe the Nvidia AI trade has run its course.

Meanwhile, Palantir (PLTR) posted its 21st straight revenue beat last week with 63% year-over-year growth and raised its full-year guidance. Yet that wasn’t enough to send the shares higher. To be fair to Palantir, I don’t know that any company in history could have lived up to the expectations implied by a price earnings ratio that was over 500 at the time.

High valuations alone don’t cause a bear market. But they do make a potential bear market far more painful.

So with that said, let’s take a look at what has Wall Street spooked, starting with the biggest AI stocks.

Really stop and marvel at the valuations before you. As recently as last week. Nvidia has a market cap of over $5 trillion. Even at its current $4.7 trillion, that’s larger than the entire entire economy of every country in the world except the U.S., China and Germany. And it’s within spitting distance of Germany.

Nvidia by itself is 15% the size of the entire U.S. economy. Throw in Apple (AAPL) and Microsoft (MSFT), and the three together are more than 40% the size of the U.S. economy.

Yes, all of these companies are phenomenal success stories and some of the most innovative companies in the history of American capitalism. But does it really make sense for Apple to trade at 10 times sales when its last major product innovation was the iPhone… back in 2007?

What would Tesla (TSLA) need to grow into in order to justify a price/earnings ratio of 291?

These numbers simply don’t make sense. Even if the wildest AI profit scenarios come to pass, it’s hard to see a lot of continued upside with prices at these levels.

Of course, the S&P 500 has 491 more stocks. How does pricing look for the index as a whole?

Not great.

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Remember, remember, the 5th of November,
Gunpowder, treason and plot.
I see no reason
Why gunpowder treason
Should ever be forgot.
Guy Fawkes, Guy Fawkes, ‘twas his intent
To blow up the King and the Parliament
Three score barrels of powder below
Poor old England to overthrow
By God’s providence he was catch’d
With a dark lantern and burning match
Holler boys, hol…

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We’ll be covering signs that the AI bubble is reaching its climax and explain how we’re positioning ourselves to profit from the blow-off top while al…

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We’ll be covering signs that the AI bubble is reaching its climax and explain how we’re positioning ourselves to profit from the blow-off top while …

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It seems that after the torrid run that gold has enjoyed over the past two months, a pullback was inevitable. We certainly got one Tuesday, as both gold and silver sold off aggressively. The SPDR Gold MiniShares (GLDM) was down over 6%, and the iShares Silver Trust (SLV) was down over 8%.

As for the “why,” there was no obvious catalyst. Investors seem marginally less concerned that the trade war is escalating and marginally less concerned about inflation. But the more reasonable explanation is that the precious metals markets had gotten overheated, traders decided to take profits, and the selling snowballed.

Do we still have more selling in front of us?

Maybe.

Corrections of 10% or more are perfectly normal and healthy in a durable bull market. Given the massive run in metals this year, there are no doubt plenty of short-term traders looking to take their profits and cash out.

I expect that the longer-term bull market is very much intact, however, because nothing has fundamentally changed. The Federal Reserve didn’t suddenly wake up and discover a backbone. They’ve already begun slashing rates, making it abundantly clear that they don’t take their mandate to keep inflation in check seriously.

Congress and the White House didn’t suddenly discover the importance of fiscal rectitude. Last I checked we were still $37 trillion in debt and adding a good $1.7 trillion to that total this year. And unless I missed something, the trade war is still giving the rest of the world every incentive to ditch dollars and replace them with literally anything else.

I’d also add that most of the buying to this point has been driven by central banks. We still have yet to see widespread buying by regular mom and pop investors.

Ask yourself: How many people do you know that have been buying gold? I do this professionally and even I can only name a handful.

So, until I see compelling evidence to the contrary, my assumption is that the bull market in gold is still in effect.

Great!

What do we do about it?

We’re maintaining our permanent position in gold via GLDM. We’re up 103% since I first recommended it back in December 2023, and I believe we’ll probably see another 100% or more in returns before this bull market runs its course.

If your gold position has become outsized relative to the rest of your portfolio, by all means rebalance and sell it back down to target. As I wrote last week,

As much as I like gold in this environment, we should remember that the barbarous relic can be wildly volatile. In a “normal” base case scenario, I’d argue that keeping 5% to 10% of your portfolio in gold and precious metals is a reasonable allocation. I think it makes sense to go a little higher than that today, but I probably wouldn’t recommend more than 15%. That’s aggressive but not unreasonable, particularly if the rest of your portfolio is fairly conservative.

Time to Take Profits On Speculative Metals Plays

GLDM is a permanent position, but our positions in silver and gold miners are not. These were always designed to be more speculative, and they’ve done fantastically well for us. Even after Tuesday’s blow-up, we’re up 101% in Agnico Eagle Mines (AEM) in a little over a year. We’re also up 29% in Royal Gold (RGLD) and 55% in the iShares Silver Trust (SLV).

Unfortunately, we’ve hit our stop losses, so it’s time for us to move on.

Actions to take:

Sell your shares of Agnico Eagle Mines (AEM)

Sell your shares of Royal Gold (RGLD)

Sell your shares of iShares Silver Trust (SLV)

Before I sign off, let’s talk about the broader market.

I’ve made no secret of my belief that stocks are in a bubble and that I believe it will end badly. To quote Alan Greenspan, Fed chair throughout the go-go years of the 1990s, the market is “irrationally exuberant.” Valuations cannot be justified at current levels. It is absurd that Palantir (PLTR), a stock with a $400 billion market cap, trades at a P/E ratio of 585. There’s no reality in which that makes sense.

But I also know that bull markets don’t end because stocks are expensive. Valuation alone won’t do it. There needs to be a catalyst, such as a recession or a collapse in earnings.

We’re not there yet.

We may get there soon. For all we know, some unknown catalyst could hit tomorrow. But for now, we should maintain our exposure to stocks.

That’s going to wrap it up for today. Note that I have included the model portfolio below for paid subscribers.

To good investing,

Charles Sizemore

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And then I saw this come across my screen this morning:

On second thought, maybe they do ring a bell at the top.

This isn’t an internet spoof. It’s real.

I’m a big believer in allowing people to take risks and to enjoy the payoff (or suffer the loss), s…

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“I’m not a gold buyer — it costs 4% to own it. It could easily go to $5,000, $10,000 in environments like this. This is one of the few times in my life it’s semi-rational to have some in your portfolio.”

Jamie Dimon, CEO of JPMorgan Chase

Jamie Dimon touting gold?

The cynic might assume that JPMorgan was launching a gold fund to get in on the action. Or…

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