Financial Report – mid-year outlook

Wow! Who saw this Bull Market coming?  Many said I was too optimistic when I said we should have a market up 8-10% this year, but as I write this, the S&P 500 is up 13 – 14% for the year.  Yes, I know it’s only been 8 stocks that have made this market (more on that later), with the Dow Jones up 2 ½ – 3% but the NASDAQ up close to 30% (gulp!).  So, let me say this first – yes, we are long-term bulls… but we believe the market is way ahead of itself.  And we base this on investor sentiment – when everybody is bullish, it’s time to sell… and vice versa.  Note, Chart 1 below – Bullish sentiment has gone from 27.4% 4 weeks ago to 45.2%… the highest point in the last year, and the highest since January 2022 – just before the market tanked.  Just for the record we showed in our third quarter 2022 letter that we believed the market had bottomed out due to the Bearish sentiment reaching an all-time record high of 60.9%.

Chart 1

Additionally, the Investor Intelligence Bull/Bear ratio tells us the same thing.  Note, if you have time to kill, look at all the peaks and bottoms… and what if you bought at the bottom level of 1 and sold at the 3’s and 4’s.  See Chart 2 below.

 Chart 2

Now for the longer term.  We should break this down by earnings, valuations, and the Fed (interest rates).  First are earnings.  As you can see from Chart 3 below, earnings for the S&P 500 look fairly good for the next few years.  The farther out, the better.

Chart 3

Second is valuation.  According to Chart 4 below we do look a little high.  But don’t let that fool you.  If you take out the Mega 8 stocks, the S&P 500 P/E ratio falls to 15.8 (from 16.9), far below the 25-year average.

Chart 4

Value, Mid-Cap, and Small-Cap have not participated as much (or at all) in this Bull Market so far.  From a valuation point of view Growth stocks are over-bought and Value is over-sold.  We should also explain that this is common at early states of a bull market (see Chart 5 below).

Chart 5

Once the Bull matures, the “breadth” of the market expands, and other areas do better.  It’s starting to do that right now.  In the final stages, Value will outperform Growth, and Mid-Cap will outperform Large-Cap.  Obviously, this Bull has a long way to go.

Finally, there is the Fed (and interest rates).  We have been in the camp that believes the Fed is done – or should be.  Another 0.25% hike will not make any difference to the downward trend and may start a new wave of bank failures.  The main part of our belief is that the “sticky” part of inflation is beginning to loosen up.

Chart 6

From Chart 6 above it is quite evident that the CPA (both headline and core) has been moving toward the 2-3% range – just a matter of time.  The sticky part of the core CPI inflation rate has been mostly boosted by the rent component of the CPI, which accounts for 34.6% of the total CPI and a whopping 43.5% of the core CPI.  And from the chart above, the core CPI inflation rate excluding shelter rose just 3.4% during May, down from last summer’s 7.7%.  Now here is the kicker, see Chart 7 below.  The CPI Primary Residence portion of the index is just now turning.  Late to go up and late to go down.  The Fed knows this!  But they are still talking about a tough “inflation battle.”  Here I should state that Fed watchers say “Don’t believe what the Fed says.  18 months ago, they were saying inflation was ‘transitory,’ and we may only have to raise interest rates 3 times for 0.75% total.”  WRONG!  So, in my opinion, it’s time to call “B.S.” on the Fed again.  Keeping rates high risks, a recession, (which may or may not happen – I think only a 25% chance) a deeper banking crisis, and U.S. Treasury going into deeper debt paying higher interest on an already untenable U.S. Debt.

Chart 7

So, a choppy 3rd quarter, recovering 4th Quarter and a BIG 2024.  Enjoy your summer!

If you would like to schedule a time to discuss the market and/or your account(s), please do so here: or contact me anytime at 832.200.3418 or via email at

Brian Craft, AIF
Past performance is not a guarantee of future results. Indices mentioned are unmanaged and cannot be invested into directly. Diversification and asset allocation strategies do not assure profit or protect against loss.  These are the opinions of Brian Craft and not necessarily those of Cambridge. The views expressed herein are for informational/educational purposes only and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal.

Author Brian Craft

Published August 7, 2023