Markets are at all-time highs but warning signs are emerging

Market Overview & Strategy - Investors are seemingly overlooking tariffs, focusing on earnings and the Federal Reserve, though potential risks remain [1][2] - The economy shows signs of weakening, with less than 50% of industries hiring in the past 3 months and consumer spending growth slowing [5][6] - The S&P 500's valuation at 245 times trailing 12-month earnings and 23 times forward 12-month earnings, with an expected 7% growth, appears optimistic [8] - Investors should broaden horizons, considering small-cap stocks, which are at their second-lowest valuation relative to large-cap stocks in 31 years [9] - International stocks are up around 20% year-to-date and are expected to continue performing well, potentially boosted by a weaker dollar [10] Small Cap & Interest Rates - Small-cap stocks present opportunities, especially with deregulation and lower tax rates potentially stimulating growth [9][13] - While historically lower rates reset the cycle for small caps, companies are adapting to current rates [12][13] - Investors with a time horizon beyond the next three minutes should consider small-cap stocks for the next 3-7 years, anticipating a cycle of different market leadership [15] Earnings Season & Forward Guidance - Forward guidance is crucial for investors to assess the impact of tariffs on individual companies [16] - Investors should pay attention to what they are paying for earnings revisions, as some large-cap stocks outside of technology trade at 40-60 times forward earnings [17] - A return to basics is advised, focusing on a margin of safety, valuation, and macroeconomic headwinds that may favor international and small/mid-cap stocks [18] Market Pullback & Investor Behavior - Historically, after reaching market peaks, the market continues to rise over 12-18 months, averaging 26%, but with drawdowns of 7% and 12-15% [20][21] - Long-term investors are advised to stay the course, while active investors should add optionality to their portfolios, considering low valuation stocks or hedging strategies using options [23][24] - A market dip is expected to be bought by retail investors, consistent with post-2020 behavior [27][28] AI & Tariff Impact - Structural AI leaders continue to be attractive, with adoption occurring across industries for both cost-cutting and revenue enhancement [33] - The market's shrug in response to recent tariff letters may be premature, given the potential for deals to be struck before August 1st [36][37]