“Talent hits a target no one else can hit. Genius hits a target no one else can see." – Philosopher Arthur Schopenhauer
Note that the contents of this memo are all my thoughts, and not the views of RBC Dominion Securities. As well, no part of this content was AI-assisted or created.
You can also now listen to this month’s abbreviated podcast version HERE.
Friends & Partners,
We are supposed to be in the dog days of summer – even though I’m writing this month’s Partner Memo from the cottage at 5am watching the sun rise, things don’t feel as quiet out there as one would hope for this time of year! The headlines are never-ending – tariffs, geopolitics, broader macro and geopolitical uncertainty, meme stock fervour once again, markets at all time highs that keep chugging higher…
I will hit the send button on this early on August 1st, and a lot can change in a few hours it seems. Aug 1 is the formal ‘tariff deadline’ set by Trump – and While Trump has stated no further extensions will be granted, the administration has so far shown a reluctance to follow through on policies that have generated ‘adverse’ market reactions…
A major concern these days for most of us is information overload. We have too much evidence on any topic we choose, to the point you can find convincing reasons to believe pretty much anything. Then confirmation bias takes over, and people feel sure whatever they want to happen is going to happen. But the worst part may be that those who desire a certain outcome tend to cluster together, convincing each other this thing they want will occur. But our views and desires don’t define the future.
This is where we separate the signal from the noise, and it’s becoming increasingly more difficult to do. The right approach is simple but difficult: to admit that we don’t know the future. Recognize the many possibilities is key, including the possibility that you don’t know what you don’t know. Then examine all the scenarios, and assign probabilities to each one, and assess accordingly, including the ability to adapt if things change. This is having process and analysis, which is easier said than done well, especially in these times of short attention spans and decision making.
So, what’s going on in markets anyway? They continue to truck higher almost daily it seems.
In effect, the market has taken a “show me” stance to all of the potential negatives still lurking in the macroeconomic periphery.
It’s entirely possible that tariffs, which are going to be much larger than expected regardless of where they settle, may create an inflation spike (and there’s evidence that’s starting to happen already). But the market’s view of that is “so, show me.”
Similarly, it’s entirely possible that tariffs and policy whiplash, which are worse than most expected, could combine with still-higher interest rates to slow economic growth (and there’s some evidence that’s starting to happen already). But again, the market’s view of this risk is “so, show me.”
On tariffs, Trump and the administration appear serious about maintaining high tariffs on trading partners (including a potential 15% tariff on EU, which was float-ed on Friday) and tariffs at currently stated levels would not be good for U.S. or global growth. But the market’s view of this risk is “so, show me.”
Admittedly, while economic growth has moderated from levels at the start of 2025, it has stabilized over the past few months and, so far, neither tariff threats nor policy uncertainty are causing a material downgrade in economic growth. But we may not have felt the effects of the negative noise out there quite yet either. Economic resilience so far is not an “all clear” on recession risks (even through stocks are acting as though they are).
The bottom line is that the facts on the ground have remained positive (so far): better-than-expected economic growth, stronger-than-expected earnings, relatively stable inflation, and anticipation of lower interest rates. Those positives have helped investors ignore risks looming on the periphery and adopt this “show me” attitude towards them, and that is why stocks are at highs.
But this “show me” attitude is also reaching historical extremes. The S&P 500 is trading more than 23x 2025 EPS of $265 and more than 21x 2026 EPS of $298. Those are historically very high and unsustainable valuations, and if we think about them in the context of the greatest shake up to the global trading system in nearly 50 years, it seems quite rich.
It has also bred a sense of complacency in investors. It is entirely possible that these elevated tariff rates don’t cause inflation or slow growth, but it’s very uncertain and the aggressive nature with which markets have assumed it won’t happen should give us some pause as long-term investors. Some investors have taken speculating to a new level – JP Morgan notes that “the latest bout of extreme crowding — currently in the 100th percentile — is in high-beta stocks. And this spans both riskier low value alongside speculative growth plays”:
Another thing being overlooked in this complacency I find is the fact that 10 companies now account for ~40% of the US stock index, and that tech and tech-adjacent companies now comprise over 50% of the index! The inverse reality of this is that “defensives” have historically been 30-40% of the S&P 500 and are now sitting at barely 15%. So, not only is the “risk on” much higher than has historically been the case, but the “stabilizers” of the index are not what they once were in that index.
