• S&P 500: +10,49% 
• Nasdaq: +15,66% 
• Stoxx Europe: 5,56% 
• MSCI All Country World Index (EUR): +8,53% (The dollar fell 1.53%, the index in USD rose 9.52%).
• Global Fixed Income Index (EUR): -0,55% (The dollar fell 1.53%, the index in USD rose 0.30%).

Despite ongoing tensions in Iran and issues in the Strait of Hormuz, with oil prices exceeding $110 per barrel, optimism returned to the market thanks to renewed interest in artificial intelligence companies, strong first-quarter earnings (84% of companies beat expectations, well above average), and perhaps hopes for a lasting ceasefire.

Optimism has returned to the artificial intelligence sector with the announcement of new investments in the construction of new data centers. This image shows the investment forecast from these companies.

Source: Seeking Alpha

These announcements have triggered sharp rallies in one of the most important suppliers to data centers: semiconductors. This sector has risen by nearly 50%,[1] which has boosted the indices. Optimism is returning, but doubts remain: will they deliver on these gains? I don’t have the data to know whether they will or not, but if they fall short, the declines will be steep given the high price-to-earnings multiples.

Geopolitics

The situation in Iran is currently marked by high tension, though it is far from a full-scale open war. Following a recent phase of attacks between Iran, the United States, and Israel, the conflict has entered a sort of fragile truce, marked by diplomatic negotiations.

Despite this attempt at de-escalation, the risk of new clashes remains high. The most sensitive point continues to be the Strait of Hormuz, key to global oil trade, whose stability directly influences global markets.

In this context, the United States seeks to avoid a prolonged war and contain Iran’s nuclear program, while Israel maintains a firmer stance. For its part, Iran, though weakened, retains the capacity to respond.

In short, we are not facing an all-out war, but rather a very unstable balance, where any incident could reignite the escalation.

Europe

One of the first economic consequences of the war has been a surge in energy prices. Europe has been one of the hardest-hit regions, due to its status as a net energy importer. Although European markets showed some recovery, it was more moderate than in other regions. Against this backdrop, the European economy barely managed to grow in the first quarter, as the conflict in the Middle East has derailed a long-awaited recovery.

The latest European data offers little cause for optimism, such as consumer confidence falling by 20.6%, —the worst reading since 2022 according to the European Commission— and an April PMI[2] (Purchasing Manager Index) of 48.6, below the 50-point threshold that separates expansion from contraction. The contraction stems from both the services and manufacturing sectors, with data pointing to inflationary pressure.

This is Europe’s perennial problem: excessive regulation and an ideologically driven industrial policy that has weakened its defenses against external shocks. Instead of strengthening its domestic energy capacity, it has remained exposed to instability in external supply, such as from the Middle East or Russia. 

The weaker performance of European companies is consistent with this perspective. Companies operating in an environment of heavy regulation, high tax burdens, and energy uncertainty face greater difficulties competing with their U.S. counterparts.

Source: Bloomberg   

This chart shows the degree of energy dependence in different regions. While Europe meets nearly 60% of its needs through imports, the United States is in the opposite situation, with exports exceeding imports.

This difference is clearly reflected in the prices paid by both economies, as shown in the following charts. The gap in energy costs faced by European businesses and households is particularly significant.

Source: Bloomberg  

 Source: Bloomberg  

And it’s not just a matter of price differences, but also of greater volatility. In such an environment, how can a company plan its investments, costs, or margins with so little visibility? Competing under these conditions makes many European companies true heroes.

Therefore, in the face of any external shock, Europe reveals its fragility, and this has been demonstrated once again. There are very good companies in Europe—as good as or better than their American counterparts—but they are at the mercy of political whims.

Inflation

Yeah, I know, I’m obsessed with this topic, but how could I not be? They call it the “invisible tax” because it takes your money without you even noticing—except for a friend’s mom, who used to tell us, “I don’t care if prices go up; I’m always going to put 20 euros’ worth of gas in my car.”  

To give you an idea, central banks aim for 2% inflation—great—but with that rate of inflation, purchasing power drops by 50% over 36 years. If you want to leave your wealth to your children, it’s clear what you need to do if you want them to be able to buy the same things—and I’m not talking about luxuries. 

Is an annual inflation rate of 2% good or bad? If monetary policy is more or less stable, it can be positive, but there are economies that have maintained low inflation rates—such as Switzerland, with an average inflation rate of 0.6% this century—where the population has maintained high purchasing power compared to other countries. Someone might rightly point out that Japan has had an average inflation rate of 0.5% over the same period and hasn’t fared well. The difference lies, I believe, between sound monetary policies and excessively interventionist ones, but I didn’t want to focus on this discussion, which could be interesting for a later commentary.

On the other hand, do we really believe that current inflation is 2%?

Source: INE, Chatgpt

How is it possible that CPI-measured inflation has averaged 60% since 2000, while many essential goods and services—such as education, healthcare, food, energy, and housing—have risen far beyond that? The CPI is an average calculated from a basket of goods and services with specific weightings. Is it designed to produce a “pretty” result? Not necessarily, but it certainly falls short of the reality of the bills a family faces in their daily lives.

Does this mean the data is incorrect? No. But it does mean the indicator has significant limitations. For example, electronics, which have seen price drops or quality improvements, help keep the index in check, even though their share of household spending is small and they are not essential. In contrast, categories such as food, housing, education, and healthcare—which are far more relevant to families’ well-being—have seen much higher increases.

The result is clear: even though the CPI reflects a moderate rise, the inflation that many families actually experience is higher, especially when their wages have not grown at the same pace in real terms.

Electronics prices are falling—in other words, there is deflation. This concept has become almost taboo, as if it were inherently negative. However, its impact depends entirely on the context.

In an uncertain environment, where consumption and investment are contracting, falling prices are often a sign of weakness: companies lower prices to move their inventory, even if it means accepting lower margins or losses. This type of deflation can create a vicious cycle of reduced economic activity. Take Japan, for example.

But there is another, much healthier form of deflation: that which stems from productivity gains. When a company is able to produce more efficiently, it can lower prices without eroding its margins. In that case, falling prices are not a problem but a blessing; purchasing power increases, and money “goes further.” Take Switzerland, for example.

The risk we face today is not just a spike in inflation, but the possibility that it will coexist with low economic growth—that is, a scenario of stagflation, a word no economist wants to hear. Such situations are typically triggered by a supply shock in a context of economic weakness, often preceded by prolonged periods of excessive monetary stimulus.

Let’s hope the conflict ends soon, as we all wish. However, it’s worth noting that the problem lies not only in the war, but in the imbalances that had built up beforehand—imbalances that the conflict has merely brought to light. An environment of excessive policies and regulations, coupled with ongoing monetary stimulus, has gradually eroded the economic strength of these countries.

Given this situation, there is no choice but to keep investing so that inflation doesn’t erode your purchasing power. There will surely be volatility and there will be downturns that, at least for me, I won’t be able to predict, but I do know that if you stay invested and let the companies do their job, the rewards will come.

Following up on that last paragraph, I’d like to wrap up this post by giving you a choice between the following two options (it’s important to answer with the first thing that comes to mind):

• Receive €1 million today
• Receive €0.05 today, which doubles every day for 30 days, that is:
  • Day 1: €0.05
  • Day 2: €0.10
  • Day 3: €0.20

Before answering, here’s a hint: our brains overvalue the immediate and undervalue the long term, especially when growth isn’t linear.

This is interesting for understanding how compound interest (compound returns) works in investing. Do the math and tell me if it isn’t worth being patient with investments—provided, of course, that you choose your companies wisely.

As Warren Buffett said: “The first rule of compounding: never interrupt it.”  

For previous market reviews, click here.  

[1] Measured by the State Street SPDR S&P Semiconductor ETF

[2] This is a survey conducted among corporate purchasing managers

• S&P 500: -5,09% 
• Nasdaq: -4,89% 
• Stoxx Europe: -8% 
• MSCI All Country World Index (EUR): -5,27% – (the dollar rose by 1.15%, so the index in USD fell by 6.11%).
• Índice global de renta fija (EUR): -0,68% – (the dollar rose by 1.15%, so the index in USD fell by 1.97%).

There is some concern among investors about a potential rebound in inflation and how it may affect upcoming interest rate decisions. Since the beginning of the conflict, the most significant movements in commodities have been:

• Oil: +62%
• Gasoline: +47%
• Diesel: +44%
• Urea: +48%
• Fertilizers: +29%
• Coal: +22%     

This is not a minor move. Energy is a cross-cutting input for the entire economy, so these increases eventually filter through to overall prices.

Following multiple bombings from both sides, the current situation is one of tense calm. Trump has extended the deadline until Tuesday, April 7, for Tehran to reopen the Strait of Hormuz, while the United States, Iran, and regional mediators discuss the terms of a possible 45-day ceasefire that could lead to the end of hostilities.

Although this situation may invite optimism, this weekend President Trump has toughened his tone, threatening to destroy key Iranian infrastructure if no progress is made. For its part, Iran has rejected the ultimatum to reopen the Strait of Hormuz, stating that it will only fully resume operations once war damages are compensated. In short, calm, but very fragile and highly dependent on political decisions that are difficult to anticipate.

Consequences of higher inflation

As we mentioned in the February report, there were already signs that inflation was not fully under control and could rise again, partly due to high global deficits. The increase in gold prices can also be interpreted in this context, either as a reflection of excessive public spending or as a gradual loss of confidence in currencies. The fact is that, at the end of the month, we saw a rise in inflation expectations in the United States, something the market had not priced in for some time.

If we add to this the increase in commodity prices caused by the war, it is reasonable to think that upcoming inflation data releases may surprise to the upside. And, as is often the case, the market does not wait for confirmation—it starts adjusting in advance.

Inflation has negative consequences for both households and companies, as it reduces purchasing power. In addition, it may lead to interest rate hikes, with clear implications:

1. Household: the cost of loans and variable-rate mortgages increases.
2. Companies: financing becomes more expensive and margins are compressed.
3. Government: deficit financing becomes more expensive, although inflation benefits highly indebted governments by reducing the real burden of debt.[1]
4. Investment value: valuations decline.

