Daily Commentary

MarketMinder’s View: Are stocks getting too pricey, thereby risking the titular “melt-up”—a scenario in which stocks irrationally spiral higher, generating big gains followed by a crash? This piece hints at that scenario perhaps playing out today, citing the S&P 500’s post-correction bounce to new highs (which reminds us, MarketMinder doesn’t make individual security recommendations). The signs investors are out over their skis? Rising shares among unprofitable firms and elevated valuation gauges, like price-to-earnings (P/E) ratios. While the former is a fine observation, it is also consistent with a broad-based rally—and not necessarily a sign of market froth. A lot of those companies got hammered hard not just in the correction but in recent years, and what falls the hardest often bounces disproportionately early. Cherry picking performance figures since this spring’s correction lows doesn’t say much about investors’ exuberance. We wouldn’t read too far into valuation metrics, either. Sure, P/Es are above their long-term averages. But the S&P 500’s trailing P/E has been above average for more than a decade now—not telling about what stocks will do next. But more importantly, valuations in general employ backward-looking data to make forward-looking forecasts. That is always a mistake. We aren’t ruling out additional stock market volatility ahead, but popular valuation metrics won’t tell you when the bounciness will begin. We would add that worries about a melt-up—a scenario that benefits stock investors—counterintuitively indicate skeptical sentiment persists and bullish wall of worry remains. Not every rally is a bubble. For more on this theme, see last Friday’s commentary, “Shake the Valuation Fixation.”

MarketMinder’s View: Here is a look at another way importers are mitigating the negative effects of President Donald Trump’s tariffs. Namely, more firms are stocking up on cash and using supply chain financing programs to stretch out their payment terms. “From large retailers to auto parts stores and manufacturers, buyers of both finished goods and raw materials, tariff pauses allowed importers to bring in more inventory. But once the inventory arrives, it may be bound for financing rather than straight to market. After an order has been shipped, an invoice is generated. Once that invoice is generated, an importer sends it to the bank where they maintain a supply chain financing program, and the bank pays the supplier. The importer then repays the bank under a timeline negotiated with the bank.” Mind you, supply chain financing isn’t new. Importers have used it for years. But its growing popularity—and adoption within unconventional sectors—today adds to a long and growing list of tariff mitigation practices. Now, this does add some costs and friction, which isn’t great—the absence of these trade hindrances would be more beneficial, in our view. But in an imperfect world, this tactic is yet another reason we think companies are faring better than many expected post-Liberation Day.

MarketMinder’s View: Please note MarketMinder prefers no party nor any politician. We assess developments for their potential economic and market effects only. With an Upper House election in Japan coming up on Saturday, “A Mainichi Shimbun poll, conducted jointly with JNN over the weekend, indicated that the LDP [Liberal Democratic Party] and Komeito could end up with fewer than 50 of the 125 contested seats in the Upper House. If that happens, they would no longer hold a majority in either house of parliament, resulting in the possible resignation of Prime Minister Shigeru Ishiba along with further political uncertainty and instability.” Even if the LDP and its allies hold on to its majority in the less-influential Upper House, Japan will likely still have a do-little government. We don’t dismiss potential uncertainty tied to an Ishiba resignation, but Japan’s “revolving door” isn’t a surprise to markets.