Clouds Swirl Over the AI Trade; WMT Joins the $1 Trillion Club; Gold Stages a Big Revival
After all that, gold is still up an impressive +16% for the year!
Key Takeaways
Model Portfolio Adds to Ex. U.S. Dollar Diversification: We made several adjustments to the Rosie Model Portfolio to reflect better diversification across ex. U.S. dollar assets. We expect the themes associated with a softer U.S. dollar to persist, and we see global asset-allocation flows away from the U.S. dollar as a durable, secular force. That backdrop should continue to support local-currency bonds in markets where fundamentals are improving and currencies are showing resilience.
Bob Farrell’s Rule #1 Looming Over Profit Margins: The most glaring K-shaped feature of the economy is that profit margins, measured by the corporate profit share of Gross Domestic Income, have risen to levels never seen before. If this ratio ever pulled a classic Bob Farrell rule #1 on mean reversion, the S&P 500 would be -20% lower than it is today. If that margin compression were ever to collide with a mean reversion of the P/E multiple, the total drawdown would amount to nearly -40%. Pray that never happens.
Economic Angst Meets Stock Market Cheer: Nobody seems particularly fussed that the labor compensation share of the economy has correspondingly fallen to its lowest level in modern history. Perhaps nobody cares because everyone is all in; all at the same time. At the end of 2025, the median household had a record $300k exposure to the stock market. The financial asset mix concentrated in equities stands at a near-record high of 72%. While consumer attitudes towards the overall economy, the labor market, and income expectations are flirting with their lowest levels ever recorded, bullish sentiment on the stock market has rarely been as high as it is today.
