It remains too early to judge whether last week’s sudden downturn is sufficient to alter our constructive outlook—April’s so-called ‘Liberation Day’ under President Trump offered a reminder of how swiftly sentiment can reverse. That said, we remain watchful amid elevated volatility, even as Sowell’s technical indicators continue to signal a fully invested posture.
The enduring spectacle of geopolitics—be it the ongoing, wearisome government shutdown, the latest pronouncements on the Israel-Hamas ceasefire, or even the major chip partnership between AMD and OpenAI—served merely as distracting noise for much of the week. The true signal, as is so often the case, arrived in a stunning denouement on Friday, confirming that systemic, structural risks remain paramount.
The catalyst for the week’s sharp correction was President Trump’s renewed threat, articulated late Friday, to impose a crippling 100% tariff on Chinese imports effective November 1st. The markets responded with characteristic vigor: the S&P 500 suffered a precipitous decline of 2.70% on the day, while the Nasdaq Composite, reflecting the acute vulnerability of globally intertwined technology supply chains, dropped an unexpected 3.5%. For the five-day trading period, the benchmark S&P 500 surrendered -2.41%, and the Nasdaq Composite registered a more profound loss of -3.85%.
The Structural Confrontation
The sudden shift in the trade posture was the culmination of escalating tit-for-tat protectionism. The latest cycle began when Beijing, leveraging its near-monopoly on critical resources (China produces over 70% of the global supply), broadened its export controls over 12 rare-earth elements (including holmium, erbium, thulium, europium, and their ilk) essential for high-technology and defense manufacturing.
Simultaneously, the trade friction manifested in maritime commerce. China announced new port fees of US$56 per net ton on U.S.-owned shipping vessels, commencing October 14. This, in turn, was a symmetrical riposte to the U.S. Customs and Border Protection’s imposition of port fees announced in April—escalating by $30 per net ton each year annually until 2028—on Chinese-made vessels docking in American ports, also effective on the 14th of October.
The market’s initial, sanguine dismissal of this administrative skirmishing evaporated instantly upon the President’s threat of a punitive 100% tariff, plunging global trade risk back into the forefront of investment calculus.
Flight to Quality Amidst an Information Vacuum
Faced with a sudden surge in geopolitical uncertainty, capital predictably sought refuge. The yellow metal enjoyed a frenzied flight to quality, with Gold continuing its surge, breaking through the $4,000 threshold to settle at a robust $4,035 an ounce. Concurrently, the Treasury market signaled a deep impairment of confidence as yields tightened: the 10-year yield declined from 4.14% to 4.05%, and the 30-year yield compressed from 4.72% to 4.63%.
This anxiety is compounded by the government shutdown, which continues to create an information vacuum. With the House recess extended until October 19th, the postponement of crucial federal economic statistics is virtually assured. Worryingly, reports of permanent job cuts—as opposed to mere furloughs—within the Trump administration suggest that the delayed labour statistics, once published, may reveal deeper structural weakness.
Indeed, even without official federal reports, the available private and regional data suggests an economy in conspicuous deceleration. The question is no longer if the economy is cooling, but rather how severely the Federal Reserve's policy options will be constrained by this malaise.
Leading indicators confirm the softening trend:
Dallas Fed Mfg Business Index: Declined by 8.7%, marking the seventh contraction in nine months.
ISM Non-Mfg Business Activity Index: Tipped into contraction territory for the first time since 2024, settling at a forecasted 49.9.
Conference Board Consumer Confidence: The reading of 94.2 was conspicuously lower than forecast, reflecting widespread consumer pessimism.
MBA Mortgage Applications: Declined by 4.7% for the second consecutive week, cementing the weakness in the housing sector.
Challenger Job Cuts: Corporate layoffs totaled 54k, a deceleration from the previous month’s 86k, yet still indicative of significant structural pruning.