This last point is especially relevant and often poorly understood.

Valuing a company through discounted cash flow (DCF) consists, in simple terms, of bringing future cash flows to present value plus a terminal value.

This is the formula:

CFi: Cash flow in year “i”. This is what the company generates through its operations.

Vn: Terminal value in year “n”. Based on the company’s long-term growth expectations, this value is calculated. “n” is subjective—it could be year five, for example[2].

K: Discount rate applied to these cash flows.

This discount rate is key in the current environment. It is subjective and depends on factors such as opportunity cost[3], expected growth, or the cost of capital, among others, depending on the perspective of the person performing the valuation.

For example, if the best available investment alternative has an expected return of 10%, or if I require a 10% return for a given investment due to its risk or duration, then k = 10%.

That said, can k change? Of course. It can increase if I perceive more risk in the investment, which reduces valuation (per the formula), as I demand higher returns. It can also change due to interest rate movements. Suppose I require a 10% return and assume a 5% spread over risk-free rates (which are at 5%). If risk-free rates rise to 7%, then k must increase accordingly. Since k is in the denominator, the company’s valuation decreases.

The war has had an immediate impact on markets, with declines in equities, as expected. However, what may be more relevant is the indirect effect via inflation and interest rates, which is more persistent and harder to reverse.

Returning to the DCF formula—and I promise this is the last headache—growth companies, particularly technology firms linked to artificial intelligence, are more affected for two reasons:

1. Their cash flows are further in the future, so a higher k has a greater negative impact on valuation.
2. They trade at demanding multiples, meaning expectations are already very high and therefore more vulnerable to disappointment.

We can see this in the chart: the light blue line (Magnificent 7) falls by 12%, the dark blue line (traditional S&P 500) falls by 4.6%, and the beige line (S&P Equal Weight) rises by 0.19%.

Source: Facset Research Systems Inc.          

This highlights concentration risk. When markets rise, it helps. But when conditions deteriorate, it becomes a vulnerability—especially in uncertain environments.

That said, although it may still be early, corporate earnings have not been significantly affected. The declines are driven more by uncertainty, as shown in the decomposition of the S&P’s performance: dividends contributed +0.28%, earnings +5.18%, and the multiple (P/E) -10.56%, which ultimately dragged the index down.

Source: Facset Research Systems Inc.                

The P/E ratio is equal to price divided by earnings. If price rises while earnings remain constant, the multiple expands, reflecting investor optimism—and vice versa. We do not know what will happen with the war, inflation, or interest rates, but many investors prefer not to wait and sell amid rising uncertainty. Higher uncertainty, lower multiples.

Private credit funds

When asked about the impact of war on financial markets, the immediate reaction is concern, risk, and uncertainty, which naturally leads many investors to sell. Beyond the human tragedy, from a financial perspective, what is more concerning is rising inflation, potential interest rate hikes, and the consequences for leveraged structures that are not immediately visible.

Some worrying news has emerged regarding private credit funds. These funds lend directly to companies and have grown significantly since 2008, partly due to tighter banking regulation. It is a less transparent market, but increasingly relevant.

Many loans are floating rate, meaning companies that borrowed when rates were low are now paying interest rates of 9–10%, leading to refinancing difficulties and rising defaults—although not always officially recognized, as they are often masked through extensions, restructurings, or PIK payments[4].        

In addition, these funds have financed small and mid-sized software companies, a sector now threatened by artificial intelligence, which may deliver similar solutions faster and at lower cost.

This creates a combination of risks: higher financing costs and declining revenues.

It is no coincidence that many investors are requesting redemptions. Some semi-liquid funds are limiting or even suspending withdrawals, while banks tighten financing conditions.

This reveals a key fragility: many funds offer liquidity while investing in illiquid assets. These mismatches only become visible in stressed environments.

This situation somewhat resembles 2008. After years of low interest rates, complex structures with questionable assets were created. When rates rose, the fragility of the system became evident.

Today’s situation is different—less leverage, more capital, simpler structures—but the underlying dynamics are similar. Key risks include opaque valuations, concentration in software/technology, and exposure to semi-liquid vehicles.

This once again reminds us of a very human tendency: repeating mistakes. In times of prosperity, greed blinds us and pushes us to take on more risk. We believe we will know when to exit, that we will stand up just before the music stops. But reality is often different.

The music always stops. The question is whether we are already seated… or still standing when it does.

For more content, click here.

[1] If I am lent 100 to repay in one year and inflation over that year has been 10%, I repay the same 100, but it is worth 10% less (a very simple example for training purposes).

[2] The terminal value is calculated as follows: Vn = (CFn / (k − g)), where k is the discount rate and g is the expected perpetual growth rate, which is usually similar to global GDP growth. No company grows above GDP indefinitely.

[3] Opportunity cost can be defined as the expected return of the best available investment alternative.

[4] Payment In Kind (PIK): the company stops paying interest in cash and instead capitalizes it by adding it to the debt. When a company is under financial stress, this provides short-term relief, but it increases overall indebtedness.

Fixed income also saw some interesting behavior. The best-performing segment was government bonds, followed by higher-quality corporate bonds, while the riskiest segment, high yield, was the worst performer. 

The main indices performed as follows:   

• S&P 500: -0.87%
• Nasdaq: -2.32%
• Stoxx Europe: +3.74%
• MSCI All Country World Index (EUR): +1.73%
  (The dollar rose 0.33%, so the index in USD rose 1.20%).
• Global fixed income index (EUR): +1.88%
  (The dollar rose 0.33%, so the index in USD advanced 1.41%).

Since the beginning of the year, the sectors that have risen the most are Energy (24.41%) and Materials (17.63%), while the sectors that have lagged behind the most are Financials (-6.34%) and Information Technology (-6.34%).

This raises an interesting question: are we facing a change in the sectoral cycle in which optimism surrounding the technology sector, and especially artificial intelligence, is beginning to moderate?

I don’t know for sure, but if history teaches us anything, it is that, as psychoanalyst Theodor Reik said, “history does not repeat itself, but it often rhymes.” I always insist that this comment is not a manifesto against artificial intelligence. What we are trying to analyze is whether these valuations reflect a reasonably achievable future or whether, on the contrary, they may be incorporating excessive optimism. In times of greater uncertainty, the market demands a higher risk premium, and that usually translates into greater volatility or declines.

The risk of concentration in the S&P 500

One of the most striking aspects of the current market is the historic level of concentration in the S&P 500 index, as shown in this image of the evolution of the weight of the top 10 companies since 1990. Today, the 10 largest companies represent approximately 40% of the index, while the other 490 companies represent the remaining 60%.

Source: RBC Wealth Management, Factset.

As I said before, let’s see what happened in similar situations when there was a similar risk of concentration.

Remembering the internet bubble at the beginning of the century.

Before the tech bubble burst in the early 2000s, the ten largest companies in the S&P 500 accounted for around 23% of the index, far from the current 38%. These 10 companies were:

• Microsoft
• General Electric
• Cisco Systems
• Wal-Mart Stores
• Exxon Mobil
• Intel Corp
• Lucent Technologies
• IBM
• Citigroup
• America Online

The internet had just been born, and a very powerful narrative was generated around this new technological paradigm, which sparked strong optimism. Six of these companies were included in the technology sector. This graph shows the Nasdaq technology index (light blue line) compared to the S&P (dark blue line) up to March 2000. Looking at this graph, our first reaction would be, “I should have invested in technology; my brother-in-law told me so.”

Source: Bloomberg

It certainly seems that at that time, you had to be invested in these companies. Those who did not invest were somehow forced to invest so as not to miss out on the wave, what is now called FOMO (Fear Of Missing Out), and that is precisely where the problem begins.

Historically, there are two main ingredients for generating stock market euphoria:

• A powerful narrative (at that time, the internet)
• Abundant liquidity

I don’t know which of the two came first, but in the 1990s, both factors were present. The narrative existed, and with regard to liquidity, it came from a period of abundant cheap credit:

• Following the recession of 1990–91, the Fed aggressively lowered interest rates.
• In 1998, following the Asian crisis and the collapse of LTCM[1], injected liquidity again.
• Real interest rates (nominal rates minus inflation) remained relatively low in an environment of strong growth.

When these conditions combine, something similar usually happens: it starts with a promising narrative (new internet paradigm), then optimism sets in, and later that optimism can turn into overconfidence. Investors start to borrow money to buy more assets (the internet is the future and its growth is limitless), investment banks, sensing easy profits, create all kinds of products linked to this new paradigm and sell them en masse, and little by little valuations cease to matter because it is assumed that the new paradigm justifies everything.

Does this sound familiar?

And as often happens in these situations, all it takes is a small spark to blow everything up: reality. And reality, although sometimes late, always ends up appearing. It can come in the form of downward revisions to profits, financial difficulties due to excessive leverage, or even the occasional unexpected bankruptcy. When this happens, optimism quickly evaporates…the bubble eventually bursts.

Finally, the internet bubble burst and the market crashed. The chart above showed the previous rise; when we zoom in to include the following years, we see the other side of the story. After the crash, the Nasdaq technology index fell by nearly 82%, while the S&P 500 fell by around 45%.

Source: Bloomberg

If we look at what happened to the ten largest companies on the market at that time, the story is also interesting:

• Eight of them still exist today.
• Three of them have had a negative return over the last 24 years.
• Only one of them remains in the top 10: Microsoft.
• Only one has outperformed the S&P since 2000, Microsoft, and even then, it took almost two decades to fully recover lost ground, as it did not outperform the index until 2019.

This does not mean that history will repeat itself. But it does call for caution when market concentration reaches such high levels.

