I think it’s safe to say that there has, in all probability, been a market-moving event every year over the last four generations of your family. The truth of the matter is this year was no different, and this trend will continue for years to come. 2020 was consumed with COVID headlines and, five years later, there is very little to no mention of it. In fact, this year was characterised by trade wars, geopolitical tensions and Trump.
The interesting thing about market dynamics that some tend to forget is that there is a lot of human emotion involved, and biases can have an impact on market moves in both directions. In a world of unknowns, it’s refreshing to know that the worries of today will always be consumed by the new normal of tomorrow. It’s one of those things that’s 100% certain, like death and taxes.
But with everything that’s been overwhelming news headlines since the start of 2025, most major stock markets across the globe are still trading at all-time highs. And with most markets becoming more expensive, it is important to understand where this momentum has been coming from. While most markets have experienced exponential valuation increases in the last 12 months, the US saw the most earnings growth (see Figure 1).
Why this is relevant is that this looks extremely positive because any investor who is worth his salt knows there is no better business out there than one with strong earnings growth driving its returns. Unfortunately, it’s not as rosy as it seems at first glance. Share buybacks have been inflating earnings per share over the last decade by shrinking share counts and making profits look stronger on paper. Outside the top 10 stocks in the S&P 500, most US-based firms are showing flat or declining growth without buybacks over the last 10 years (see Figure 2).
The good news is that the Arysteq Global Opportunities Fund (“the Fund”) is telling a slightly different story. While being significantly underweight US tech, 70% of our top 10 holdings are expecting positive earnings growth over the next year, with 100% of the top 10 holdings expecting positive dividend growth (see Figure 3). While three of the companies are expecting negative earnings revisions, the factors contributing to this have nothing to do with the fundamentals of the businesses. We are therefore comfortable that this short-term pain should provide potential for better entry points and top-ups in the near term.
In the US, technology stocks now account for a record 56% of the total US stock market cap. At the same time, defensive stocks make up just 16%, an all-time low which has never happened before. In previous times when we saw this dynamic play out in the market, it was always followed by a relatively sharp reversion to its mean valuation. As the father of American literature so perfectly reminds us: “History doesn’t repeat itself, but it does rhyme.” – Mark Twain. While we are comfortable with the positioning of the Fund, we’re keeping a close eye, particularly on opportunities with a defensive tilt.
With that in mind, I guess the question on everyone’s mind remains whether stocks still have some legs in this bull run. Will we continue to see markets reaching new highs until the end of 2025, or will this race be cancelled like the 2025 Cape Town Marathon an hour before the starting gun? A tough one for many who travelled there to participate, but I guess safety first.
With money supply at all-time highs and money market levels at record levels, there is just too much liquidity in the system for things to change anytime soon (see Figure 5). Valuations have not reached the levels we saw during the Dotcom bubble, and it’s worth noting that, even on a relative basis, there was not this much liquidity in the market during the 2000s. Money supply has almost grown fivefold over the last 25 years, and valuations are, in fact, not stretched enough.
And this is all available while we’re already experiencing extremely loose financial conditions in the market. The US Financial Conditions Spot Index is at extreme levels (see Figure 6), with a high probability for further rate cuts in the US — currently standing at a 98% probability for a 25 bps rate cut at the end of this month. This, added to the potential for further stimulus cheques being put in the hands of US consumers, has the potential to create a new wave of market speculation and even more extreme market valuations.
While cracks are certainly starting to appear in the US market, we are still seeing a lot of fairly priced opportunities across the globe. The UK and Japan are trading at significant valuation discounts of 44% and 15%, respectively, to the US market. Together these jurisdictions account for 33% of our portfolio and have been driving a significant portion of the outperformance in the Fund since the beginning of the year (see Figure 7) — year to date, the Fund has outperformed the MSCI World Index by 4.8% net of fees and taxes. We maintain that there are further opportunities in these jurisdictions and continue to keep a close watch on these positions in our Fund. While valuations are stretched in certain areas of the market, the expectation is for this to continue higher — those that will come out on top just need to have a keen focus on their portfolio positioning and risk management in navigating this uncertain market environment we find ourselves in.
