Whiplash:

1. a neck injury due to forceful, rapid back-and-forth
movement of the neck, like a cracking of a whip

2. a great 2014 film about an obsessive drummer and his demanding
music teacher starring Downingtown, PA’s own Miles Teller

3. an apt descriptor of how the financial markets
and trade policy made us feel in the first half of 2025

Investors & Friends,

Those of us engaged in economic prognostication have often felt like young Miles this year, searching for the proper drum beat to follow, only for the tune to change just as we find the rhythm.

That the economy was barely nudged off course and the equity markets have regained all-time highs is a testament to how resilient and diverse our broad and dynamic economy is. It is true that the S&P 500 is dominated by mega-cap tech companies with 10’s of billions of dollars in free cash flow, but the lifeblood of the economy flows through the tens of thousands of small businesses across the country that employ nearly half of all Americans. And they are adaptable, resilient, innovative.

They have had to be. At the midpoint of the decade, these enterprises have navigated a pandemic, an inflation crisis, an interest rate shock, and are now wading through waist high trade muck. Having weathered all that it is a wonder that the unemployment rate sits near 50-year lows, corporate profits register at record highs, household balance sheets are flush with cash and home equity, shareholders are enjoying a stock market at all-time highs, a normalized interest rate curve is providing yield to savers and retires along with an incentive for banks to lend; hell even crime of all types is at half-century lows.

Should it be surprising then that the valuation of the equity market for such a place should also be trading near historic levels, requiring a premium for those who wish to invest their capital in the most profitable companies to ever exist? And of course not everyone is participating, and of course we have major problems. But imagine if we didn’t have to muddle through these myriad calamities, self-inflicted and otherwise. Imagine if we had a political class that… oh, never mind.

But it would be foolish to ignore the price tag one must pay to accumulate additional shares in this market.

One oft-cited stock market valuation metric is known as the “Buffet Indicator” or the ratio of Total Stock Market Capitalization / GDP. In basic terms it answers the question “how big is the stock market relative to the size of the real economy?”

Answer: Kind of a lot.

Since there is an upward sloping trendline, i.e. that the ratio consistently rises over time as our markets become more efficient and composed of more productive companies, it can be helpful to view this same metric as normalized for that trend.

But no matter how much chart gymnastics you do, it is hard to come away with a conclusion other than “not cheap”. Or as this chart puts it, “Strongly Overvalued.”

IMPORTANT PSA: whenever we talk about valuations, we always must add the very important caveat that they are NOT a timing indicator, and these metrics mean literally nothing on a 1-year forward basis. At this level of Price/Earnings Ratio, the one year forward returns have ranged from +45% to -25%.

In fact – if anything, the bias is to the upside at these higher ranges in any given year. That is because bull markets tend to last far longer than bear markets, and valuations can remain at these upper levels for years.

With that in mind, let’s look at the length and breadth of bear markets and their subsequent bulls going back to the Stagflation bear market of 1973. Since then, bull markets have averaged 70 months in length and 221% in cumulative return. This current bull market, starting in October 2022 after the inflation and interest rate driven bear of that year has lasted only 33 months and returned a cumulative 73%. This bull isn’t old nor has it been particularly strong and even if it were, they don’t die of old age.

Now, as we were before April’s tariff induced volatility, the market is priced for perfection; baking in the assumptions that trade deals will be worked out before deadlines, that inflation has been tamed and the Federal Reserve will resume interest rate cuts later in the year, that the President won’t try to fire Jerome Powell before his term is up as Chairman of said Federal Reserve, that corporate profits will continue to accelerate through the adoption of AI, that the geopolitical conflagrations throughout the world will simmer and not boil over, that the long and variable lags of tighter monetary policy of the past few years won’t tip the real economy in to recession, that the bond market won’t rebel against excess government spending, and that those things not on this list, the unknown unknowns, won’t manifest themselves in new and innovatively disruptive ways. A lot of things need to go well to justify a 22x+ Price/earnings ratio on the S&P 500.

But the thing is… they are going well (enough). Despite the vibe feeling like things are ‘off’, backed up by the steady progression of talking heads on CNBC and in the Twitterverse (it will always be Twitter) waiting for the other shoe to drop, as they have been for three years now.

By the way, if we go by the “Truflation Index”, a “modern consumer and spending data set” pulling in real-time prices from thousands of different products and services then inflation is already under the Federal Reserves 2% target.

So, what do investors do with this information? For those of us with multi-decade investment horizons and many years until retirement the short answer is “nothing.” Continue to invest, to save, to properly insure, to spend prudently. For folks who are at or close to retirement, these lofty valuations could provide an opportunity to evaluate the risk in their portfolios, raise cash for shorter-term distribution needs, and stress test their retirement income projections.

My sense is that we will spend the rest of the year trying to find the rhythm like drummer Andrew in Whiplash as his music teacher Terence Fletcher says – “Not quite my tempo”, and “you’re dragging” and “try again, just a hair”, shortly before hurling a chair at him.

Gotta keep our heads on a swivel.

With abundance,

Zachary S. Mineur CFA, CFP®

Chief Investment Officer

Independence Square Advisors

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