For this reason, we prefer to be cautious with indices such as the traditional S&P 500, where the weighting of a few companies is very high. As I always say and insist, this is not a criticism of artificial intelligence, as was the case with the internet. It is an innovation that is here to stay, but as Keynes said “It is better to be approximately right than precisely wrong.”[2]

For those who want exposure to the US market, an interesting alternative may be the S&P 500 Equal Weight, where all companies have the same weighting. This reduces the impact that sudden movements by larger companies can have. This is important because while everyone is happy when the market is rising, if there is nervousness caused by an event that affects these companies, the index suffers greatly.

We saw a recent example of this in early 2025, when the Trump administration’s announcement of tariffs caused a market correction. The chart reflects what happened during that period: The “Magnificent Seven” (represented by the light blue line), which account for about 33% of the S&P, fell approximately 25.8%, the traditional S&P 500 (represented by the dark blue line) fell 15.3%, and the S&P Equal Weight (represented by the beige line), where the magnificent seven represent 1.4%, fell 12.7%.

The difference in this case between investing in the traditional S&P or the S&P Equal Weight was close to 3% in just three months.

Source: Bloomberg

Now, the important question is how both approaches perform in the long term. In this graph, I compare both indices since the beginning of the 20th century, taking into account several crises.

Source: Bloomberg

If we analyze its performance since the beginning of the century, through several financial crises, the S&P Equal Weight has outperformed the traditional S&P. However, in shorter periods, especially when there is a very optimistic narrative surrounding a small group of companies, the traditional index tends to perform better.

Conflict in Iran

Unfortunately, I must end this commentary with the event that marked the beginning of March: the US and Israeli bombings of Iran and Iran’s subsequent retaliation.

It is not our goal to make political assessments or determine who is right. The only thing we can say with certainty is that all conflict is, above all, a human tragedy.

That said, we will attempt to analyze the effect that this type of event has on financial markets. Conflicts in the Middle East are nothing new for financial markets, but the current situation has a particularly sensitive element: the possible disruption of the global energy system.

The initial reaction of the markets has been the usual one in the face of a geopolitical shock. Global stock markets recorded widespread declines as volatility increased and investors sought refuge in defensive assets.

At the same time, there has been a classic increase in demand for safe-haven assets such as gold, high-quality sovereign bonds, the Japanese yen, and the Swiss franc. The main concern for the markets is not so much the military conflict itself as its implications for global energy supplies. The focus has been on the Strait of Hormuz, one of the most critical points in global energy trade. Approximately 20% of oil and liquefied natural gas transported by sea passes through this strait. Any disruption to traffic on this route can cause immediate tensions in energy prices.

Following the escalation of the conflict, oil and gas prices rose sharply. Brent crude oil stood at around $80 per barrel, while natural gas prices rose significantly in Europe.

This move has reignited fears of a new energy shock, especially in Europe, which is still in the process of adapting after the energy crisis triggered by the war in Ukraine.

Beyond the immediate impact on markets, the real risk lies in the macroeconomic consequences of rising energy prices. A sustained increase in oil and gas prices could result in:

• Greater inflationary pressures.
• Delays in interest rate cuts by central banks.
• A deterioration in global economic growth.

In other words, the conflict reintroduces the risk of a stagflationary scenario, in which growth weakens while inflation remains high.

Despite the initial noise, historical experience suggests that the impact of conflicts in the Middle East on financial markets is usually temporary. An analysis of several conflicts in the region since 1970 shows that, although stock markets tend to react with short-term declines, the effects on financial markets and global growth tend to moderate once the initial uncertainty subsides.

In fact, in many historical episodes, oil prices experienced initial increases that subsequently normalized if there was no prolonged disruption to energy supplies. The path we travel during the investment process is fraught with obstacles and uncertainties. But remaining calm and making decisions based on a detailed analysis of each asset in our portfolio, rather than on media noise, remains, in our opinion, the best ingredients for achieving good long-term results.

For more Market Reviews, click here.

[1] Long Term Capital Management (LTCM) was a hedge fund founded in 1994 by John Meriwether, with the participation of prominent figures such as Robert Merton and Myron Scholes (Nobel Prize winners in Economics). It collapsed in 1998 after huge losses on highly leveraged positions, leading to a bailout coordinated by the New York Federal Reserve.

[2] A Treatise on Probability: The Connection Between Philosophy and the History of Science : Keynes, John Maynard: Amazon.es: Libros

Fixed income, meanwhile, is maintaining the momentum we saw last year: short maturities are performing better than long ones. This behavior is significant, as it may be anticipating what is happening, or may happen, in the future.

• S&P 500: +1.37%
• Nasdaq: +1.20%
• Stoxx Europe: +3.18%
• MSCI All Country World Index (EUR): +1.27% (the dollar fell 0.90%, while the index in USD rose 2.83%).
• Global Fixed Income Index (EUR): -0.35% (the dollar fell 0.90%, so the USD index rose 0.11%).

The start of the year didn’t even give us time to settle into our chairs. On January 3, the capture of Nicolás Maduro and his transfer to the United States acted as a real wake-up call for the markets. Beyond the political component, the impact was clearly felt in oil: Brent rose from around $60 per barrel to nearly $70 throughout January, reflecting the increase in geopolitical risk premium in a market already tight in terms of supply.

The so-called “Magnificent 7” rose by only 0.55%, clearly below both the S&P 500 and the Nasdaq. This behavior is relevant because it challenges one of the most repeated narratives of recent years: that a small group of companies can sustain the market indefinitely. January suggests that investors are becoming more selective.

So who has led the gains? To delve a little deeper into the analysis, we take as a reference the US index that groups together the 3,000 companies with the highest market capitalization. The best-performing sectors for the month were energy (+17.63%) and materials (+16.10%), while the last on the list was, surprisingly… TECHNOLOGY!!!, with a drop of -3.87%.

The market is beginning to question the real profitability of the huge investments announced by many companies linked to artificial intelligence. From a prudent perspective, we prefer not to be exposed to this type of gamble. The case of Microsoft was revealing: its share price fell by nearly 10%. The market did not punish the quality of the business, but rather the sharp increase in CAPEX in artificial intelligence. The market is questioning whether it will be profitable.

At the same time, the Bloomberg Commodity Index has risen 8%, while gold has advanced 10% and silver 11%.

Movements in commodities, especially precious metals, are often an early sign of increased uncertainty. When they rise in a coordinated manner, the market is paying a premium for protection… and warning that the year is not going to be exactly boring. The reasons that immediately come to mind are growing tensions between the United States and other countries, Donald Trump’s increasingly harsh foreign policy tone, an energy market that is already tight in terms of supply, and even less common events, such as the renewed geopolitical focus on Greenland. I believe these events may have an influence, but there is a somewhat deeper interpretation that has to do with the US government’s accounts.

As I mentioned earlier, the performance of fixed income provides us with valuable information. Short-term bond yields are falling, largely influenced by central banks’ interest rate management. However, yields on longer maturities, which are more driven by investor supply and demand, remain stable or are even rebounding.

Source: Bloomberg

The brown line represents the yield curve as of December 31, 2024, and the green line represents the yield curve as of February 5, 2026. The red downward arrow indicates the decline in yields on one-year government bonds (-0.67%, from 4.15% to 3.47%). The red circle marks the stability of the 10-year bond, while the upward arrow indicates the increase in the yield on the 30-year bond.

As a result, investors are buying short-term debt and selling very long-term debt. Why[1]? Investors are confident that interest rates will fall in the short term, but are beginning to demand greater compensation for fiscal risk, long-term inflation, and fewer buyers who are insensitive to price.   

If we add the evolution of the US deficit to this analysis, the picture becomes clearer. The graph shows the evolution of the US deficit in the 21st century. The trend is clearly upward and, according to official projections by the Congressional Budget Office (CBO), the deficit in 2026 will reach -6%, above the last recorded figure of -5.36%.

Source: Bloomberg

This implies that public spending structurally exceeds revenue. It should be remembered that during the COVID pandemic, spending increased due to exceptional circumstances, as shown in the graph (dip in 2020). This imbalance must be financed with debt, and this is where a worrying fact arises: US public debt already represents approximately 120% of GDP, meaning that the volume of debt is 1.2 times the country’s production.

The main buyers of US debt have historically been pension funds and insurance companies, both domestic and international, as well as countries such as China and Japan. However, China has reduced its debt purchases and is significantly increasing its gold reserves. This can be interpreted as an attempt to weaken the role of the dollar as the world’s reserve currency and, at the same time, to gradually replace the dollar with gold on its balance sheets.

The big question is: who is replacing these purchases of US debt? The Federal Reserve? For how long? We don’t know. This helps explain why US government bond yields have not fallen and have even risen in the longer maturities: there are fewer and fewer structural buyers, and not just China. What is the result? Just look at these two charts: gold and the dollar against the euro.

Source: Bloomberg

Gold has risen 64%, while the dollar, against a basket of international currencies, has fallen 9%.

And this is not just a problem for the United States. This image shows public spending as a percentage of GDP around the world. Dark brown represents countries with public spending above 40%, lighter brown between 30% and 40%. Most of Europe spends more than 40% and the United States more than 30% and rising. At the beginning of the 20th century, it was between 0% and 10%.

Source: IMF

I have nothing against public spending as long as it makes sense, but these levels imply high taxes and increased debt. Does it make sense? Well, that’s what investors are worried about.  

What does all this smell like? Growing uncertainty about the US public accounts, where debt interest payments already exceed defense spending. As a result, there is a gradual loss of confidence in the dollar.

This brings us back to the world of commodities, and in particular precious metals such as gold and silver. Why are they rising so sharply? For me, there are two fundamental reasons:

• Less supply and the same or growing demand.
  • Since the commodities crisis caused by overcapacity generated as a result of the Chinese supercycle, many of these companies have canceled projects.
  • Environmental regulations that impose many obstacles to production.

Silver, for example, is used in various industries such as electronics, solar energy, automotive, and jewelry, so demand remains strong.

• Protection. We have seen that one of the uncertainties is future inflation.
  • We have already seen that raw materials have begun to rise sharply, and if I had to bet, this will continue in the near future.  
  • The growing deficit is inflationary if there is full employment. The unemployment rate in the United States is 4.4%, which implies full employment.

