Brian Rapose
Brian Rapose
Spain
2mo
πŸ“°π™‹π™€π™§π™©π™›π™€π™‘π™žπ™€ π™ͺπ™₯π™™π™–π™©π™šπŸ“° On Friday I closed my short positions on the S&P 500 and QQQ. Unfortunately, those trades didn't play out as expected. Despite higher interest rates, persistent inflation and elevated oil prices, the market has continued to push higher. At some point these factors are likely to cause the market to pause or pull back. However, in the short term, the trend remains firmly upward. With those positions now closed, I'm happy to step aside and wait for the next high-conviction opportunity rather than force a trade. One area that continues to catch my attention is software. The sector is starting to show renewed strength, highlighted by ServiceNow's strong move on Friday. I expect this trend to continue into the third quarter as investors increasingly focus on companies that can monetise AI rather than simply build the infrastructure behind it. While markets also look ahead to the anticipated SpaceX IPO, another metric has been grabbing my attention. The Shiller CAPE ratio, developed by economist Robert Shiller, has now moved above 42x. Historically, that level has only been seen once before during the dot-com bubble. This isn't a timing indicator and it certainly isn't a sell signal. Markets can remain expensive for much longer than most investors expect. However, it does suggest that future returns are becoming increasingly dependent on earnings growth continuing to justify current valuations. What makes the current environment particularly interesting is what is happening beneath the surface. Nvidia has delivered exceptional earnings, yet the stock has struggled to build on the news. When market leaders stop responding positively to strong results, it can be a sign that investors are becoming more selective. The question is no longer whether AI will transform industries. The question is whether current valuations already reflect much of that future potential. At the same time, software stocks are beginning to outperform. Companies with established customer bases, recurring revenue and strong margins may ultimately become some of the biggest beneficiaries of AI adoption. The market appears to be shifting its focus from the companies building the tools to the companies generating profits from them. I'm also paying close attention to the economics of AI itself. As adoption accelerates, businesses are starting to understand the true costs associated with large-scale deployment. If those costs continue to rise, investors may place greater emphasis on companies that can demonstrate measurable returns rather than simply spending heavily on AI initiatives. For now, the broader market trend remains constructive. Major indices continue to make higher highs and higher lows, market breadth remains healthy, and liquidity conditions remain supportive. While valuations are undeniably stretched, price action remains the final arbiter. Until the trend changes, I see little reason to fight it. For now, I'm focusing on sectors showing relative strength and waiting patiently for the next opportunity.
Not investment advice. The author may have financial interests in the mentioned instruments.
null
.