While the docket for the week ahead includes highly anticipated reports on Unemployment, CPI, and PPI, the continuing, extended shutdown means these key economic data points will likely be deferred. Consequently, investors must shift their focus from backward-looking government statistics to forward-looking guidance, which will be available through the upcoming corporate earnings releases, particularly in the Financial Services sector.
“Nothing in life is to be feared, it is only to be understood. Now is the time to understand more, so that we may fear less”
— Marie Curie, first woman to win a Nobel Prize for Physics and Chemistry.
US Stocks Move Closer to Dot-Com Bubble Valuations
“The question that people pose—are we in a bubble?—seems to me a little bit vague. We’re always in a bubble somewhere.”
—Robert J. Shiller, Nobel laureate economist, interviewed by CFA Institute in 2019
When the S&P 500 closed on September 30, 2025, its price was just a few dollars off an all-time record high set the prior week, with US stocks having bounced back a stunning 34% since hitting “Liberation Day” lows in early April. It was a different market milestone, however, that caught our attention at the end of Q3: September marked the second-highest level ever for a well-known valuation metric, the CAPE ratio, which was only exceeded at the height of the dot-com bubble in 1999 (see below). That could explain why Fed chair Jerome Powell, in a speech following last month’s FOMC, described equity prices as “fairly highly valued.” With that in mind, while many investors watching the 2025 rally in equities are probably feeling the FOMO, we prefer to explore what sky-high valuations might mean for the market’s future performance.
It’s worth taking a moment to explain what exactly the CAPE ratio is, and what it’s meant to capture. Popularized by Yale Professor Robert Shiller—and most famously promoted during the Internet stock craze of the late 1990s—the Cyclically Adjusted Price-to-Earnings ratio is actually similar to the P/E ratio most of us will have seen many times before. That measure divides the market’s price over the last 12 months by the EPS of companies making up the index, answering the question: How much does an investor have to pay for each dollar of last year’s earnings? When the price we pay for the same dollar of earnings is much higher today than it was before, we might say stocks are a little too pricey. When earnings can be bought on the cheap, perhaps it’s a bargain.
What the CAPE ratio does differently is to account for a simple intuition about earnings: the fact that companies’ profits vary over the course of the business cycle, peaking during macro booms and bottoming out amidst recessionary busts. Along those lines, rather than comparing price to last year’s earnings, the CAPE ratio compares the real price of the index to an average of the last 10 years’ inflation-adjusted earnings—essentially smoothing out the cyclical variation in EPS, leading to a more robust representation of where prices stand relative to the market’s history.
Once again, judging by the chart above, US shares are certainly on the expensive side. Recognizing that companies and markets have evolved quite a bit since the 1870s—yes, Professor Shiller has collected data covering well over a century in the stock market—we’ve plotted a band of plus-or-minus two standard deviations around the mean return over just the last 20 years, and the CAPE ratio is testing the top end of that range in recent months.
But what does all of this mean? We’ve been following broad market returns long enough to know that reliably predicting what’s going to happen over the next year, let alone in the next week or month, is far from a sure thing—and probably closer to an impossibility. On the other hand, we do believe today’s valuations might serve as a helpful indicator of longer-term stock market performance. Historically, referring again to Professor Shiller’s data on S&P 500 returns over the decades, when the CAPE has been in excess of 30x, stock returns over the next 10 years have been slightly negative to low single digits. As such, it wouldn’t surprise us in the least if US equities end up delivering lower-than-average performance as earnings gradually catch up to valuations.
In the meantime, we acknowledge there are plenty of things that could yet keep prices moving higher in the short run: the Fed is easing again, President Trump is pushing some pro-business policies, and it’s anybody’s guess when enthusiasm for AI might wane, to name a few. Rather than dump stocks and retreat to cash, investors might consider a number of less dramatic moves. Opting for active stock selection can help avoid the most over-hyped names and land on lower-risk, more defensive, higher-quality plays. International diversification may also lead to better investment opportunities for investors. The MSCI World ex-USA index of Developed Market stocks currently trades at a CAPE ratio of just over 20x—only modestly above its 20-year historical average level.