With regard to gold, there has been a significant increase in purchases by central banks globally. According to a survey by the World Gold Council, 95% of central banks expect to increase their gold reserves over the next twelve months. This trend invites reflection: what are the major institutional players anticipating?

This behavior fits with a macroeconomic scenario such as the one described above. In this context, it is reasonable to consider whether it is advisable to seek protection against inflation. In our opinion, the answer is yes, provided that a prudent and diversified approach is taken.

There are different ways to gain exposure to this type of protection: direct investment in gold, silver, or other commodities, as well as investment in companies linked to these sectors. However, it is important to note that not all of these companies behave in the same way.

For example, gold producers tend to benefit from rises in the price of the metal, as a significant portion of their costs are fixed, which generates an operating leverage effect and increased margins. On the other hand, developers do not yet produce gold, but they have identified deposits and are working to bring them into production; these are companies with greater volatility, but also with high potential for appreciation. Finally, royalty companies provide financing for mining projects in exchange for a contractual right to a portion of the economic value of production, allowing them to operate with very low costs and structurally high margins.

Beyond raw materials, investing in companies with real assets is also an effective tool for protecting against inflation. Keeping capital tied up in an inflationary environment implies a progressive loss of purchasing power, commonly known as the “invisible tax” on savings.

Therefore, investing prudently and in a well-diversified manner is not a matter of opportunity, but of preserving wealth. If the goal is to maintain the same consumption capacity in the future as today, postponing investment has a cost. In this sense, tomorrow may be too late to start investing.

[1] Remember that bond prices move inversely to interest rates.

For this reason, the data you will see below corresponds to the close of the markets on December 24.   

• S&P 500: +1.21%
• Nasdaq: +0.87%
• Stoxx Europe: +2.13%
• MSCI All Country World Index (EUR): +0.18% (the dollar fell 1.57%, while the index in USD rose 1.68%).
• Global fixed income index (EUR): -1.13% (the dollar also fell 1.57%, so the index in USD fell 0.42%).

Overall, it has not been a month of high volatility, but there has been some uncertainty surrounding interest rates and how this situation could affect the field of artificial intelligence. As I mentioned last month, there are reasonable doubts about how to finance the expected heavy investment and how to cope with the increase in energy demand associated with this sector.  

Although market performance over the last month has been relatively stable, this uncertainty has led to episodes of volatility throughout the year, especially in the artificial intelligence sector. This can be clearly seen in the following chart of an ETF (investment vehicle) that groups together US companies linked to this type of business.

At first glance, the annual data is very attractive: so far this year, the ETF has accumulated a return of 32%. However, this final result hides an important reality: during February and March, it suffered a drop of close to 26%.

And here the key question arises: Would we have been able to maintain the investment during that drop without selling?

Source: Bloomberg

If you have carried out your analysis and the conclusion is positive, the reasonable thing to do would be to maintain your investment and even increase it if you are highly confident. But it’s not that simple, is it?

Doubts begin to creep in: was the analysis sufficient, should you have listened to the criticism, is this time different… I don’t know about you, but this happens to me ALL THE TIME.

One of the characteristics that a good manager should have is to have gone through difficult times, as experience helps to better understand how financial markets really work. And you don’t have to be particularly brilliant to understand this; in fact, the opposite example is very illustrative.

The hedge fund Long Term Capital Management, founded in 1994 by John Meriwether (formerly of Salomon Brothers), had such brilliant minds as Myron Scholes and Robert Merton, winners of the 1997 Nobel Prize in Economics. Despite this, the fund ended up going bankrupt after taking on excessive debt, convinced that its strategy could not fail.

It’s not about being very intelligent, but about applying common sense and dedicating a lot of time to studying. It’s true that sometimes the best investments can be boring (personally, they’re the ones I like best), but if we’re convinced of them, we have to persevere even when the going gets tough. I firmly believe that artificial intelligence is here to stay, but it’s not my style to invest in companies with very high multiples, in other words, companies that I consider too expensive.

All this reminds me of a series of charts shared by Jordi García, from Dinero y Bolsa[1], which I found particularly interesting and illustrative. I think they help us to think long term and forget about the “magic” of the short term.

Invest for the long term, for real.

The S&P 500, despite having gone through some of the most difficult times in recent history—the Great Depression, world wars, and major financial bubbles—has generated an annual return of over 9%.

Even if we limit ourselves to the 21st century, the index has achieved an annual return of 8.13%, despite the dot-com bubble, the real estate crisis, and the COVID pandemic.

The investor’s worst enemy is…the investor himself.

Source: JP Morgan

Over the past 20 years, investing in stocks has generated an annual return of 9.5%, while fixed income has offered 4.3%. However, the average investor barely achieved an annual return of 3.6%.

Peter Lynch, manager of the Magellan Fund for 13 years (1977–1990), achieved a compound annual return of 29%. Even so, according to studies by Fidelity, the average investor in the fund earned returns of between 7% and 10%, even below the market.

The reason? Our emotional biases push us to buy and sell at the worst possible time.

Can we predict the future?

We can study and analyze how the economy and financial markets work, and use that to establish benchmarks. But we will NEVER know for sure what will happen in the future.

This somewhat peculiar graph shows precisely how wrong Wall Street economists are when predicting interest rate trends. The dotted lines represent forecasts and the solid line represents reality. Spoiler alert: they don’t get a single one right.

It was said that economists were paid twice: once for making predictions and again for explaining why they had not come true. Mind you, there are excellent economists, but that does not make them fortune tellers.        

The actions and benefits

Long-term stock performance correlates with company profits. Put simply, over time, companies that earn more money tend to be worth more on the stock market.

In the short term, however, market movements respond to other, very different factors: speculation, fads, trends, cash flows, and expectations, all of which are difficult to predict.

This graph clearly shows this difference. Over a one-year horizon, stock market performance depends largely on the expansion of the multiple, i.e., on expectations about the future, which may or may not be fulfilled.

The problem is that these expectations must materialize. If they do not translate into higher sales and real profits, the subsequent adjustment can be catastrophic.

Ten years down the line, however, the determining factor in performance changes completely: what really explains the evolution of stocks is the sales and profits of companies, as it should be.

No, the stock market is not a casino… unless you decide to treat it as such. In that case, I can only wish you luck.

No gain, no pain

To obtain a reasonable return on long-term savings, it is inevitable to live with market volatility. There are no shortcuts. That’s right… sorry…

Source: Shotwell Rutter Baer     

The blue bars on the chart show how the market ended each year. For example, in 1980, the S&P 500 closed the year with a 26% gain. However, the red dot indicates the biggest drop the market suffered during that same year, which was -17%.

Looking back, it all seems simple. But at the time, you have to live through and endure that -17%, without knowing yet that the year will end up being very positive. And this happens practically every year: even in those that end with strong gains, the intermediate declines can be significant.  

The longer the investment period, the greater the probability of obtaining a positive annual return. 

This chart is particularly interesting because it shows something fundamental: market declines are not necessarily a problem if we maintain our investment over the long term.

Source: ScwabCenter

If we invest for just one year, the result can vary greatly. The range of results goes from a gain of +54% to a loss of -43%. In other words, in the short term, practically anything can happen.

However, when we extend the time horizon and maintain the investment for 20 years, the picture changes radically. In that case, the range of results narrows significantly, falling between +17.9% and +3.1% per year.

In other words, time does not eliminate volatility, but it does drastically reduce the probability of negative results. And for an investor with long-term goals, that changes everything.

The conclusion is simple, or at least I think so. Provided that the assets we allocate for investment are not needed today and are intended to cover future needs—such as building a hospital, an educational center, helping those most in need, or supporting our children in the future—it is advisable to keep a few key ideas in mind:

• Always think long term.
• Analyze investments carefully or trust an advisor or manager to do so.
• Assume that there will be volatility in the markets.
• Accept that, at times, there will be pain.

This way, you increase the chances that your assets will grow over time, fulfill the purpose for which they were created, and, at a minimum, beat inflation, which does so much damage to savings.

I wish you all a great 2026, even or precisely, in an environment of market volatility.

And, if you’ll allow me, I’d appreciate a prayer for my family during this journey.

Happy 2026.

For previous Market Reviews, click here.

[1] Dinero y Bolsa — Tu camino hacia la libertad financiera

• S&P 500: +0.13%
• Nasdaq: –1.64%
• Stoxx Europe: +0.79%
• MSCI All Country World Index (EUR): –0.61% (the dollar fell 0.53%, the index in USD rose 0.07%).
• Global fixed income index (EUR): –0.32% (the dollar fell 0.53%, so the index in USD rose 0.21%).
• Nasdaq: –1,64%

Markets remain extremely sensitive to any signals related to monetary policy. Attention is focused on the Federal Reserve meeting on December 10. According to CME FedWatch, the current probability of a rate cut stands at around 87%, as can be seen in this image created by CME Group[1].

Source: FedWatch (CME Group)

This percentage has been highly volatile: on November 19, it fell to 30% from the previous 75%, only to subsequently recover to levels close to 90%. This fluctuation can be explained by a combination of factors:

Shutdown of the US federal government due to Congress’s failure to approve the budget. It lasted 43 days and affected more than 900,000 federal employees, including statistical offices that stopped publishing key data such as the CPI and employment figures.

• Positive surprise in the November 20 employment data, which further reduced expectations of rate cuts.

• Mixed messages from Federal Reserve members, some of whom suggested that further cuts might not be necessary in the short term.

In a context so dependent on expectations, the relationship between the probability of cuts and market behavior is immediate: when the probability of a cut falls, the market corrects; when it rebounds, the indices recover. This is what happened after statements by New York Fed President John Williams, who said that the option of cutting rates “remained open,” boosting expectations and stock indices once again.

In the short term, the market is driven by stimuli, as you can see in this chart. The dark blue line is the S&P during November, the light blue line is the Nasdaq (the technology index that includes the magnificent seven, which account for more than 44% of the index), and the beige line is the evolution of the probability of a rate cut (which is why the left axis is negative).

