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Key Takeaways Stocks Fall As Earnings Misses And High Valuations Stir Caution Supreme Court Tariff Case Adds Uncertainty Amid Prolonged Government Shutdown Tech Layoffs And CAPE Spike Highlight Efficiency And Market Overheating Markets took it on the chin Tuesday as voters cast ballots in a number of races across the country. The S&P 500 fell over 1% while the Nasdaq dropped 2%. Small cap stocks were down over 1.5% and the Dow Jones Industrial Average gave up 0.5%. The main theme of the market continues to be earnings as we're still in the heart of earnings season. Overnight, McDonalds reported a slight miss on earnings but beat on same store sales. That stock is indicated slightly lower in premarket activity. Shares of Pinterest are indicated lower by nearly 20% following weaker than expected earnings. And shares of Advanced Micro Devices are off slightly in premarket. The chipmaker posted a beat on earnings and revenues, but its guidance on margins was in line with expectations. I think it's worth noting the market's reaction to AMD as it is a key player in Artificial Intelligence (AI). It's possible the slight pullback we're seeing this morning could simply be profit taking following a massive run higher from $160 just a month ago to over $260 just a few days ago. It's also possible the expectations being priced into equities are such that there is little to no room for earnings misses. There have been a number of comparisons between the current market and the market in the late 1990s. AI has become the new "it" thing and that has had the effect of pushing valuations on AI related stocks significantly higher. But those valuations are spilling over into other sectors as well. In fact, one metric, the cyclically adjust price to earnings (CAPE) now stands at its highest level since 1999. The 12-month forward-looking P/E ratio is also trading significantly above its historical average. I think these are important because of the context surrounding the economy. Corporate taxes are at the lowest level we've seen since 1939. Therefore, it's reasonable to expect any further relief from lowering taxes and the subsequent boost it would have on earnings is unlikely. We're also seeing earnings growth outpace revenue growth this quarter, which suggests companies are becoming more efficient. Some of that efficiency may be the reason we're seeing several tech companies announce large scale layoffs. Microsoft, Amazon, and IBM have all announced large layoffs in just the last week. The point I'm getting at here is that the environment driving profits is about as good as I can recall, yet valuations are suggesting reason to be even more optimistic. It's certainly possible these companies have room for continued growth, but in light of the gains equities have experienced in the last few years, there's an equally strong case to be made for being prudent with investments and seeking out opportunities where valuations are more modest. Markets also tend to like stability and after last night's election results, today could mark an important day in U.S. trade policy. Later today, the Supreme Court will hear arguments on President Trump's use of tariffs. Back in April, when tariffs were first announced, the market sold off significantly. Since then, we've seen a substantial rebound. Concerns over runaway inflation have thus far failed to show up, although some of that is a result of U.S. companies incurring at least a portion of those increased costs. One could argue markets have rallied in anticipation the tariffs would be struck down, One could also argue, the tariffs will be allowed to stand and just are simply not impacting inflation to the extend many expected. It usually takes around three months for a ruling to be issued; however, based on the questions the justices ask during oral arguments, we may get an idea as to which way the court is leaning. Also, we're quickly approaching the current government shutdown reaching a new record for longest shutdown on record. The overall impact this will have on the economy and GDP is tough to estimate, but it's safe to say the longer it continues the worse it will be for those directly affected as well as the economy as a whole. However, there may be some hope reason for optimism this is coming to an end following news last night that Democrats and Republicans may be nearing a compromise. Earnings season continues tonight after the close. Qualcomm and Robinhood are both scheduled to report. Analysts expect Qualcomm to earn $2.87 per share and the stock has an expected move by Friday of just under $10. Qualcomm recently announced a new chip for AI data servers and analysts will be interested in guidance surrounding demand for those chips. Robinhood is expected to earn $0.54 per share. Robinhood has branched out in a number of directions recently, but the stock is still highly correlated to crypto. With bitcoin down near $100K, Robinhood stock has fallen around 8% in the past couple days. For today, I want to see if markets have any follow through to the downside after Tuesday. Volatility was up on Tuesday but remained below 20. That is a number I've often cited as a level where markets get choppy. And, despite the down day we saw in equities Tuesday, bonds were little changed, which may be a sign markets are not moving toward a panic. As always, I would stick with your investing plans and long-term objectives.