Disclosure: This material is for informational purposes only and should not be considered personalized investment advice. It does not consider the specific investment objectives, tax and financial condition or needs of any specific person and therefore, the strategies and investment ideas may not be suitable for all individuals. An investor should consult with their financial professional before making any investment decisions. The opinions contained herein are subject to change without notice. Indices cannot be invested in directly and are unmanaged. Past performance is not indicative of future results.
Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.
WEEK AHEAD
October 13-17, 2025
Tariffs Don’t Just Talk—They Dictate
The enduring spectacle of geopolitics—be it the ongoing, wearisome government shutdown, the latest pronouncements on the Israel-Hamas ceasefire, or even the major chip partnership between AMD and OpenAI—served merely as distracting noise for much of the week. The true signal, as is so often the case, arrived in a stunning denouement on Friday, confirming that systemic, structural risks remain paramount.
The catalyst for the week’s sharp correction was President Trump’s renewed threat, articulated late Friday, to impose a crippling 100% tariff on Chinese imports effective November 1st. The markets responded with characteristic vigor: the S&P 500 suffered a precipitous decline of 2.70% on the day, while the Nasdaq Composite, reflecting the acute vulnerability of globally intertwined technology supply chains, dropped an unexpected 3.5%. For the five-day trading period, the benchmark S&P 500 surrendered -2.41%, and the Nasdaq Composite registered a more profound loss of -3.85%.
The Structural Confrontation
The sudden shift in the trade posture was the culmination of escalating tit-for-tat protectionism. The latest cycle began when Beijing, leveraging its near-monopoly on critical resources (China produces over 70% of the global supply), broadened its export controls over 12 rare-earth elements (including holmium, erbium, thulium, europium, and their ilk) essential for high-technology and defense manufacturing.
Simultaneously, the trade friction manifested in maritime commerce. China announced new port fees of US$56 per net ton on U.S.-owned shipping vessels, commencing October 14. This, in turn, was a symmetrical riposte to the U.S. Customs and Border Protection’s imposition of port fees announced in April—escalating by $30 per net ton each year annually until 2028—on Chinese-made vessels docking in American ports, also effective on the 14th of October.
The market’s initial, sanguine dismissal of this administrative skirmishing evaporated instantly upon the President’s threat of a punitive 100% tariff, plunging global trade risk back into the forefront of investment calculus.
Flight to Quality Amidst an Information Vacuum
Faced with a sudden surge in geopolitical uncertainty, capital predictably sought refuge. The yellow metal enjoyed a frenzied flight to quality, with Gold continuing its surge, breaking through the $4,000 threshold to settle at a robust $4,035 an ounce. Concurrently, the Treasury market signaled a deep impairment of confidence as yields tightened: the 10-year yield declined from 4.14% to 4.05%, and the 30-year yield compressed from 4.72% to 4.63%.
This anxiety is compounded by the government shutdown, which continues to create an information vacuum. With the House recess extended until October 19th, the postponement of crucial federal economic statistics is virtually assured. Worryingly, reports of permanent job cuts—as opposed to mere furloughs—within the Trump administration suggest that the delayed labour statistics, once published, may reveal deeper structural weakness.
Indeed, even without official federal reports, the available private and regional data suggests an economy in conspicuous deceleration. The question is no longer if the economy is cooling, but rather how severely the Federal Reserve's policy options will be constrained by this malaise.
Leading indicators confirm the softening trend:
While the docket for the week ahead includes highly anticipated reports on Unemployment, CPI, and PPI, the continuing, extended shutdown means these key economic data points will likely be deferred. Consequently, investors must shift their focus from backward-looking government statistics to forward-looking guidance, which will be available through the upcoming corporate earnings releases, particularly in the Financial Services sector.
US Stocks Move Closer to Dot-Com Bubble Valuations
“The question that people pose—are we in a bubble?—seems to me a little bit vague. We’re always in a bubble somewhere.”