Having implemented some defense, ‘defensive growth’, and some ‘hedges’ has served our clients very well this year, and remains the name of the game in my view. We want to protect capital first and foremost, achieve decent returns with lower risk, and smooth the ride so our clients can sleep at night, preserve capital and meet their goals at the end of the day. A smoother ride in life is worth the effort – we are emotional animals, and we feel losses more than gains – so let’s minimize those on the ride.
Other Interesting Things To Highlight
I am proud to again be the presenting sponsor of the second annual Escarpment Corridor Alliance Annual Summit, taking place at Osler Bluff Ski Club on October 24th. This is a very important concern, and the Summit highlights a day of learning about Nature Corridors, how they are necessary for the longevity of the Niagara Escarpment of South Georgian Bay, its people and the economy that sustains it all. Purchase your ticket HERE
My Friend’s House provides shelter, crisis support and advocates for equity for women and children in the South Georgian Bay area experiencing gender-based violence and abuse. In 2024/25, 42 women and 27 children accessed the shelter, they received 3894 crisis calls (1468 information and support calls), 119 women accessed transitional support, and 83 children and Youth accessed individual and group counselling. This is an important initiative for the community.
I am proud to be the presenting sponsor for My Friend’s House and their events in 2025, and they are hosting a wonderful evening of art & entertainment Saturday, September 20th at Side Launch Brewery in Collingwood. The inaugural HeART of Red Gala will showcase artists and their work from all different mediums in an effort to raise much needed funds for the Southern Georgian Bay women's shelter. Get your tickets HERE
Reasons to Worry: Complacency, Speculation & Valuations*
Investor complacency towards a myriad of risks out there, combined with rather aggressive behaviour in the markets is an ugly combination in today’s environment.
As an example of aggressive behaviour, it is notable that meme stock trading has taken off again, and many are doing it on leverage. NYSE margin debt increased 18.5% over the two months ended June 30, as investors utilize broker leverage to by equities. This is the fastest rate of investors re-leveraging to buy US equities since late 1999 and mid-2007. And we know how those periods ended.
And note this one: the Goldman Sachs Non-Profitable Tech Index is up over 60% from the April lows. I like to call unprofitable tech “crap.” There is a Ponzi-like element to it—you buy it for the hope of higher prices, not for the cash flows.
Along with equity valuations making new highs, so has equity speculation. “The latest bout of extreme crowding — currently in the 100th percentile — is in high-beta stocks. And this spans both riskier low value alongside speculative growth plays,” notes JP Morgan:
Despite market optimism, not all is good under the hood. Using data from Equifax, Ned Davis Research highlights that credit cards, student loans, and auto loan delinquency rates in the U.S have climbed above 12%, 7.5%, and 5% respectively. In other words, we are potentially entering a credit delinquency cycle at a time when credit spreads (the yield compensation demanded by investors for the risk of default) remains near record tights.
Valuations are clearly at high levels (in the US), and The Financial Times notes that forward returns are challenged from here. “Just because investors have never before realised positive 10-year real returns when investing at CAPE above 37.3x, doesn’t mean they can’t. This time may be different.”
Speaking of complacency, recession expectations have dropped again, oddly enough.
Source: BofA
Company insiders don’t seem overly optimistic either, and their the economy’s ‘front line’:
Finally, here’s an interesting take on all that capital that is ‘sitting on the sidelines’, with the implication that it is ready to buy more stocks. "Many market commentators think of money market fund balances as capital that will migrate to stocks at some point (“dry powder” for a rally), but history shows this only happens when short term rates decline. With the Fed on hold for now and only expected to cut rates modestly this year (50 or maybe 75 basis points), it is hard to see this “sideline” capital getting into the game any time soon. " (Data Trek)
The Outlook From Here: Unsustainable Debt Levels and Minsky Moments?*
The outlook of potential stagflation, below-average growth and higher-than-expected inflation is a plausible scenario from here. The economic resilience we’ve seen of late could be a mirage attributable to the combination of tariff front running as a response to tariff announcement volatility and uncertainty. Many expect that the full effects of tariffs on inflation and growth will start to be seen in Q3 2025 and continue into next year – time will tell.
