In Your Money This Week, stocks have done great this year, and its encouraging to see where the gains are coming from.
Emerging markets, small-cap U.S. stocks and the equal-weighted S&P 500 have outperformed the S&P 500, which is also doing well, and developed international stocks are having a strong year but behind those other four. That’s different from the high concentration from the recent past, when investors who didn’t own enough mega-cap tech underperformed.
Broader participation is healthy, but investors shouldn’t be complacent and forget to plan for the future.
Bond yields are higher, and Fed Chair Kevin Warsh’s semi-hawkish Jackson Hole speech reinforced the idea that interest rates may remain elevated. He recommitted to the Fed’s 2% inflation target and described current financial conditions as not overly restrictive. Markets have increased their expectations for a potential rate hike, although market forecasts for Fed policy have been unreliable recently.
Then there’s AI.
The AI infrastructure build-out is becoming difficult to comprehend. Approximately $1.2 trillion has reportedly been spent on AI capital expenditures since 2024, with another $3.7 trillion projected through 2029.
Will the eventual profits justify those expenditures, and will the AI boom turn into an AI bust as we’ve seen in other major cap ex cycles.
So far, markets are largely giving management teams the benefit of the doubt. Earnings continue to grow, demand for AI infrastructure remains strong, and the investment cycle appears to have considerably further to run than many people expected earlier this year.
But that doesn’t eliminate the risk. Investors should focus on profit margins and earnings in the quarters ahead. Also, the longer this boom goes the worse the correction could be if it wasn’t justified financially.
So, what should you do about all this?
Your Action Plan
If you’re approaching retirement or recently retired, today’s strong markets provide an opportunity to check whether your portfolio suits your retirement plan. U.S. large-cap outperformance may have left you less diversified than you should be. Diversification doesn’t require abandoning those companies. It means complementing them with other U.S. stocks, small caps, international equities and high-quality fixed income.
Your stock-bond allocation deserves particular attention as retirement approaches. You want enough stability to fund spending during the first several years of retirement without being forced to sell stocks after a major decline. With bond yields considerably more attractive than they were several years ago, investors can potentially generate meaningful income while preparing for sequence-of-returns risk. Any repositioning should also account for the tax consequences of selling appreciated investments. Why a Retirement Portfolio Checkup Is Essential Now shares more detail.
Business owners have a related planning opportunity. If you’re contemplating a sale within the next several years, strong economic conditions, healthy profits and attractive valuations shouldn’t automatically be assumed to last until the precise year you’d prefer to exit. A downturn can hurt both your earnings and the multiple buyers are willing to pay for them, potentially delaying a sale for years.
We can’t predict when today’s favorable environment will change. That’s precisely why favorable conditions are a good time to prepare for when it eventually does. Check out the full piece for more – When to Sell Your Business: Economic Timing Matters.
Andrew and I get into this and more in today’s Your Money This Week video below followed by my Weekly Reads.
Weekly Reads
Warsh Gets an A: Re-focused Fed on the Right Key Principles by Professor Jeremy Siegel
Professor Siegel viewed Chair Warsh’s speech as hawkish because he doesn’t consider current monetary policy particularly restrictive and appears open to raising rates if inflation warrants it. He loves his approach overall because he’s broadening the Fed’s focus beyond backward-looking inflation and employment data to include money supply, credit conditions and commodity prices. He also favors relying more on interest rates and less on tools like quantitative easing and forward guidance outside of crises.
Is the AI Capex Bubble About to Burst? What 250 Years of Market History Tell Us. by Barron’s
The AI buildout is enormous, with roughly $1.15 trillion already spent on chips, power, construction and networking since 2024 and trillions more of spending anticipated through 2030. The upside is that AI revenues are growing rapidly and the spending is benefiting a wide range of businesses, while history suggests transformative investment booms can run for years and leave behind valuable infrastructure even after they end. The risks are that companies increasingly need debt and other financing to sustain the buildout, higher interest rates could make that financing more difficult, and history suggests capital-spending booms eventually tend to end painfully if profits cannot grow fast enough to make the investment self-sustaining.
US Housing Outlook: 10 Facts by Apollo
Apollo shares some conclusions and charts from its 127 page US housing outlook. The U.S. housing market remains constrained by affordability, with 6.7% mortgage rates and $400,000 median home prices keeping buyers on the sidelines, first-time buyers increasingly shut out, and fewer Americans moving or forming new households. Home-price growth has stalled near 1%, although expensive homes are performing better as wealthier buyers are less dependent on financing, while builders are responding by constructing smaller homes even as the nation’s housing stock continues to age. Looking ahead, affordability and weak mobility remain major obstacles to a stronger market, but homeowners are supported by roughly $35 trillion of accumulated equity, while rising multifamily delinquencies represent an emerging area of stress.
5 Estate-Planning Mistakes That Could Cost Your Family by Morningstar
The biggest estate-planning mistake is doing nothing, which can leave courts deciding who manages your healthcare and inherits your assets, but trying to handle everything yourself can also result in documents that do not accomplish what you intended. Estate plans should also consider taxes—such as the different treatment of inherited IRAs versus stocks or real estate—and whether giving assets to children during your lifetime could be more useful than leaving them an inheritance decades later. Finally, don’t let uncertainty about individual decisions prevent you from putting a plan in place, because estate documents can be changed as your circumstances and wishes evolve.
How to Tell if a Charity is Legitimate by Savant Wealth Management
Before donating, verify that a charity is legitimate through the IRS and look for red flags such as high-pressure requests, demands for sensitive financial information, or payment by cash, gift card, wire transfer or cryptocurrency. Also review how transparently the organization reports its finances and how much of its spending actually supports its mission rather than overhead and fundraising. Once you are comfortable with the charity, consider tax-efficient ways to give, such as donating appreciated assets through a donor-advised fund or using qualified charitable distributions if eligible.