—Robert J. Shiller, Nobel laureate economist, interviewed by CFA Institute in 2019
When the S&P 500 closed on September 30, 2025, its price was just a few dollars off an all-time record high set the prior week, with US stocks having bounced back a stunning 34% since hitting “Liberation Day” lows in early April. It was a different market milestone, however, that caught our attention at the end of Q3: September marked the second-highest level ever for a well-known valuation metric, the CAPE ratio, which was only exceeded at the height of the dot-com bubble in 1999 (see below). That could explain why Fed chair Jerome Powell, in a speech following last month’s FOMC, described equity prices as “fairly highly valued.” With that in mind, while many investors watching the 2025 rally in equities are probably feeling the FOMO, we prefer to explore what sky-high valuations might mean for the market’s future performance.
It’s worth taking a moment to explain what exactly the CAPE ratio is, and what it’s meant to capture. Popularized by Yale Professor Robert Shiller—and most famously promoted during the Internet stock craze of the late 1990s—the Cyclically Adjusted Price-to-Earnings ratio is actually similar to the P/E ratio most of us will have seen many times before. That measure divides the market’s price over the last 12 months by the EPS of companies making up the index, answering the question: How much does an investor have to pay for each dollar of last year’s earnings? When the price we pay for the same dollar of earnings is much higher today than it was before, we might say stocks are a little too pricey. When earnings can be bought on the cheap, perhaps it’s a bargain.
What the CAPE ratio does differently is to account for a simple intuition about earnings: the fact that companies’ profits vary over the course of the business cycle, peaking during macro booms and bottoming out amidst recessionary busts. Along those lines, rather than comparing price to last year’s earnings, the CAPE ratio compares the real price of the index to an average of the last 10 years’ inflation-adjusted earnings—essentially smoothing out the cyclical variation in EPS, leading to a more robust representation of where prices stand relative to the market’s history.
Once again, judging by the chart above, US shares are certainly on the expensive side. Recognizing that companies and markets have evolved quite a bit since the 1870s—yes, Professor Shiller has collected data covering well over a century in the stock market—we’ve plotted a band of plus-or-minus two standard deviations around the mean return over just the last 20 years, and the CAPE ratio is testing the top end of that range in recent months.
But what does all of this mean? We’ve been following broad market returns long enough to know that reliably predicting what’s going to happen over the next year, let alone in the next week or month, is far from a sure thing—and probably closer to an impossibility. On the other hand, we do believe today’s valuations might serve as a helpful indicator of longer-term stock market performance. Historically, referring again to Professor Shiller’s data on S&P 500 returns over the decades, when the CAPE has been in excess of 30x, stock returns over the next 10 years have been slightly negative to low single digits. As such, it wouldn’t surprise us in the least if US equities end up delivering lower-than-average performance as earnings gradually catch up to valuations.
In the meantime, we acknowledge there are plenty of things that could yet keep prices moving higher in the short run: the Fed is easing again, President Trump is pushing some pro-business policies, and it’s anybody’s guess when enthusiasm for AI might wane, to name a few. Rather than dump stocks and retreat to cash, investors might consider a number of less dramatic moves. Opting for active stock selection can help avoid the most over-hyped names and land on lower-risk, more defensive, higher-quality plays. International diversification may also lead to better investment opportunities for investors. The MSCI World ex-USA index of Developed Market stocks currently trades at a CAPE ratio of just over 20x—only modestly above its 20-year historical average level.
Disclosure: This material is for informational purposes only and should not be considered personalized investment advice. It does not consider the specific investment objectives, tax and financial condition or needs of any specific person and therefore, the strategies and investment ideas may not be suitable for all individuals. An investor should consult with their financial professional before making any investment decisions. The opinions contained herein are subject to change without notice. Indices cannot be invested in directly and are unmanaged. Past performance is not indicative of future results.
Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.