Source: Bloomberg

The market’s strong reaction to small changes in expectations fuels the perception, widespread among non-professional investors… and professionals, that the stock market is like a casino. However, the comparison is flawed.

In a casino, it is impossible to maintain a long-term position, which is precisely where the value of the investment lies. According to the study “The Rate of Return on Everything (1875–2015)” by the National Bureau of Economic Research, equities and housing are the assets with the highest real long-term returns. Housing led the way until 1950, but since then stocks have outperformed real estate (8.3% vs. 7.4%).

Fuente: NBER

This highlights the importance of maintaining diversified portfolios, where each asset serves a different purpose depending on each investor’s situation. It is not a Real Madrid vs. Barcelona rivalry: both assets can coexist in harmony.

Real estate stands out for its low volatility; equities, for their higher returns. And it is precisely this volatility, often misinterpreted as “risk,” that creates exceptional opportunities in quality companies.

Financial Fragility:

This month, I read a report by the BIS (Bank for International Settlements) on the leveraged structures that some hedge funds[2] are implementing based on government bonds. It left me somewhat concerned because it appears to be a structure that Nassim Taleb describes as fragile, with potentially dangerous consequences.   

In his book “Antifragile”[3], Nassim Taleb says that a system is fragile when it suffers serious damage from small shocks. According to Taleb, the characteristics of a fragile system are as follows:

• It depends on predictability: it needs the world to behave as expected. It does not tolerate surprises.
• It is over-optimized: reducing redundancies and safety margins makes it efficient… but very fragile.
• It has risk concentration: a single critical source can cause the whole thing to collapse.
• It appears stable until it breaks: a facade of calm that hides accumulated vulnerabilities.

Some examples would be the following:

• A company balance sheet that is excessively indebted.
• A bank that depends on daily market liquidity.
• A logistics system without safety stocks.
• A country that imports a single essential product.
• Investment portfolios positioned for a single scenario.

Why am I saying all this?

The Bank for International Settlements (BIS) recently warned that the global financial system is entering a phase of greater fragility as a result of:

• A decade of near-zero interest rates.
• An extraordinarily long credit cycle.
• High valuations of assets such as housing, shopping centers, and stocks.
• Significant accumulation of debt by companies, households, and governments.

The report highlights the growing risk associated with complex and highly leveraged financing structures that are being used by a large number of hedge funds. What are these structures? They tend to be very creative, but they also require a number of conditions to be met for a particular strategy to be profitable. 

I will try to explain it as simply as possible. Let’s imagine that the price of a US Treasury bond is trading at 99.80 and the future  on that same bond is trading at 100, there is a price difference for the same or a very similar product. What do these funds do? They buy the bond and sell the futures[4], thereby earning the difference. You might say, “Yes, but that difference is very small, and they won’t earn much.” Exactly, so if they want to earn a lot of money, they have to do it many times and with large amounts of money, and for that, they need someone to finance them. They do the following:

• They buy $100 million of Treasury bonds at 99.80.
• They borrow another $100 million from a bank overnight (repo), leaving the purchased bonds as collateral and thus obtaining liquidity. What they are actually doing is selling the bonds to the bank with a very short-term repurchase agreement.
• The bank charges a discount, meaning the fund repurchases the bond from the bank at a slightly higher price (discount). Given that we have been in a period of low interest rates and assets (US Treasury bonds) are very stable, the discount is very close to 0.
• The fund repeats this as many times as it can. According to the report, leverage of up to 50 times has been achieved, meaning that $5 billion in bonds has been purchased.
• On the other hand, it sells futures of the same bond at 100 for an underlying value of $5 billion. In this way, it offsets this transaction.

The BIS warns that this strategy has grown massively, moving hundreds of billions. The problem is not so much the strategy itself as the extreme leverage, between 20 and 60 times the equity capital.

What is the risk? If the repo becomes more expensive or liquidity dries up, the strategy ceases to be profitable and the position can collapse. Many funds are doing exactly the same thing, which eliminates diversification from the system.

If bond prices fall or repo costs rise, the fund must provide additional collateral. With such high levels of leverage:

• a small drop in the bond,
• a brief rebound in the repo rate,
• or a widening of the basis,

can generate very heavy losses. If repo lenders demand more collateral or withdraw financing, the hedge fund is forced to sell bonds quickly, triggering forced sales. If several funds simultaneously begin to close positions, a flood of sales occurs, causing bond prices to fall even further and amplifying losses.

A significant portion of the demand for Treasury bonds comes from funds that use this strategy. If they disappear due to liquidity problems:

• Bond prices would fall.
• Yields would rise.
• The cost of government financing would increase dramatically.
• Interest rates would rise, and so would the cost of financing for the private sector.

Nothing happens until it happens.       

History shows that the impact of rate hikes is not immediate:

the Fed began raising rates in 2004, but Lehman Brothers did not go bankrupt until 2008, and the market bottomed out in 2009.

Prolonged periods of abundant liquidity tend to generate collective euphoria. FOMO (Fear of Missing Out) pushes many investors to buy assets whose prices are rising without fully understanding their nature or risk.

Current markets show parallels with historical episodes: high liquidity, demanding valuations, implicit leverage, and very fragile expectations.

However, they also offer opportunities for disciplined, diversified, and long-term investors.

Professional management consists precisely of navigating these cycles, distinguishing noise from signal, and maintaining conviction when the short term, with its volatility, headlines, and fears, attempts to divert investors from their objectives.

For past Market Reviews, click here.

[1] FedWatch – CME Group

[2] Hedge funds that manage different hedges, including taking advantage of market inefficiencies such as the same asset having two prices in different markets.

[3] Antifragile: Things That Gain from Disorder (Contexts): Taleb, Nassim Nicholas, Sánchez Barberán, Genís, Santos Mosquera, Albino: Amazon.es: Books

[4] A futures contract is one in which a buyer and seller agree on the price of a commodity in the future, and the only thing you pay is a deposit. It is a way to leverage because you pay a very small percentage (deposit) of the price of the commodity. In addition, you can sell it to someone else during the life of the contract.

In the United States, strong third-quarter corporate earnings boosted stock market gains. In Europe, although growth remains very weak, the market managed to advance 2.46% thanks to the momentum of the automotive and luxury sectors. 

For its part, the Fed lowered interest rates by 0.25%. However, Chairman Powell warned that there are no guarantees of further cuts in 2025, which increased volatility.  

• S&P 500: +2.27%.
• Nasdaq: +4.77%.
• Stoxx Europe: +2.46%.
• All Country World Index EUR: 4.34% (the dollar rose 1.68%, the index in USD rose 2.18%).
• Global fixed income index EUR: +1.54% (the dollar rose 1.68%, so the index in USD advanced 0.60%).

To get an idea of the uncertainty generated by trade tensions, we need only recall what happened on the day Trump threatened to further increase tariffs on China: the S&P fell 2.7% and the MSCI World fell 2.3%. Everything calmed down once Trump and Xi Jinping reached an agreement whereby the US committed to reducing tariffs, while China would resume soybean purchases, lift restrictions on rare earths[1], and strengthen control over fentanyl.  

It seems that we are reliving what happened last year: the market is rising again, led by technology and semiconductor companies, especially those most closely linked to artificial intelligence (AI). 

If you recall, in February of this year, the Chinese AI company Deepseek rose to fame. It is dedicated to the development of large language models (LLMs) and associated tools, very similar to those of OpenAI (creator of ChatGPT). Its main appeal was its low development cost, which highlighted the valuations of similar companies or those linked to the same sector, such as Nvidia, which fell 17% that day. It seemed that the AI euphoria had come to an end, but the reality was quite different: shortly afterwards, the market forgot this news and Nvidia has since risen more than 100% from its lows.

And not just Nvidia. The group of AI-related companies in the United States[2], listed in an ETF that includes 43 companies, has risen on average by 80% in just seven months from those same lows. Is the average increase for 43 companies really 80% in just seven months? Maybe I’m too old, but is this really healthy? Those who bought Nvidia would say yes, of course. I, however, have my doubts. This is not a criticism of Nvidia; in fact, I consider it to be a very well-managed company from a fundamental point of view.

On average, 80% means that there are companies that have done even better: Celestica (+413%), Advantest (+273%), and Doosan Enerbility (+247%). In fact, we would have to go down to 28th place to find Nvidia in the ranking of rises. I will comment on this later, but you can already imagine where this is going. 

Therefore, there is not only euphoria surrounding the “Magnificent 7,” but practically everything related to artificial intelligence. Of course, within this universe there are high-quality companies with solid, well-managed business models, but there are many others that are rising by contagion, simply because their name or activity is reminiscent of the same thing.

This is nothing new. I remember that during the dot-com bubble of 2000 (yes, it’s true, I was working at the time), there were companies that added .com to their name and automatically skyrocketed on the stock market. One example was Pets.com, an online pet food store, which rose 27% on its first day of trading and went bankrupt a year later.

Something similar happened more recently, in December 2017, when a non-alcoholic beverage company decided to change its name to Long Blockchain Corp and on the same day its share price shot up 200%. Shortly afterwards, it was delisted from the Nasdaq for lack of transparency and it was discovered that it had never had any connection with blockchain.

PETS.COM

Source: Bloomberg

LONG ISLAND ICED TEA

Source: Bloomberg

With all of the above in mind, I would like to dwell on something I mentioned earlier: is this rise really healthy? Thanks to the quarterly letter from the American fund manager Wedgewood Partners[1], I think I understand it a little better.

They begin by quoting a sentence from Michael Cembalest of JP Morgan Asset Management that I find very revealing:   

Oracle shares rose 25% after OpenAI promised it $60 billion a year—an amount that OpenAI does not yet earn—to provide cloud computing services that Oracle has not yet built and that will require 4.5 GW of power (the equivalent of 2.25 Hoover dams or four nuclear power plants), in addition to increased debt for Oracle, whose debt-to-equity ratio is already 500% compared to 50% for Amazon, 30% for Microsoft, and even less for Meta and Google. In other words, the technology capital cycle could be about to change.” 

Why do you say that the capital cycle is about to change?

The capital cycle is the amount of investment required in a given sector at certain points in time. For example, in the oil sector, the capital cycle depends, among other things, on the price of oil: when the price rises or is expected to rise, oil companies begin a new investment cycle to take advantage of those expectations of increases.

Some sectors are more capital-intensive, meaning they need large investments to operate (such as energy or infrastructure), while others require much less capital. Until now, technology has been in the latter group. This characteristic explains why technology companies have higher than average market margins: their costs are lower and, as a result, the valuation multiples at which they trade are higher, as long as these margins are sustainable over time (and this point is key).

We have already seen this in previous comments: the S&P currently trades at around 25 times earnings, while the technology sector trades at 40 times.

Now, is 40 times earnings too much to pay?

The answer, as a Galician would say, is: it depends. Are that growth and those margins sustainable?

And this is where the comments by Cembalest and the WedgeWood managers come into play, which I think are very accurate.

If the capital cycle in the technology sector becomes more demanding, i.e., if the business requires increasing investment, costs will rise and margins will tend to fall.

In this context, only companies capable of using capital very efficiently will be able to maintain their profitability, although even for them it will be difficult to maintain current margin levels.

Why might this change occur?

• Excessive spending on AI infrastructure.

Tech companies are spending enormous amounts of money to build data centers, purchase chips (GPUs), and secure sufficient electrical power to train AI models. In a sense, they are building before knowing whether there will be enough real demand to justify these investments.

• From low capital intensity to high capital intensity.

This is a key change because it will determine who can bear these costs. Until recently, big tech companies (Google, Meta, Microsoft) were not very capital-intensive, meaning they did not need to spend too much on factories or physical infrastructure:

their value came from software, advertising, or digital services. With AI, that changes.

Now they need gigantic infrastructure to buy millions of chips, build data centers, and consume enormous amounts of energy.

This makes them very capital-intensive companies, something unthinkable just a few years ago.

And beware: this could make them more like industrial or energy companies, with more leveraged balance sheets and a heavier cost structure.

• Accelerated depreciation of hardware.

The chips (GPUs) used to train AI are extremely expensive and also become obsolete very quickly. Every year, Nvidia launches a new, more powerful generation, forcing companies to continually renew their hardware. In accounting, these machines are depreciated over 3 to 5 years (their costs are spread out over time), but in practice, they are no longer fully useful after 1 or 2 years.

This means that in the coming years, technology companies will have to recognize many accounting expenses, which may reduce their future profits (even if they continue to generate cash).

• Debt financing.

As the expenditure is so high, many companies can no longer finance it with their own money alone. In 2025, it is estimated that technology companies will have issued more than $157 billion in new debt to continue building infrastructure.

Meta, Oracle, and xAI (Elon Musk’s company) are taking out loans with extremely high debt levels (more than 60% leverage). Some are even using the chips they have purchased as collateral for the loans (like mortgaging a car to buy another one).

This turns the AI boom into a credit story: it depends on banks and debt markets continuing to lend cheap money. If rates rise or investors lose faith, the house of cards will come tumbling down.

• Energy Dependence.

Each new data center requires enormous amounts of electricity.

For example, a single Meta data center in Louisiana consumes as much energy as the entire city of New Orleans in the summer.

This is a real problem because power grids are not equipped to handle that level of demand, and energy costs are skyrocketing. In addition, local governments and regulators are beginning to limit the expansion of these infrastructures for environmental and capacity reasons.

Conclusion: The growth of AI will not depend solely on money or talent, but also on available energy and political decisions: where construction is permitted, what tariffs are applied, or what environmental impact is considered acceptable.

Phew, it doesn’t seem so attractive anymore, does it? Well, once again, it depends.

AI is here to stay, and when used properly, it will make many production chains and numerous jobs more efficient and therefore more productive. And productivity, in the end, is the most important ingredient for real wages to increase, as long as politicians curb their tendency to waste money.

AI is undoubtedly a powerful tool, but it has to be a good servant and not a bad master.

There will be winners, just as there were in the early days of the internet, when many companies fell by the wayside for various reasons—euphoria, leverage, lack of common sense—while others managed to run their operations prudently and consistently.

But if we realize that trading at more than 40 times earnings is not sustainable, and that the scenario outlined above—higher costs, lower growth, and pressure on margins—is real, then it stands to reason that valuations will eventually adjust. Multiples will fall to more reasonable levels, without this meaning that companies will cease to be good companies. They will simply reflect a more balanced environment.

Could the hype surrounding AI be leading us into another bubble?

I don’t know, but after researching the evolution of small and medium-sized enterprises, I get the feeling that there may be some speculative hype in the market.

Why do I think this? As I have mentioned on previous occasions, at Altum we invest in companies whose operations and/or practices do not conflict with the social doctrine of the Church, and the result of applying these filters generates a bias towards small and medium-sized companies.  

The Bloomberg World Small and Mid Cap Index has risen by 36% between April 4 and October 31, 2025, similar to the S&P. Our investments have not risen as much, which begs the question: why?

To understand this, I separated the companies on the list into those that were losing money and those that were making money. I was very surprised. The companies that were losing money rose by +48%, while the profitable ones rose by +31%. A difference of +17%.

That realization gave me a lot of peace of mind. At Altum, we focus on finding companies that make money, because that is the key ingredient for good long-term returns. We don’t want to participate in this speculation. At Altum, we prefer to build on rock.

Source: Bloomberg

That realization gave me a lot of peace. At Altum, we focus on finding companies that make money, because in the long term, that is the key ingredient for good returns.

That’s why I feel there is a speculative component in the market, the consequences of which will be painful for those seeking stratospheric returns in the very short term. It may be working for them now, but “Which of you, if you want to build a tower, does not first sit down and calculate the cost to see if you have enough to complete it?”[4]

For previous market commentary, click here.

[1] This is the name given to the chemical elements essential for the manufacture of mobile phones, computers, screens, electric vehicles, wind turbines, weapons, chips, and artificial intelligence components, among other things. China controls 60% of global production.

[2] Measured by the ETF iShares AI Innovation and Tech Active (BAI US)

[3] Wedgewood Partners Third Quarter 2025 Client Letter If You Build It Will They Come?

[4] Luke 14, 28-29

In the case of fixed income, the increases reflected investor optimism ahead of the upcoming Federal Reserve (Fed) meeting and expectations of a possible rate cut.    

• S&P 500: +3.53%.
• Nasdaq: +5.40%.
• Stoxx Europe: +1.46%.
• All Country World Index EUR: +2.91% (the dollar fell 0.20%, the dollar index rose 3.49%).
• Global fixed income index EUR: +0.27% (the dollar fell 0.20%, the dollar index rose 0.54%).

The market has maintained its upward trend since April’s lows, driven once again by US tech giants. More and more voices are saying that the market is overvalued and even in bubble mode, and that there will soon be a correction that will erode gains. Are they right?

Before answering this question, it is worth reviewing the general reasons behind stock market rises. I humbly offer the following, although others may add more or disagree with these:

1. Positive Economic Situation

Gross Domestic Product (GDP) is the most common benchmark for assessing a country’s economic activity. Personally, I find it unrealistic to try to encapsulate this reality in a single figure, which can also lead to misleading interpretations, but it is the most widely used indicator. GDP is calculated as follows: 

GDP = C + I + G + (X – M)

Where:

C = Consumption

I = Investment in goods and services

G = Government spending

X-M = Exports-Imports (The so-called external sector)

All these variables can rise and fall, but if the net result is positive, it indicates that economic activity is expanding. The variable that carries the most weight in most countries is consumption. For this reason, many economists known as Keynesians propose policies aimed at stimulating consumption, such as making credit cheaper or increasing public spending. 

In times of crisis, when both consumption and investment stagnate, the public sector tends to increase spending (G) to compensate. However, this approach carries an obvious risk: the waste of public money, which, let’s not forget, is our money. An extreme example is provided by the Soviet system implemented in the late 1920s under Stalin’s leadership. This model was guided by planned production targets, not by the actual production needs of the market. If the five-year plan set a target of producing 10 million tons of steel, the factories did so, even if there was no immediate use for so much steel. Success was measured by “fulfilling the plan,” not by the usefulness or profit of the product. One of the consequences of these plans was the environmental disaster caused in the Aral Sea, [1]one of the greatest in contemporary history.  

It is true that I have given an extreme example, but today there is still an incentive or “temptation” on the part of governments to manipulate public spending in order to appear to be in good financial health. That is why I insist: GDP can be misleading if it is not interpreted with caution. 

That said, how is the global economy doing? According to the latest data, global growth stands at around 2.9%, with a more or less stable trend. The United States, with growth of 3.8%, accounts for approximately 35% of the total increase.   

In summary, the economy is growing, albeit in a fragile manner: the momentum comes mainly from consumption, often sustained by credit, which may prove detrimental in the long run, while investment, which is key to future growth, continues to decline. 

2. Corporate Earnings.  

The share price reflects expectations about a company’s future earnings. It is therefore an estimate of the future, which always introduces some uncertainty as to whether those forecasts will be fulfilled or not. Because it is based on projections, the price that investors assign to a company is ultimately subjective, which is why equities tend to be more volatile. 

Currently, there is widespread optimism about the new paradigm of Artificial Intelligence (AI), which is reflected in valuation multiples that, as we have said on previous occasions, are very demanding. AI-related companies continue to post spectacular profits, although the market is already discounting an almost perfect scenario; in other words, growth will have to remain high for quite some time to justify current prices.

But does this mean that if these “AI companies,” represented by the Magnificent 7 (M7), grow, the rest of the market will grow too? 

According to Facset data, the M7s show growth of 14.3%, compared to 3.4% for the rest of the S&P 500. Therefore, a slowdown in the M7s will have a direct impact on the index’s valuation. Today, they continue to lead the rise and pull the rest of the market along with them. 