We do know that the threat of tariffs and uncertainty it has caused has affected corporate behaviour, and consumers as well as they’re seeing the highest tariff rates since 1911. Tariff revenue only began to rise in April and it has been steadily increasing since then. We may begin to see the preliminary effects in the July – September time frame for companies, which would then be reflected in Q3 earnings. This may be the reason why the economy appears to be resilient so far – again, time will tell here, but we’ll know shortly.
The reality is tariffs are not going away as they are needed to offset the growing deficits in the US. The nonpartisan Congressional Budget Office warned that the ‘Big Beautiful Bill’ (OBBB Act) will add $3.4 trillion to U.S. deficits! This is a major issue and overhang in the US.
And that leads us back to the US debt issue, something I have written about at length over the last couple of years.
The US debt situation requires raising revenue as well as spending cuts. The US can’t simply grow their way out of this problem as they could have in the past. All of their debt options are bad, and they won’t seriously address the problem until a crisis forces them to. The crisis hasn’t come yet but it will. We are establishing the conditions for one right now.
Unfortunately we’ve grown too comfortable with uncertainty. You’ve likely heard the phrase “Minsky Moment”, which refers to the ideas of economist Hyman Minsky who studied financial crises. Minsky found crises occur when a long period of stability prevents investors from seeing risks that are, in hindsight, usually obvious.
Governments and markets and investors can be complacent longer than you can bet against them. We are in an era of complacency.
Look at this chart:
It shows the US debt, which is federal versus everything else (except banks). From 2008 forward, federal debt rose while the other categories fell or stayed flat. John Mauldin notes that they’ve slowly transferred debts that would once have stayed in private hands to the federal government’s balance sheet, or to the quasi-federal lending agencies. The various post-2008 bailout/loan guarantee/QE programs changed the way they borrow. The assorted COVID programs changed it even more. They transferred a lot of risk from the private sector to the government. They’re still accumulating unsustainable levels of debt. But they are shifting them out of the private economy to the government. This creates an illusion of solvency. Businesses and households seem to be in good shape because so much debt has left their shoulders and moved to Washington. But as taxpayers, they’re still ultimately responsible for it.
Intentionally or not, they’ve put their debt “out of sight, out of mind.” This lets them keep merrily spending and investing in ways they probably wouldn’t if they knew how much debt they really had. The federal part is someone else’s problem… complacency will continue until it doesn’t. Then we may see a Minsky Moment…
But, Remember That There Are Many Positives To Highlight As Well*
The positives have won the day so far in the last few months, even in the face of significant uncertainty. This highlights the importance of assessing all aspects of the markets objectively and implementing process around that. There are significant risks and headwinds out there, but we also have to remember that “staying on the sidelines” while you are waiting for the end of the world which could be a long way off is not a good investment strategy.
Remember that there is $7 trillion in cash on sidelines still which can serve as fuel and defense in the markets. The overall investment outlook has improved since early 2025 across a number of fronts: tariff visibility, tax and de-regulation visibility, Fed outlook (likely more dovish moving forward from here).
Economic policy uncertainty is receding, which at a high level is an overall positive without question.
Corporate earnings have been strong, and the outlook is good as well:
Don’t fear investing at new highs – it happens by definition all the time. JPM notes that “while some investors may not feel comfortable buying when markets are at new highs, history shows there is little difference between future returns following a new all-time high and future returns following any other day when the market has not registered a new high. Since 1950, the S&P 500 has delivered strong returns in the forward 1-, 3- and 5-year periods from a new all-time high. The reason is the day of an all-time high is just like any other trading day, and investors are best served by viewing them all through the same lens. Don’t let fear of all-time highs keep you on the sidelines. Rather, stay invested and diversified and maintain a long-term perspective.”
Keeping things in perspective – if we assess the equal-weighted S&P500, we’re cheaper than where we were before COVID even after having endured multiple ‘black swan’ events:
