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

• 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.

• 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.

• S&P 500: +6.15%
• Nasdaq: +9.04%
• Stoxx Europe: +4.02%
• All Country World Index EUR: +5.98% (the dollar rose by 0.16%, so in dollars the increase was 5.82%).
• Global Fixed Income Index EUR: -0.22% (the dollar fell by 0.16%, so in dollars the change was -0.38%).

It appears that the market is somewhat calmer regarding the tariffs announced by Trump, who has temporarily suspended these increases while awaiting agreements in the upcoming negotiations with various countries. However, there is a tense calm due to movements in the fixed income market that generate concern.

What is happening in fixed income? Inflation is decreasing slowly, credit is cooling down, and government debt continues to rise. All of this affects the market, but the drop hasn’t been very pronounced. So, why worry?

This image shows the yield curve, a graphical representation of the different maturities of U.S. Treasury bonds (it could be any type of bond, but we focus on U.S. Treasuries because they are the global benchmark) with the corresponding interest rates for each maturity.

Source: Bloomberg

These rates are set by the market through supply and demand. The U.S. Central Bank (FED) only determines the “overnight” interest rate (the rate at which banks lend to each other day by day). As can be seen, the one-year interest rate is at 4.04%, the two-year at 3.875%, the five-year at 3.927%, and so on.

Why do the interest rates on this curve move? If investors heavily demand 10-year bonds because they find the offered yield attractive, the bond price rises, but the interest rate falls. Why? Bonds are usually issued at a price of 100, and the rate is set in advance based on market conditions. Suppose a 5% rate is set, so the bondholder receives a €5 coupon annually or at the agreed frequency. Bonds are traded in a market with buyers and sellers. If the bond starts being in high demand because the interest rate is attractive, its price begins to rise—let’s say to €105—yet the coupon remains the same at €5. So, what is the new yield for a bond bought at €105? It would be 5€/105 = 4.76%. When investors find a bond attractive and buy it in large quantities, the price goes up but its yield goes down.

That said, what is worrying investors is the rise in long-term rates. In the next graph, you can see the evolution of the yield curve from April 2 (black line) to June 5 (blue line).

Source: Bloomberg.

In the ovals, I highlight the rise in rates at the 10-year and 20-year maturities in just one month.

• 10-year increased from 4.13% to 4.35% (+22 basis points).
• 20-year increased from 4.53% to 4.86% (+33 basis points).

What is driving this increase? Long-term rates (from 7 years onward) can rise due to the following three fundamental reasons[1]:

• Economic improvement. Companies seek more debt to invest in more projects as a result of this perceived improvement. This increases demand for bonds and thus interest rates. Moreover, bonds are sold to buy riskier assets such as equities. And what happens to interest rates in this scenario? They rise. Higher returns are demanded from financial assets. This could be seen as a positive scenario.

Is there really an economic improvement? In this graph showing GDP (Gross Domestic Product) evolution, a downward trend is evident.

Source: Bloomberg

And in this graph, which represents expected new orders in manufacturing and service sectors, there is also a downward trend, suggesting these sectors are not experiencing significant improvement.

Source: Bloomberg

Looking at these two examples, it is reasonable to conclude that the rise in long-term interest rates is not due to a broad economic improvement.

• Higher expected inflation. If you expect inflation to be 5%, you wouldn’t buy bonds yielding 5% because you’d lose all your purchasing power. Instead, you’d sell those bonds (what happens to interest rates then?) and buy other assets that protect against inflation.

This graph shows 10-year inflation expectations. Currently, inflation is expected to be 2.31%, and it currently sits at 2.30%. This suggests no inflation increases are foreseen in the long term.

• Issues with national accounts. If investors suspect that a country’s finances are deteriorating, they prefer to stop or reduce investment amounts. The U.S. deficit continues to grow, and debt-to-GDP is at 120%. The U.S. pays around $1T annually in interest, more than its defense spending. Moody’s downgraded the debt rating, and the CDS (default insurance) peaked at 56 points in May, compared to 33 in February.

It makes sense that the rise in long-term rates is due to a loss of confidence in the U.S. economy and its currency, caused by excessive spending far beyond its revenue.

Although the increases in 10- and 20-year rates may seem small, they have significant implications in the financial world, especially since they are causing investor concern.

Investors are selling U.S. Treasury bonds and are not showing up at auctions as before. On May 21, there was a $20Bn Treasury bond auction with unusually weak demand. As a result, 20-year rates rose sharply, surpassing 5%. This coincided with a 1.6% drop in the S&P 500, a -0.50% fall in the dollar, and a 1% rise in gold.

The Trump administration had promised to cut unnecessary spending while also lowering taxes. During the campaign, these promises were expected to generate $2 trillion in savings. However, by January 30, 2025, this had been reduced to $1 trillion and finally to $155 billion. The forecasted deficit for 2025 is $7 trillion, or 6.2% of GDP. By the way, the disagreement between Elon Musk and Trump stems precisely from this issue.

How will they finance this growing deficit?

• Taxes? Trump wants to cut them.
• Print more money? A measure that could generate inflation.
• More debt? They could issue more debt, but we’ve seen that in one of the auctions, they had to increase yields to attract demand. It’s a vicious cycle: more debt is issued, investors demand more yield, which raises costs, and so on.

I believe the bond market is signaling a warning, as this is not only happening in the U.S., but globally, as shown in this image.

Source: FMI, Incrementum

This chart shows the deficit (the more negative the number, the larger the deficit) to GDP ratio in each of these countries, with the trend rising everywhere except Italy, where the “Superbonus” has been eliminated. The deficit rose sharply in 2020 due to COVID, when spending increased to help households. Although this spending was claimed to be temporary, it now seems it could return to those levels.

What are the implications?

1. Higher yields required for financial assets: As I’ve mentioned before, the U.S. 10-year interest rate is a benchmark for riskier investments. We saw earlier that the U.S. 10-year rate is currently at 4.35%, so any other investment in dollars should offer a higher return. How much higher? That depends on the perceived risk. Investing in a very defensive company is not the same as investing in a risky one; the former will require a smaller spread, but always above 4.35%.

If I demand higher returns from financial assets, my entry price must be lower than previously estimated in order to increase that return. So far, rate increases aren’t very steep, but they must be monitored closely.

• Rising government debt: If governments keep increasing debt and offer higher yields to make it attractive (higher interest rates), it could crowd out private corporate debt. Why? Because if market interest rates rise, companies will have less capacity to finance themselves at low rates, which can be problematic.

• Currency destruction due to excessive deficit: An excessive deficit devalues the currency, as investors lose confidence in the country, creating inflationary pressures. Central banks around the world are reducing U.S. bond purchases and stockpiling gold. As evidence, the dollar has fallen 10.4% so far this year.

So should we sell everything due to the perceived risk? Absolutely not. We must discern where to invest. The conclusions I draw from the three points above for the world of investing are:

• Demand higher returns from assets.
• Avoid highly indebted companies.
• Seek assets that protect against potential inflation increases.

Therefore, in my humble opinion, investment should target companies with high Return on Capital Employed (ROCE), meaning companies with high, sustainable, and growing returns over time and low debt. Inflation is best fought by investing in real assets—and companies are real assets—and if there is cash, it should be converted into gold to preserve purchasing power.

[1] Why has the cost of US public debt skyrocketed? – Podcast by Juan Ramón Rallo | Podcast on Spotify. Min 0,55.

• S&P 500: -0.76%.
• Nasdaq: +1.52%.
• Stoxx Europe: -1.21% Stoxx Europe: -1.21
• All Country World Index EUR: -3.84% (the dollar fell by 4.71%, so in dollars the rise is 0.87%).
• Global Fixed Income Index EUR: -2.18% (the dollar fell by 4.71%, so in dollar terms the gain is 2.53%).

The final result does not say much about what has really happened in the market this month. But is that what has happened? Here is the data for the same indexes from high to low for the month.   

• S&P 500: -14.74%.
• Nasdaq: -15.56%.
• Stoxx Europe: -13.5%.
• All Country World Index EUR: -15%.
• Global Fixed Income Index EUR: -3.87%.

Thus, the April close concealed declines that invited pessimism at the beginning of the month due to the announcement of Trump’s proposed tariffs on April 2. In the first forty-eight hours after the announcement, more than nine trillion dollars of global market capitalization evaporated: the new tariffs imposed by the United States generated shockwaves in the global market. These protectionist measures are fraught with economic contradictions, especially damaging global supply chains and increasing the cost of goods for the end consumer. The rumor (later dismissed) of Jerome Powell’s dismissal only added fuel to the fire.

Source: Bloomberg

If you look at this chart, from the high of February 19 to the low of April 7, the global market as measured by the All Country World Index (ACWI) in euros fell by 23%. From April 2, the day of the tariff announcement, to April 7, the drop was 15%. It then recovered strongly (+14.64%) but is still 12% below its highs.

But let’s take it in parts:

1. The announcement of the tariffs caused panic because it could be the beginning, together with possible retaliation from other countries, of a new world economic order with strong protectionism. In addition, part of the infrastructure generated in supply chains, suppliers, etc., risked disappearing with all the investment made. This is reflected in the 15.35% drop in the graph.

2. Intentions. There are several interpretations, but some are contradictory to each other:

• Lowering the dollar to reduce the excessive trade deficit. Having some trade deficit is not negative if your currency is a world reserve, but an excessive trade deficit can lead to a constant increase in debt to continue financing it. I think exporting more, less about the currency and more about the quality of the products, although it helps.

• To finance the American government by assuring that trillions of dollars would come from other countries and thus cover the lowering of taxes, but really, those who pay these tariffs would be the American citizens if these goods are necessary (more or less inelastic demand) and there is no infrastructure to produce them internally.

• Bring more manufacturing jobs to the U.S., but the U.S. stopped being a manufacturing country long ago and became a value-added service economy. Reindustrialization of the country does not happen overnight.  

• Negotiation. But if it is a negotiation, then the two previous points would be invalid if it is agreed to lower tariffs worldwide.

Note that this has been said by members of the U.S. government, and therefore adds more uncertainty.

3. Temporary suspension of tariffs. Trump announces the temporary suspension because he says that several countries want to negotiate. Good, but it is also possible that this announcement created absurd situations, such as, for example, several cargo ships stopped waiting to enter American ports because of the uncertainty of tariffs. In the graph, it corresponds to the final rise of more than 14%.  

I think we are far from seeing the end of this situation, although it is true that decisions are being taken in the right direction. In any case, following an article by Professor Aswath Damodaran, the evolution of the different assets during this month may be telling us something important about what is happening.    

1) Equities: This asset moves with much more virulence because it is the most liquid, i.e., it can be bought and sold quite quickly (there are shares that are more liquid than others). When the investor smells something he does not like, it is the first thing he sells and that is the reason for the initial fall. Then it recovers strongly and quickly because the situation is analyzed more rationally. It is true that the profits of global companies depend on a healthy international situation.

2) Government bonds: These tend to be risk-free assets, especially US government bonds. As it is risk-free, historically it has been a safe haven asset, i.e., when risks in economic growth were perceived, investors parked their money here waiting for the downpour to pass. But this month it has moved in a similar way to equities, as you can see in this chart (equities are more volatile), why? We see it at the end.

3) Gold and Bitcoin: Gold has risen by 5.8% and bitcoin by 9.6%. They have functioned as a safe haven asset, but perhaps this is not the reason that has weighed the most in this month, mainly because bitcoin is still too young to act as a safe haven asset. Gold and bitcoin rise especially when there is a perceived deterioration in monetary policy, i.e., distrust in the currency.

4) Dollar: It is considered a safe haven asset because it is the world’s reserve currency. But the dollar has fallen by 4.5%. Now the previous point is better understood.  

5) U.S. CDS (Credit Default Swaps). The CDS is a type of insurance that pays if the bond on which it is contracted defaults, i.e. stops paying coupons. If the CDS rises, let’s say on a Microsoft bond, it is because there are investors who demand it (the CDS) because they are worried about the viability of the company in question.  Well, the CDS on US government bonds went up 38% after the announcement of the tariffs. These are not worrying levels, but they are trying to tell us something.

Source: Bloomberg

What is the conclusion we can draw?

I don’t think we are close to a recession, but these movements in the dollar, gold, bitcoin and CDS are meant to alert us to how the US accounts and monetary policy are being perceived. If, in times of crisis, investors prefer to buy gold or bitcoin rather than the dollar, it is because they are not trusting the dollar, even though it is still the world’s reserve currency.    

If you remember, one of Trump’s intentions was to lower the dollar and this month he has achieved it. Were all these movements foreseen? I find it hard to see it, but anything is possible with Trump.

I think it is not worrying because the United States will continue to be the first economic power whose currency is and will continue to be the world’s reserve currency, but an excessive trade and fiscal deficit has its consequences, especially when you depend on debt to finance it.

What are the implications for investment? 

I don’t know who said that the stock market is the only sector that when there are sales, people run away, but he is absolutely right. The great manager Howard Marks said that financial markets work like a pendulum that swings between greed and fear. We have had a few years where the pendulum has swung to the greed side and this year it seems to be swinging to fear, but lazily. The pendulum swings constantly but always passes through the middle which is what we call in the financial markets reversion to the mean, what does it mean? That any excess tends to return to the mean and therefore susceptible to sell if it has risen in excess or buy if it has done so in the fall. The best of all this is that the average in the stock market is an ascending line, therefore, it would be necessary to identify which assets are the best so that when they fall, to be alert and to buy them.      

With the excuse of what has happened this month, it is possible to explain how investment works, especially in listed companies, the stock market and in the long term. Equities are the most profitable asset in the long term, but they must tolerate continuous ups and downs. If the secular trend is upward -and history corroborates this-, strong jolts are, paradoxically, the time to keep calm and, with the analysis done, take advantage to buy companies or quality funds at better prices.

Finally, I would like to refer to the historic blackout that took place in Spain on April 28. Many speculations have been made, starting with possible cyber-attacks, but it seems that in the end, it all has to do with the excessive dependence on renewables that have been somewhat forced into Spain by European prescription. I am no expert, but from what I have read, if there is no balance of generation between the different energy sources when there is a deviation in demand and/or supply, dependence on renewables that do not generate continuously can cause blackouts, as Red Eléctrica itself said in its annual report in the section on risks: “Generation disconnections due to high penetration of renewables without the necessary technical capabilities for adequate behavior in the face of disturbances[1]”.

We know that we cannot foresee what politicians are going to say, they usually seek to win the next elections and offer what they believe the people want, and many times these are not the right decisions because of the long-term consequences. We have two clear examples: Spain and the United States.

Once again, it is shown that it is very difficult to try to know what is going to happen in the economic environment, so the best option is to have analyzed the assets that we believe are good investments, as long as we buy them at good prices. And above all, be patient because situations similar to those experienced in April will come, and in many cases, they will be more pronounced falls that will turn a good asset into a good investment when its price falls.

For the last Market Review, click here.

[1] Redeia’s Annual Report

• S&P 500: -5,75%
• Nasdaq: -7,69%
• Stoxx Europe: -4,18%
• All Country World Index EUR: -7,45% (the dollar fell 4.25%, thus in dollars, the decline was -3.20%) 
• Índice renta fija global EUR: -3,13% (the dollar fell 4.25%, thus in dollars, it rose by 1.12%) 

What caused this disaster? Before diving into details—and many of you already know—how can we determine if a market is expensive or cheap? With other assets, like real estate, we have benchmarks such as price per square meter, and this benchmark will vary based on qualitative factors like location, neighbors, noise, etc. That’s why some apartments are pricier than others with the same square footage. Financial assets operate similarly; we look for benchmarks to help us understand whether a financial asset (stock, bond, etc.) is expensive or cheap.

It’s not just about the number—we’re assuming certain things behind that number. Although financial jargon can make things seem overly complicated, this is really common sense. Let me clarify:

The most commonly used benchmark for valuing companies is the P/E ratio (not my favorite, but helpful).

P/E = Price/Earnings

This ratio indicates how many times a company’s earnings investors are willing to pay. For example, if a company’s P/E is 10, you are paying 10 times its earnings, meaning you must wait 10 years (at annual earnings) to recover your investment. Great, but is 10 expensive or cheap? As a good Galician would say, “It depends.” There is no magic number, as mentioned earlier regarding real estate; it depends on the sector, company quality, risk, etc.

Perhaps it is clearer if we rearrange the formula:

Price = Earnings × P/E

Earnings are factual¹, but the P/E (the multiple) is subjective. Depending on the multiple I assign, I determine the asset price. If I consider a company high-quality, I assign a higher multiple; if I perceive greater risk, I assign a lower one. Hence, no magic number exists.

This leads me to what happened in the market. These declines were not driven by falling earnings but rather by a shrinking multiple—a reduction in the P/E ratio. Investors perceive greater risk and thus want to pay a lower multiple due to increased market uncertainty. Remember, the S&P 500 was trading at historically high multiples, boosted by optimism around artificial intelligence, economic improvement, and improving corporate margins. Now, this optimism has been overshadowed. Why? Trump.

Firstly, there is heightened geopolitical tension due to ongoing conflicts, but investors’ main concern has been the announcement of “Liberation Day,” set for April 2, when the definitive tariff policy would be revealed. The higher the uncertainty, the less investors want to pay a high market multiple; instead, they prefer selling and buying more defensive assets, such as gold, which rose 9.26%.

In this chart, you can observe the sharp rise in the political uncertainty index created by Economic Policy Uncertainty².

Source: Economic Policy Uncertainty Index

Trump’s announced tariffs intend to boost U.S. production, creating jobs and revitalizing American industry. Additionally, revenues from these tariffs might allow for tax cuts. It sounds good, but…

1. Tariffs will likely reduce imports, and it’s uncertain whether remaining import revenues will sufficiently fund the desired tax cuts.
2. Foreign companies will export less, resulting in reduced sales, and American private sectors will suffer from higher prices.

Given this scenario, it’s logical for investors to become more cautious. Notably, American stocks suffered the greatest declines, especially the “magnificent seven” (Microsoft, Amazon, Alphabet, Meta, Nvidia, Apple, and Tesla), as illustrated in this chart.

Source: Bloomberg

Besides affecting U.S. markets significantly, the hardest-hit companies were those trading at higher multiples. Investors tend to sell first what has risen most and thus has the potential to be more volatile. Regions targeted by tariffs initially did not suffer as severely. Emerging markets rose 0.378%, and small-to-medium European companies fell only 2.9%—by the way, companies within Altum’s investment universe.

“Liberation Day” arrived, loudly announced by Donald Trump’s administration. In his speech, he talked about reciprocal tariffs and making America a richer, better country again. Here’s a summary of some tariffs:

• Universal tariff: 10%.
• Aranceles adicionales:
  • China: 34%, totaling 54%.European Union: 20%.Japan: 24%.
  • Vietnam: 46%.
• 25% tariff on automobiles and components.

I believe this is a mistake and will negatively impact international trade. Affected countries have already started to announce possible retaliations. Tariffs are protectionism, and protectionism is harmful to the economy. In the 1930s, the U.S. Smoot-Hawley Tariff Act had devastating national and international economic consequences. For instance, American imports fell by 40% and exports by 60% between 1930 and 1932³. Today’s situation is different due to the Great Depression context, but measures meant to stimulate recovery ultimately worsened the crisis.

But let’s verify if these tariffs are truly reciprocal, as Trump claims. This image shows tariffs, including non-tariff barriers imposed by other countries:

Source: BofA Research

What non-tariff barriers is Trump complaining about? In Europe, among others, these include:

• Sanitary and phytosanitary standards.
• Technical and quality standards (labeling, emissions, etc.).
• Environmental and climate regulations.
• Subsidies and unequal access to public contracts.
• Import quotas limiting American products.

Trump claims these barriers obstruct trade with the EU, being even more harmful than tariffs—a point Mario Draghi also highlighted in his latest report⁴. A theoretical tariff calculation, considering these aspects, would be:

Theoretical tariff = U.S. trade deficit with the country/U.S. imports from that country

Applying this formula to the EU yields a 39% tariff. Hence, Trump argues they’re effectively charging half that rate, implying they should be satisfied. However, this argument seems weak, suggesting fair trade wouldn’t involve trade deficits—a historically inaccurate notion since trade deficits have always existed. Indeed, global trade has significantly reduced poverty worldwide.

What raises doubt is the exaggerated theatricality of the tariff announcement, leading me to suspect—as I’ve read elsewhere—that the U.S. truly aims for trade negotiations⁵ from a position of power or perhaps aims to weaken the dollar to reduce the trade deficit.

All this maneuvering has made markets extremely nervous, widening the range of potential outcomes—in other words, increasing uncertainty and thus reducing the multiple (P/E) to reflect this scenario.

What should we do? Immediate consequences are:

• The steepest declines came from companies trading at demanding multiples. For example, Nvidia has dropped 32% from its January peak.     
• Companies selling products with narrow margins may face serious challenges due to increased costs or even stop producing if they lack pricing power. Low-margin companies typically lack such pricing power.  

This environment offers attractive opportunities because when markets panic, investors sell indiscriminately, creating excellent opportunities in companies with high margins, low debt, and stable growth—precisely the companies we seek at Altum.

[1] Taking into account the profit already published. There is the estimated P/E which is calculated with the estimated profit..

[2] Tool developed by Scott R. Baker, Nicholas Bloom and Steven J. Davis. This index is constructed based on news analysis, tax law changes and dispersion among economic forecasts. 

[3] Qué son los aranceles Smoot-Hawley, que profundizaron la Gran Depresión de 1929 y desataron la última gran guerra comercial de EE.UU. – BBC News Mundo

[4] 97e481fd-2dc3-412d-be4c-f152a8232961_en

[5] Trump se abre a negociar los aranceles si le ofrecen “algo fenomenal” a cambio

• S&P 500: +2.70%.
• Nasdaq: +2.22%.
• Stoxx Europe: +6.29%.
• All Country World Index EUR: +3.90%.
• Global Fixed Income Index EUR: +0.18%.

In equities, the prize for the month of January goes to Europe with a rise of 6.29%, well above the rest of the indices. Why? I believe the main reasons are as follows:

• Fears about US tariffs were reduced, especially after the easing of Trump’s stance on trade policies.
• The emergence of Chinese artificial intelligence “startup” DeepSeek led to a significant drop in U.S. tech stocks, especially Nvidia, whose market value dropped nearly $600 billion in a single day. To put it in perspective, Spain’s GDP is approximately $1.6 trillion.
• The European Central Bank (ECB) cut interest rates by 0.25 points, leaving them at 2.75%, with the aim of reviving the eurozone’s stagnant economy. ECB President Christine Lagarde hinted at the possibility of further cuts, which further increased optimism in the markets.

What has happened in the American technology sector?

This month we have witnessed the collapse of Nvidia, one of the most prominent companies in recent years, which lost almost $600 billion ($600,000,000,000,000) in a single day due to the arrival of DeepSeek, an artificial intelligence (AI) assistant developed in China. To put the magnitude of this drop in perspective, Spain’s GDP is $1,900 Bn, which means that the loss represents 37% of that GDP. Not only Nvidia was affected, but the rest of the companies linked to AI such as Broadcom (-17.4%) and AMD (-6.37%), which caused a 3% drop in the Nasdaq.

I know I have already talked about Nvidia on other occasions, and I am sorry to repeat myself, but I consider it key to understand what is currently happening. Nvidia dominates the GPU (Graphics Processing Unit) market with a 90% share, while Advanced Micro Devices takes the remaining 10%. In the data center GPU sector, its share amounts to an impressive 98%. Why is this information relevant? Because the most expensive component in data center construction is precisely GPUs, which account for almost 50% of total spending¹.

Nvidia expects sales of $47 billion in 2024 in the Data Center segment alone. Where do these sales come from? According to Bloomberg, Microsoft accounts for 18.9% of the total, Meta (formerly Facebook) accounts for 10%, Alphabet 6%, Amazon 5.5%, and Tesla 2%. In other words, with the exception of Apple, the rest of the “Magnificent 7” account for 42% of Nvidia’s sales. Based on this data, Microsoft would be paying almost 9 billion dollars to Nvidia for its data centers, and so on for the other companies. In short, the market for data centers and GPUs is huge to this day and should continue to grow… or so we believe.

Suddenly, the Chinese startup DeepSeek, which you’ve probably heard of lately, made its appearance. This artificial intelligence assistant has shaken up the global AI industry, generating both excitement and concern.

Until recently, the United States seemed to be at the forefront of the AI race. President Trump had announced “Stargate,” a $500 billion AI infrastructure megaproject backed by key figures such as OpenAI’s Sam Altman and SoftBank’s Masayoshi Son. However, the launch of DeepSeek has drastically altered this picture.

DeepSeek in its “debut” quickly climbed to the top spot in Apple’s App Store, surprising investors and significantly affecting the value of tech stocks. Its appeal lies not only in its performance, comparable to ChatGPT-4, but also in its surprisingly low cost. While OpenAI invests more than $100 million in developing its advanced models, DeepSeek claims to have built its application in just two months with less than $6 million. If this is true, the change in the industry would be monumental: less investment and thus many companies like Nvidia would be severely affected, as reflected in its 17% drop on the day of the announcement. However, as the daughter of a friend of mine says: “Mom, what you buy in a Chinese shop, breaks the next day”. So, beware of betting on the cheap.

Regardless of whether or not DeepSeek will turn out to be a success story, this phenomenon calls into question the valuations of technology companies, especially those linked to artificial intelligence.

There are several multiples we use to assess the valuation of companies. Two of the most common are P/E (price to earnings) and P/S (price to sales), which help us determine whether these companies are overvalued or not. To make this comparison, we contrast them with the multiples at which the U.S. S&P 500 trades.

It seems that these companies are overvalued compared to the rest of the market, considering that the historical average P/E of the S&P 500 over the last 25 years has been 18x and the P/S has been 1.85x.

Is it reasonable for them to trade at these multiples? Some investors are willing to pay these multiples because of the high margins and their great optimism about the future growth of these companies. If they can sustain that pace of expansion and margins, it might make sense, but those multiples imply an extremely optimistic scenario. In fact, Nvidia alone trades at a P/E of 47x and a P/S of 26x.

Thus, the drop in the market for these companies is better understood. There is an excess of optimism, and just a small disruption is enough to trigger a stock market tsunami, a phenomenon that is not new and has been repeated in the past.

Every time I see these valuations, I am reminded of what the CEO of Sun Microsystems said after the collapse of the tech bubble at the turn of the century, referring to his own company: “At a valuation of 10 times earnings, to give you a 10-year payback, I would have to pay you 100% of earnings in dividends for 10 years in a row. That assumes my shareholders would approve. That assumes I have no cost of goods sold, which is very difficult for a hardware and software company. That assumes I have no expenses, which is virtually impossible with 39,000 employees. That assumes I pay no taxes, which is very difficult for a hardware and software company. That assumes I have no expenses, which is practically impossible with 39,000 employees. That assumes I pay no taxes, which is very complicated. And that assumes that you don’t pay taxes on dividends, which is basically illegal. And that assumes that, without investing anything in R&D for the next 10 years, I can maintain the current level of income. Now, having said that, do any of you want to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need transparency. You don’t need footnotes. What were we thinking?”

This company, which reached a $200 billion valuation in 2000 ($64 per share), ended up being sold to Oracle for $7.4 billion, representing a -96.3% drop.

An investor’s worst enemy is himself. Biases, both emotional and cognitive, can ruin the best analysis. Daniel Kahneman, Nobel laureate in economics and author of the book Thinking, Fast and Slow, talked about these biases. When I read it, I realized that I fell into several of them, which helped me to be more aware and to try not to get carried away by them. 

In the case at hand, we seem to be witnessing what the author called the “herd effect”. This phenomenon occurs when investors follow the majority without analyzing for themselves whether the decision is correct. It is based on the belief that if everyone is doing it, it must be a good idea.

Are we experiencing a herd effect at the moment? I don’t know for sure, but what is clear to us at Altum is that, at the risk of being wrong, we do not think it is prudent to invest at these multiples.

1. AI’s $600B Question | Sequoia Capital ︎

• S&P 500: -2,74%
• Nasdaq: -0,72%
• Stoxx Europe: -1,17%
• All Country World Index EUR: -2,70%
• Índice renta fija global EUR: -0,87%

Following Trump’s victory in the U.S. elections, we are observing its repercussions on financial assets. The United States has outperformed the rest of the world, with Nasdaq (which includes the renowned “Magnificent 7”[1]). standing out once again. This index has not only surpassed the rest of the world but also the almighty S&P 500. Additionally, the dollar continues its ascent, a movement that began strongly in November. Meanwhile, the yield on the U.S. 10-year bond has risen from 4.17% at the beginning of December to around 4.60% today.

I would like to highlight two aspects of the financial market that have stood out this year:

• Inflation and interest rates.

We know that central banks raised interest rates due to the sharp increase in inflation following the pandemic and the war in Ukraine. Were the war in Ukraine and the pandemic really the causes of inflation? I don’t think so; they were merely the straw that broke the camel’s back. Many voices have concluded that central banks, especially the FED, have managed to control it and have thus begun a downward trend in interest rates, something that pleases short-term investors. In my experience as a manager, I have seen countless times how arguments are twisted to sell financial products by investment banks.

I remember that a private banking boss where I worked many years ago tried to sell a structured product on Lloyds Bank before the U.S. real estate crisis in 2008-2009. If I recall correctly, the condition for obtaining good returns was that Lloyds would not drop by more than 40%. He argued it was almost impossible for Lloyds to drop 40%, and if it did, the stock market would be the least of our concerns, and he would leave the bank. The stock fell by 40%… not once, but four more times, ultimately dropping 93% between October 2007 and January 2009. And… he just retired.

But the question I wanted to address is this: Is it true that central banks have won the battle against inflation? Honestly, I don’t know, but there are signs in the market suggesting otherwise. If you remember in a previous commentary, the FED (the U.S. central bank, but applicable to others) manages short-term interest rates, while long-term rates are at the mercy of the market and depend on the state of the economy and especially on expected inflation. Well, if the FED lowered rates by 0.50% in September, 0.25% in November, and another 0.25% in December—a total of 1%—why has the 10-year U.S. bond yield risen by 1% since September? The chart shows the evolution of the U.S. 10-year Treasury yield, and you can see that since the FED lowered rates by 0.50% in September, the 10-year yield has risen by 1%.

    Source: Bloomberg, own elaboration.

The market is indicating that inflation will rise or is already rising. For some figures, the 30-year mortgage reference rate in the United States has risen to 7.30% when three months ago it was 6.58%[2].

Therefore, if inflation is still above the target, the economy seems to be doing well, financial conditions are loose, and employment appears solid, why are rates dropping? As I mentioned before, central banks are no longer independent. Governments worldwide need to spend or at least maintain their spending levels, and for that, they need financing. Moreover, a significant amount of government debt is due in 2025 and 2026 that needs refinancing, making it crucial to keep interest rates low.

The immediate consequence is more liquidity in the system when they wanted to reduce it, and the less immediate consequence is the potential for inflation to rise again.

So, what should we do to protect ourselves? Invest in real assets, either directly or through shares of companies with financial strength and solid business models. If we want to maintain liquidity, the most advisable substitute to preserve value could be gold.

• Small and medium-sized enterprises versus large ones.

I don’t want to bore you with this topic, but I think it’s important to understand this situation. I already mentioned that the increase in passive management (replicating an index regardless of the valuations of the companies that weigh more in the index) has caused large companies to rise more strongly than medium and small ones.

This chart shows the valuation difference between large and medium-small companies in terms of long-term PER (CAPE)[3].

Source: Bloomberg, own elaboration.

Large companies are trading at 31.4 earnings, while medium and small ones trade at 20.7 times, a large difference that could reverse over the years. When will this happen? I don’t know, but I think it’s unsustainable. When people tell me that we don’t understand the market and should follow the wave of big companies, I remember the situation faced by one of the greatest managers in history, Warren Buffet. Buffet achieved an annual return of over 23.6% from 1965 to 2000, compared to the S&P 500’s 11.8% annual return—a huge difference. However, from 12/31/1998 to 03/01/2000, he achieved a return of -37.57% compared to 12.2% for the S&P 500 (Bloomberg). He was criticized for not investing in the new paradigm emerging at the time, the internet and its economic implications, and many people stopped trusting him. Well, from 12/31/1998 to 12/27/2024 (today), Buffet has achieved 874% compared to the S&P 500’s 384%. Buffet didn’t invest in this new paradigm because 1) he didn’t understand the technology and 2) he saw excessive euphoria in valuations and even in the indebtedness of many investors to invest in these types of companies.

Of course, I’m not saying we are as good as Buffet, far from it, but one must persevere with the investment decision made if one believes in the prior analysis. There are many companies in the field of artificial intelligence of great quality, but we sincerely believe they are trading at very demanding valuations.

We wish you a happy and prosperous 2025.

[1] Microsoft, Amazon, Google, Nvidia, Meta Platform (Facebook), Tesla and Apple.

[2] Bankrate.com US Home Mortgage 30 Year Fixed National Avg (Bloomberg)

[3] CAPE=Pº actual index/Media real Bº (adjusted by inflation) of last 10 years.

• S&P 500: -0.99%
• Nasdaq: -0.85%
• Stoxx Europe: -3.35%
• All Country World Index EUR: +0.92%[1]
• Global Fixed Income Index EUR: -0.65%

The market was in a kind of “tense calm,” awaiting the U.S. elections in November, with results that were generating and would continue to generate high uncertainty. There are significant differences in the priorities and approaches of both candidates’ programs, but they do agree on one thing: increasing spending.

Can a state spend ad infinitum? According to the proponents of Modern Monetary Theory (MMT), the answer is yes or almost. They argue that a country with control over its currency (like the United States) can increase the deficit to achieve full employment, as long as it doesn’t face high and persistent inflation. And who decides if inflation is high and persistent? The politician in charge.

If you recall, in September, the Federal Reserve (the U.S. Central Bank) lowered rates by 0.50%, a significant reduction considering inflation was still above 2%. This decision was made due to the perceived deterioration in the economic situation, especially in the labor market, with the aim of reducing public spending both now and in the future.

However, following the Fed’s 0.50% rate cut, the 10-year bond yield increased by 0.70%. It seems the Fed didn’t achieve the desired effect… This movement reflects investor sentiment and expectations, which is crucial as it gives us insight into possible market trends in the coming months.

Let’s start at the beginning. The yield curve, which represents interest rates across various debt maturities (1 year, 2, 5, 10, 20…), was inverted. Short-term rates were higher than long-term rates, which is illogical since lending over the long term should, in theory, involve higher interest due to greater uncertainty. So, why does the curve invert? One explanation that makes sense to me is that economic agents are requesting short-term credit to finance their working capital due to insufficient liquidity from lower sales. Many companies, anticipating an increase in inflation and a rise in rates, stock up to avoid higher future prices; if they haven’t done so, they reduce their purchasing budgets. This increase in short-term credit demand drives up interest rates.

On the other hand, long-term rates hold steady or might even decrease, as investors anticipate higher inflation and lower economic growth. Historically, this type of inverted curve has been a recession indicator, although that hasn’t been the case so far.

In simple terms, short-term rates are adjusted based on the Fed’s decisions. When the Fed lowered rates, short-term yields also dropped, but long-term yields, from five years and up, increased. This is because investors believe the Fed has “thrown in the towel” on fighting inflation, prioritizing the labor market instead. This sounds like Modern Monetary Theory (MMT), doesn’t it?

The latest labor market data show signs of weakness. In October, only 12,000 jobs were added month-over-month, the slowest growth in four years. What’s more concerning is that private sector jobs dropped by 28,000 while the public sector rose by 40,000. In other words, if it weren’t for public spending, total employment would have fallen. Moreover, the main type of employment being created is temporary. At first glance, it may seem that the state is doing a great job compensating for the private sector, but beware: “the devil is in the details.”

Why are investors expecting higher inflation?

1. Fossil fuels (oil, coal, and natural gas).

Investment in oil-related infrastructure fluctuates with prices. If demand increases, prices rise, making oil projects more attractive, thus boosting investment. However, this infrastructure isn’t immediately operational, so it can’t meet demand automatically, leading to further price increases. Often, supply overshoots and eventually exceeds demand, causing an oversupply and prices to fall. We are currently in a low-investment cycle, further strained by regulated energy transitions, where a politically motivated agenda has resulted in less investment in fossil fuels, though 81.5% of global energy consumption still depends on them[2], especially in emerging countries. Rising demand from sectors like artificial intelligence [3]and China’s growth, combined with reduced supply due to geopolitical events, could lead to sharp increases in oil prices and inflation.

2. Fiscal deficit.

The U.S. government projects a cumulative deficit of $22 trillion over the next ten years, excluding possible recessions or events requiring additional spending, as was the case during the COVID-19 pandemic.

U.S. debt today exceeds $35 trillion, representing 123% of GDP. Federal spending constitutes 37% of GDP, and, more importantly for our analysis, interest payments make up the second-largest federal expense, surpassed only by social security and greater than defense[4] spending. Based on government projections, it’s likely that interest expenses will surpass the social security budget.

How to finance this spending? By raising taxes, increasing debt, and/or printing money. All of these methods, in some way, are inflationary.

3. Rate cuts.

Regardless of the Fed’s motivation for lowering interest rates, a possible consequence is an increase in credit and consumption, which, in turn, puts upward pressure on prices.

What’s the conclusion of all this?

• As I mentioned in last month’s commentary, the Fed and other central banks around the world may lose their independence and serve only the state in its spending programs. I’m not saying that many of these expenditures are unnecessary, like subsidies in healthcare, education, defense, justice, and especially in emergencies like the recent DANA in Valencia. However, if there’s excessive spending on superfluous matters, resources for more necessary objectives decrease.

• The curve inversion. As you can see below, the curve inversion has already begun, but there is still more ground to cover. On the X-axis are debt maturities, from 1 month to 10 years, and on the Y-axis are interest rates. The brown line represents the yield curve as of December 31, 2023, and the green line, the same curve as of October 31 of this year. In the December 2023 curve, maturities from 1 month to 4 years were higher than those for 10 years. Currently, the curve has inverted significantly, with the 10-year rate exceeding all previous maturities up to one year. It’s noticeable that sub-year maturities have higher rates, but they are more sensitive to central bank cuts.

The interpretation, as mentioned before, is that the Fed will fight to avoid worsening employment, meaning it will lower interest rates so companies keep hiring, putting inflation on hold for now, as it’s near the 2% target.

What does this imply for investment?

• Having a greater exposure to short-term fixed-income bonds. Short-term interest rates are higher, and if central banks continue to cut rates, the prices of these bonds would rise (remember, prices move inversely to rates).[5]

• Lower exposure to long-term maturities. If long-term rates rise, driven more by the market, this would negatively impact long-term bond prices.

• Regarding equities, they are generally a good asset against inflation because the assets on their balance sheets are real assets that inherently reflect price increases.

• If public spending increases, helped by lower interest rates, inflation is likely to rise. Therefore, it’s preferable to have certain assets that protect against inflation, like gold.

I would like to include a brief comment on the election outcome and its possible impact on financial markets.

Donald Trump secured the majority in the Presidency, Senate, and House of Representatives. From an economic perspective, these are the most relevant points in his electoral program:

• Tariffs: Imposing tariffs on various products, especially those from China, with rates potentially reaching up to 60%.

• Fiscal Deficit: Increasing spending and cutting taxes, so the deficit will continue to grow.

• Labor Market: Restricting illegal immigration, affecting the labor market, decreasing supply, and raising wages.

One of the long-term consequences of this economic program is the greater likelihood of rising prices, so I believe that the election results have not altered the conclusions regarding the financial assets discussed above.

[1] The increase in this index is due to the rise of the dollar against the euro of 2.17% in the month.  

[2] Statistical Review of World Energy.pdf

[3] Demand for electricity is growing so much with AI that the International Energy Agency has convened a global summit

[4]  Nick Giambruno: Is the Dollar Collapsing? 7 Key Indicators You Can’t Ignore

[5] If I buy a bond at 100 with a coupon of 5%, at maturity, let’s assume 1 year, I will get back 100 and my profitability will be equal to the coupon, that is, 5%. But if the price of the bond falls in the market for whatever circumstances and I can buy it at 90 for example, my return will no longer be 5%, it will be higher because in addition to the coupon, I get a rise in price at maturity of 10 because I get 100 back.    

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• S&P 500: +2.02%
• Nasdaq: +2.48%
• Stoxx Europe: -0.41%
• All Country World Index EUR: +1.68%
• Global Fixed Income Index EUR: +0.87%

Why did Europe end in negative territory?

The sector that fell the most was healthcare, which represents 17% of the Stoxx Europe. The main culprit was Europe’s largest pharmaceutical company, Novo Nordisk, which dropped 16% in September due to several investigations in the United States related to insulin reimbursements. Another sector that fell significantly was the automotive sector, which also carries substantial weight in Europe.

What can we highlight from what happened in September?

I believe there are three key issues that affected and will continue to affect the market in the future:

1. The FED (U.S. central bank) lowered rates by 0.50% to the range of 4.75% – 5%.

This interest rate is called the Federal Fund Rate, and it is the rate at which banks lend to each other overnight. It’s the tool the FED uses to influence monetary policy, meaning it can make borrowing more expensive to curb economic growth when inflation is rising, or make borrowing cheaper to stimulate bank lending.
It is a reference for other loan interest rates, such as mortgages, car loans, credit cards, student loans, etc. That’s why it’s so important, as it influences our consumption and investment decisions. The FED and other central banks do not decide long-term interest rates, which move according to investor buy-sell activity, including that of the central bank itself.

A lingering question in the market is: why lower rates by 0.50% now when the economic data isn’t bad, inflation is still above the 2% target, and they even said there would be no recession? Additionally, the first rate cut is 0.50% instead of the usual 0.25%. At other times, this would have led people to believe the FED saw significant economic risks to justify a cut of this magnitude.
Many have speculated that the reason could be the upcoming elections in November. It would be disappointing if this were the case: that such a powerful entity (which has a monopoly on money printing¹) that is legally independent would make decisions affecting millions of people for political reasons, like helping someone win an election. I don’t care what party they belong to, they almost all do it.

Savings are key to a country’s development as they allow:
• The financing of investment projects that create value and jobs.
• Savers to make returns on their savings to cover future needs, such as their children’s education, addressing social needs, etc.

This chart shows the importance of savings in increasing wealth and, therefore, in reducing poverty globally.

Source: Prepared by the company

If we lack certainty about the level of interest rates, we will be less willing to lend those savings. Therefore, if rate decisions depend on the needs of the politician of the day, there will be a risk of investment shortages.

What are the effects of an interest rate cut on financial markets?

Although a 0.25% cut had already been priced in, the effects are as follows:
• It benefits companies in the growth phase whose profits are not immediate.
• Fixed income rises with interest rate cuts. The price moves inversely to the rates. Remember that the central bank only controls overnight rates.
• It encourages borrowing, although that depends on the level of existing debt, which is already significant.
• It temporarily relieves those with variable-rate loans.

2. Strong stock market gains in China.
   The People’s Bank of China announced a significant fiscal and financial stimulus plan to try to support both the real estate market and the stock market, which have been falling for some time. Among other measures, they reduced the down payment required to buy a house from 25% to 15% of the value, and launched a stock purchase program worth 500 billion yuan (€65 billion). This last measure had never been taken in China before.

At least in the short term, the stock market reacted positively, with the Chinese stock market rising 20% in September. Allocating resources to a sector like real estate, which is already over-leveraged and with many companies in critical condition, carries high risk. Many real estate companies still have a backlog of empty buildings across China. If, instead of channeling resources into more productive sectors, they are poured into a sector that needs readjustment, it’s akin to throwing money away. We’ll see how this plays out.

3. Geopolitical tension.
   There’s a third point which, though listed last, is no less important. The situation in the Middle East is escalating, with Iran’s attack on Israel and possible reprisals. We hope this does not escalate further, and let us pray that the leaders making decisions that could affect thousands of lives act wisely and choose peace.

These types of events affect the market and are often hard to predict, except for the post-event forecasters who claim it was obvious that one should have invested in China or bonds. Even when events are predicted, their market effects may differ from expectations.

Investing involves uncertainty because it’s about the future. The best way to minimize uncertainty, though never eliminating it entirely, is to conduct thorough analysis of the assets being invested in. If this is done, and you fully trust your analysis, such events will not lead you to make hasty decisions. As St. Ignatius said, “In times of desolation, make no changes.

1. This is not entirely true. Commercial banks, thanks to the fractional reserve, can lend more than 90% of the money deposited in their clients’ accounts. If Peter deposits €1,000 in bank A, it can lend to John €900 that he will deposit in bank B, and this in turn will lend to James €800 that he will deposit in bank C. Therefore, there is €800 that has been multiplied by 3, basically €1,600 has been created out of nothing. The situation is that all 3 are owners of the same €800 ︎

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