Does this mean that if we do not invest in the M7, we will miss out on the stock market rally? Not necessarily. This Bloomberg chart compares the performance of the S&P index so far this year (orange) with the same filtered index, which excludes companies whose operations and practices conflict with the Social Doctrine of the Church. The result shows that profitability is not lower. There are still high-quality companies outside these M7 stocks, and at much more reasonable prices. 

Source: Bloomberg.

In conclusion, profits are accompanying the upward trend, although in some cases they are underpinned by considerable optimism, perhaps excessive, on the part of the mega tech companies.

3. Liquidity

According to some studies, in the short term, what drives the market is available liquidity. In periods when central banks have injected liquidity into the system, stock markets have tended to rise, as shown in the graph. The dark blue line represents the money supply (money printing, or the amount of money in circulation) called M2, and the light blue line corresponds to the S&P 500. The correlation between the two is almost perfect. 

Source: Own elaboration, Bloomberg.

This seems like good news, right? In part, yes, but it depends: an injection of liquidity above the real needs of the economy can lead to speculative bubbles and/or inflation. Therefore, in the short term it is very positive, but it is also important to analyze the long-term consequences. 

4. Optimism in the face of interest rate cuts.

This month saw confirmation of the interest rate cut in the United States, a decision eagerly awaited by investors, which has driven the subsequent rise in the stock markets. 

But why is an interest rate cut usually good news for the stock market? There are several reasons, of which I would highlight two in particular: 

• First: Financial assets are valued, in most cases, by discounting future cash flows using a formula that is:    

Oh my goodness, what is that? Don’t worry, I’m not going to go into detail explaining all the elements that appear, but I would like to highlight what is in the denominator: the WACC (Weighted Average Cost of Capital). This is the rate at which cash flows are discounted and is closely correlated with official interest rates. Therefore, if these fall, the WACC is also likely to fall and, as a result, the value of the asset (EV) will increase. 

• Second: Lower interest rates reduce companies’ financial costs, which will have a direct impact on their income statements. 

But beware, not everything has to be positive. Every action has its consequences, and an excessive drop in interest rates can lead to bad investments and future crises.     

It therefore seems that the above factors—economic growth, corporate profits, abundant liquidity, and optimism about rate cuts—are the cause of the rise in the stock markets, but it is very important to analyze each of them, because they could be “the devil dressed as a being of light.” 

Risks and contradictions of lowering interest rates.

1. Does lowering interest rates make sense? When the central bank decides to lower interest rates, it does so to stimulate the economy in times of weakness. However, the current context is as follows:

1. Stocks at record highs.
2. Real estate prices at record highs.
3. Gold at record highs.
4. Money supply at record highs. 
5. Government debt at record highs.
6. Inflation above the central bank’s target.

Given this scenario, it is difficult to understand the need to lower interest rates. Or perhaps there is something we are not seeing?

2. Stagflation

A drop in interest rates accompanied by excessive liquidity injections could lead to stagflation, i.e., economic stagnation with high inflation. This is not a likely scenario, but we must remain alert to any signs in this direction. 

The dark blue line in the graph represents surveys of service companies regarding prices, and the light blue line represents surveys regarding employment. Prices are rising sharply while employment is weakening. 

Is this what the FED is observing? Surely, and its justification for lowering interest rates seems to be the fall in employment, even at the cost of accepting higher inflation…     

Source: Own elaboration, Bloomberg.

But is this really a technical decision by the central bank or interference by the Trump administration, which is interested in keeping rates low to help maintain the country’s deficit? 

Finally, there has been an unusual event in the US administration: a government shutdown, with all the implications that this entails. 

The start of fiscal year 2026 was scheduled for October 1, 2025, and before that date, Congress had to approve the budgets for the various agencies. However, a continuation agreement was not reached in time. 

The main causes of the dispute include:

• The level of federal spending (defense, social programs, etc.). 
• The continuation of certain health subsidies (e.g., tax credits under the Affordable Care Act) and their funding. 
• Disagreements over cuts or termination of foreign aid, as well as possible changes in fiscal policy. 
• Growing political polarization (Republicans vs. Democrats), which makes it difficult to obtain the 60 votes needed in the Senate to pass certain proposals. 

With the deadline passing without consensus, many agencies were left without available funds, which has had significant consequences: 

• An estimated 803,000 federal employees have been temporarily furloughed, in addition to hundreds of thousands more who continue to work without immediate pay. 
• According to analysts, each week of shutdown could cost between $7 billion and $15 billion to the U.S. GDP, depending on the duration and scope of the shutdown. 
• Key economic data, such as the monthly employment report, has been delayed due to the government shutdown. 
• Negotiations between Democrats and Republicans continue, with mutual accusations of unwillingness to compromise. The main point of contention remains the funding of health subsidies and budget cuts demanded by the more conservative Republican wing. 

Jesus said, “The truth will set you free,” and I’m not going to argue with him. In the world we live in, knowing the truth, or at least having an interest in knowing it, is essential for exercising good judgment and freedom. In the world of investing, it’s key, which is why we need to learn or at least put ourselves in the hands of those who know what they’re doing so they can help us. 

If we see investing as a means to get rich quickly, we are more likely to end up getting caught up in some scam, but if we invest so that our assets continue to cover our needs and those of our loved ones, then it is essential to discern what to do with them.   

[1] Mar de Aral: los desastres medioambientales de la Unión Soviética

• S&P 500: +2.03%.
• Nasdaq: +0.92%.
• Stoxx Europe: +0.96%.
• All Country World Index EUR: -0.36% (the dollar fell by 2.38%, the index in dollars rose by 2.52%).
• Global fixed-income index EUR: -0.80% (the dollar fell by 2.38%, the index in dollars rose by 0.35%).

Both equities and fixed income rose in general terms thanks to growing hopes of rate cuts by the Fed in September. On the other hand, a certain caution is perceived because valuations are at highs, above the historical average; structural risks persist such as the uncertainty generated by U.S. tariffs, high public debt, an upward trend in fiscal deficits that is reflected in the rise of the risk premium offered by the longest maturities of government debt, mixed economic data, and very stubborn inflation in returning to central banks’ 2% target.

But well, markets keep going up, don’t they? True, although I think it’s related to what I mentioned in last month’s analysis: the fear of a resurgence in inflation due to various circumstances is leading many investors to replace cash—which is losing value by the day—with assets that can preserve or even increase their value. Among these, gold stands out, as do shares of companies with solid balance sheets and real assets, and even bitcoin.

Historically, the correlation between gold and equities has been slightly negative. That is, when equities fall, gold tends to rise, and vice versa, as can be seen in this chart. This is because, in periods of crisis, investors tend to seek safe-haven assets, with gold being the most traditional and recognized of them.

Source: Bloomberg

However, this year—and especially after the market drop caused by Trump’s tariff announcements—the correlation between gold and equities has been positive. That is, both assets have risen at the same time. In the lower chart, which is the same as the previous one but focused on the current period, the red line marks the low that the market (represented by the orange and yellow lines) set after the tariff announcement. As has happened historically, at the moment of greatest uncertainty gold reacted to the upside. But interestingly, from that red line onward, both gold and equities have risen simultaneously. What happened?

Source: Bloomberg

If we add what is happening with long-term government bonds, we can better understand this situation. As I mentioned before, equities have performed well, driven by optimism about a possible rate cut by the Fed, fueled by weaker-than-expected employment data.

Upside-down world? Is bad data good data? Well, yes, because the weaker the data, the more arguments the Fed has to justify a rate cut at its next meeting in September—and happiness for shorter-term investors.

Do I like it? Not particularly. Although it can stimulate markets in the short term, I believe that in the long term it creates deeper distortions, especially in capital allocation and in the perception of risk.

This chart shows U.S. bond interest rates at different maturities (the famous yield curve). The brown line shows how the curve looked on 07/31/2025 and the green one on 08/31/2025.

Source: Bloomberg

As a consequence of the higher probability of rate cuts, the yields on shorter maturities have fallen. However, longer-term yields, such as 15- and 20-year, have fallen only very slightly or even risen, as is the case with 30-year bonds.

How is it possible that, with a higher likelihood of rate cuts, these yields fall so little or even rise?

The key is that the Fed controls very short-term interest rates, but long-term rates depend on supply and demand in the market—that is, on investor appetite. And what we are seeing is that such an appetite for long-term bonds is not present.

Why? This is one of the big questions. Investors seem to be worried about several factors: the growing trend in the fiscal deficit, the increase in public debt to finance that deficit, the crowding-out effect (which makes access to credit more difficult for the private sector due to higher rates), and the impact all this may have on inflation in the future.

The immediate question would be: isn’t inflation already close to 2%, which is the Fed’s target?

Apparently, yes. It seems to finally be under control. However, besides the fact that it has stayed above 2% since February 2021, the process of a growing fiscal deficit is an important factor that can continue to fuel inflation.

Before sharing my view, it is worth remembering that the official inflation figure is an aggregate average of goods and services that a group of experts considers representative of society. So far, so good. But since it is an average constructed by a group of people, who guarantees that the selected products truly reflect the consumption of the majority?

This table shows a series of common goods and services in the United States that people tend to consume in their day-to-day lives. As can be seen, their prices are well above that “desired” 2%.[1]

Source: BLS

With respect to food, the evolution of food prices has been higher than the overall index.

In the chart, you can see jumps in prices in 2009 and in 2020, coinciding with the crises of those years. What happened?

The Fed, with the goal of supporting the private sector, began to increase the money supply—that is, it printed money to buy assets deteriorated by the crisis and to purchase Treasury debt, thus allowing an increase in social spending.

But of course, printing too much money entails risks, and the most important—and dangerous—of them is inflation.

In the following chart, you can see how, starting in 2020, the money supply (M2) increased very strongly, with the intention of helping families and companies during the COVID-19 pandemic. However, the side effect was a rise in inflation to very high levels.

Source: Bloomberg

Subsequently, the Fed began to lower interest rates, which made it possible to control inflation, at least in the short term. However, if we look at the chart, the money supply—far from decreasing—has taken on new upward momentum.

Once the money supply is increased, reducing it becomes very difficult. It is the “drug” that generates the most addiction among politicians: more spending… and more votes?

We have already mentioned how Trump is pressuring Powell to lower rates, with the aim of reducing the government’s financial cost (that is, the cost of debt) and thus being able to finance the growing fiscal deficit more comfortably. This pressure represents an intrusion into an institution that, in theory, should be independent, namely the central bank. But the truth is that it stopped being so years ago. Today, the Fed is the largest buyer of U.S. debt. And to be able to acquire that debt, it needs to print money, which is a necessary—though not sufficient—condition for generating inflation.

The scheme of what is called deficit monetization is as follows:

• The Treasury spends more than it takes in → issues bonds.
• The central bank buys those bonds (or promises to buy them if necessary) → creates money supply to pay for them.
• More money supply → more bank credit available → higher money supply (greater liquidity in the system) → inflationary pressure.

For me, this is the big problem. The rise in government debt interest rates reflects that investors perceive high uncertainty about the future: slower growth and higher inflation

And this is not happening only in the United States; it is even more serious in other countries, as is the case of France. On Monday the 8th it faces a vote of confidence to obtain parliamentary backing for its fiscal program and to unblock the budget due to having a deficit of 5.8%, far from the 3% required by the EU; debt of 106% of GDP and rising; political uncertainty with an uptick in its risk premium of 0.80%; public spending of 57% of GDP; and weak growth.

With this clarification, the correlated rise of equities, gold and even bitcoin as alternatives to cash makes sense. Gold, by itself, is already a traditional substitute for liquidity: it has proven to maintain its value and to rise in times of uncertainty, because investors sell their banknotes, which are worth less and less, and buy gold, which is worth more and more.

Equities, for their part, represent companies with real assets that, if well managed, not only preserve their value but also increase it over time. That is why it is so important to understand well the businesses one invests in and to know the managers who lead them, to ensure they make the best use of those assets.

Investing, in my humble opinion, has become a search for shelter from political power.

As long as States have the common good as their objective and are governed by the principles of subsidiarity and solidarity, it is legitimate for them to obtain income through taxes to cover those needs. But one may ask: is that common good and those principles so great as to justify a gigantic state, financed through unlimited taxes and debt?

Investment offers us independence and freedom.

For more Market Reviews, click here.

[1] The CPI column indicates annual inflation in the corresponding periods calculated using the CPI index. 

• S&P 500: +2.17%
• Nasdaq: +2.38%
• Stoxx Europe: +0.88%
• All Country World Index EUR: +3.95% (the US dollar rose 3.16%, the index in USD rose 1.28%)
• Global Fixed Income Index EUR: +1.03% (USD up 3.16%, index in USD fell 0.31%)

Why are global equity markets performing so well amid geopolitical tensions and macro uncertainty?

Investors usually price the market based on a series of subjective assumptions—economic growth, controlled inflation, stable interest rates, low debt levels, etc.

But what happens when uncertainty is introduced to one of those variables—economic growth, inflation, interest rates, and so on? If I have a lifelong friend, a responsible and trustworthy person, and he asks to borrow money, I lend it without hesitation. But imagine one day he starts behaving suspiciously—going out every night, drinking too much, missing work… My perception of his ability to repay the loan changes. I’ll probably impose stricter conditions and ask for interest—because I now perceive a higher risk.

That’s precisely what happens in financial markets when uncertainty rises: risk premium increases. But whose premium? We could call it the new required return. If the market is trading at a P/E (Price-to-Earnings) of 20x, I’m paying 20 times a company’s annual earnings—that’s like asking for a 5% return (because the inverse of the P/E, earnings/price, gives the expected return). Is 5% acceptable? It’s a consensus of all participants at that moment, but as with any consensus, it might be wrong.

If we add uncertainty—like Trump’s tariff announcements or geopolitical tensions—it’s logical that we would require more from the market. How? By selling. That pushes prices down. If prices drop, so does the P/E ratio, and consequently, the implied return increases. For example, if the P/E drops to 18x, the expected return rises to 5.55%, reflecting a higher risk premium.

Has that actually happened? Sort of. Initially, yes. But then? Not only did the risk premium not go up—it actually declined. Here’s the chart showing the inverse of the S&P 500’s P/E (i.e., the required return):

Source: Bloomberg

As you can see, after Trump’s tariff announcement, the required return spiked above 4.60%. But it has since returned to pre-announcement levels.

So… is there uncertainty or not? The market doesn’t seem to think so. True—but I find it odd. Let’s break it down.

The positives:  

• Tariffs: The initial tension has eased. Trump started unilateral negotiations with several countries (though not all, e.g., China).
• Corporate Earnings: Strong performance. This chart shows U.S. corporate earnings have grown 10.3% compared to the expected 4.9% as of June 30.

Fuente: Factset

The negatives:

• Tariffs (again): While uncertainty has decreased, it hasn’t disappeared. Higher tariffs are still bad for global trade. For example, Japanese car imports will face a 15% tariff instead of the previously threatened 25%. Better, yes—but still costlier for the U.S. consumer. Ironically, if Trump wants cars built in the U.S., it’s difficult when American manufacturers like Ford and GM pay a 50% tariff on imported materials like steel.
• Inflation: Despite Trump’s pressure on the Fed to cut rates, Powell hasn’t acted yet. The Fed remains uncertain about how tariffs will affect inflation and left the door open for a rate cut in September—if data supports it. Inflation is ticking up in tariff-affected goods. This chart from Oxford Economics shows prices rising month by month.

Source: Oxford Economics/Haver Analytics

These products include appliances, home equipment, furniture, decorative items, recreational gear, and video games, among others.

Many companies built up inventory before tariffs were imposed, but they’ll eventually need to restock. During Q2 earnings calls, several firms noted uncertainty over how tariffs will ultimately be implemented.

In short, much of the market is anticipating that the Fed will lower interest rates. Lower rates would mean more liquidity, potentially pushing asset prices (i.e., the stock market) higher.

In fact, after a weak U.S. jobs report in early August, market expectations for a September rate cut jumped from 45% to 90%—and the market rallied.

But is that the only reason? I think there’s more to it. Trump’s pressure on Powell may stem from the fact that debt servicing costs are limiting his spending ability—spending that shows no signs of slowing, as seen in his spat with Musk.

Is it likely a politician will reduce spending? Highly doubtful, especially since spending is a powerful tool to win votes.

The U.S. deficit continues to rise. Current figures:

• National debt: $36.2 trillion
• Deficit: $1.7 trillion (6.4% of GDP)
• Interest payments: $1 trillion
• Congressional Budget Office (CBO) projects debt could reach 156% of GDP by 2025 (vs. 118% today)

This is not just a U.S. problem—it’s global.

There’s growing fear that the dollar and other currencies will lose value due to governments’ fiscal irresponsibility.

Are there limits to debt and spending? Yes, and here are the options:

1. Balanced budgets: Highly unlikely.
2. Inflation: Helps reduce debt burden, but comes with serious risks.
3. Debt forgiveness (haircut): Extremely dangerous.

Debt forgiveness might sound attractive, especially when politicians suggest that public money “belongs to no one.” But that’s false—it comes from taxpayers.

When a country issues debt, it’s supposed to repay it. If it doesn’t, future borrowing becomes very costly—or outright impossible. Consequences include:

• Higher borrowing costs → higher financial burdens for everyone.
• Higher taxes → we already pay more than half our income in taxes; raising them further could spark backlash.
• Money printing → unless there’s enough demand for currency, this leads to inflation.

If deficits continue, distrust will rise, leading to currency devaluation and future inflation.

A key signal of distrust in government debt is the divergence between sovereign and corporate bonds. The credit spread—i.e., the extra return investors demand from corporates vs. “risk-free” government bonds—tells the story.

Normally, if the spread narrows, it suggests corporate bond demand is rising (healthy economy). This time, the spread is narrowing because corporate bond yields are falling (prices rising) while government bond yields are rising (prices falling).

This chart illustrates the divergence:   

Source: Bloomberg

Spreads are near all-time lows. Past spikes occurred during the 2008–09 housing crisis and 2020 COVID crash—periods of distrust in corporate finances. Now, the opposite: distrust in government debt.

Other market signals include rising safe-haven assets like gold, bitcoin, and real assets (e.g., equities).

 If that’s what’s happening… what should we do? Defend ourselves from currency depreciation. How? By investing. This explains current market complacency despite perceived risks. Where to invest?

• Equities: Absolutely—but choose wisely. Not all businesses are equal. Look for strong models at good prices.
• Avoid sovereign debt: U.S. Treasuries might be an exception given global demand for USD.
• Fixed income: Provides portfolio stability—but again, select the right companies.
• Gold: When cash isn’t needed, consider replacing it with gold—or even keeping it as a core holding alongside equities and bonds.

To illustrate gold’s strength: here’s a table showing how many ounces of gold are needed to buy certain goods since 1970 [2]. The prices fall in gold terms.

If someone had held 485.7 ounces of gold in 1970 (at $35/oz, the price of a NYC house back then: $17,000), today they’d own $1.64 million in gold—enough to buy nearly two homes worth $878,000 each. That’s the power of real assets. 

Source: Perplexity

There’s too much noise in financial markets—whether from excess information or manipulation. It’s essential to understand what’s really going on, to seek truth and invest with freedom rather than following the crowd.

Don’t get me wrong—I don’t claim to possess the truth. But I do have a deep desire to find it. As Saint John Paul II wrote in Veritatis Splendor, no. 35: “Without truth, freedom loses its foundation, isolates itself and becomes mere whim… Truth and freedom either go together or perish together in misery.”    

[1] Don’t take it literally—these are references meant to provide a foundation for making investment decisions, but they are only approximate.

[2] 1970 is chosen because the following year, Richard Nixon announced the “temporary” suspension of the dollar’s convertibility into gold. It wasn’t temporary.