After a steady climb higher, stocks have declined over the last few weeks. The Nasdaq has declined about 4% and the S&P 500 has declined about 3%.
In the chart below you can see the significant gains since the low point in April following Liberation Day and the slight decline over the last few weeks.
On a year-to-date basis, the S&P 500 is up about 14% and the Nasdaq is up about 18% (not including dividends).
The recent pullback is being driven by a few things:
Anxiety over a potential AI bubble
Anxiety over the next Fed moves on interest rates
A big increase in interest rates in Japan
AI’s impact on the stock market is extremely volatile of late. One day the AI excitement drives the market higher and the next day AI fears drive the market lower.
We are still not receiving timely inflation or jobs data due to the government shutdown. The most recent jobs report was decent even though unemployment ticked up to 4.4%. All eyes will be on the next inflation update which will determine the Fed’s position on interest rates. At this point, it looks like even odds on whether the Fed cuts rates by another quarter of a percent or whether they hold steady.
Many stock market analysts believe that the low interest rates in Japan over the last decade have been a catalyst behind the long and powerful bull market of the last ten years. With rates rising in Japan, this source of cheap money will dry up and no longer be available to drive US stock prices higher.
My valuation gauge indicates that the stock market (S&P 500) is now about 24% above its fair market value in late November. At the beginning of November this guage was at 27% over fair market value. Both readings (+24% currently and +27% at the beginning of the month) are a cause for some concern.
I do not trade based on market valuation levels and you should not either. It is just a reminder that you need a strategy in place to protect your savings in case we experience a bear market. Older investors in particular need loss protection.
My investing system comes with built-in loss protection. It is designed to avoid most of the losses in bear market meltdowns. But it also produces big gains in bull markets. You can now invest in my system directly from your brokerage account. Click on this link to get on my calendar to learn how to start using my smarter way to invest.
Stay Disciplined My Friends,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
There is a question on many minds today: Is the AI bubble finally starting to pop? After years of exponential hype, skyrocketing investment, and aggressive infrastructure build-outs, a growing chorus of tech leaders, economists, and market watchers are questioning whether the current AI boom is sustainable. And if it is popping, what does that mean for the stock market?
Below are a few things that have people concerned.
META Capital Expenditures
META recently announced a major increase in AI-related capital spending — and the stock market did not like the news. The stock dropped roughly 20% in response.
Many investors took this as a sign that the market is skeptical about the return on those investments.
The big AI players will invest nearly $400 billion this year alone. The good news is that these companies have the cash flow to fund it. Smaller companies and startups, however, do not have the financial strength to weather AI ROI disappointments.
ROI Concerns
A recent MIT study suggested that 95% of AI pilot programs are not yet showing measurable benefits. If business results from AI don’t materialize in a meaningful way, a major correction in the AI sector could follow.
That being said, the MIT findings don’t entirely align with many reports of AI-driven job cuts and real productivity gains. I’ve seen studies showing that software developers can increase productivity by several hundred percent when paired with an AI coding agent. Companies are regularly announcing job cuts due to AI productivity improvements.
It is also very likely too early to fully measure the long-term business impact of AI. These systems are still in the early stages of real-world deployment.
Valuations
Valuations for many new AI companies do look aggressive. Some AI startups have annual revenues under $10 million but market valuations above $10 billion. Some will grow into those valuations — many will not. This dynamic isn’t unusual with emerging technologies.
However, the valuations of the established AI leaders are supported by strong revenue and profit growth. Microsoft, for example, trades at a price-to-earnings ratio of about 35. Given its profitability and growth trajectory, that valuation isn’t unreasonable.
The Future
As we move further into the AI era, we should expect volatility. Smaller and newer AI companies are likely to experience dramatic stock price swings. Even so, I do not expect startup failures to significantly impact the broader stock market.
If AI returns fail to materialize for the major players — the “Mag 7” — the impact will be larger, but still manageable. These companies have strong balance sheets and generate massive profits from other parts of their operations.
This is why I do not expect anything resembling the dot-com collapse of 2000–2001. Back then, tech stocks fell more than 75%. Companies were overvalued by 60% or more, and many early dot-com businesses had no profits and flawed business models.
Today, stocks appear overvalued by roughly 20%, and I do not see major credit risks forming around AI investments.
If significant AI disappointments emerge, stocks could easily fall 30%. But a 30% decline is actually a below-average bear market — declines of 25% to 30% happen regularly.
Over the past week, the stock market has fallen about 4% to 5%. It’s too early to tell whether this is the start of a major decline or simply a normal correction. Major declines don’t happen overnight; the dot-com crash unfolded over more than two years. The average bear market plays out over roughly 11 months.
Regardless of what triggers the next market downturn — AI-related or otherwise — retirement investors need a strategy that protects their savings from major losses.
My investing system is designed to do exactly that. Reach out if you’d like to immediately get the peace-of-mind that comes with a high growth investing system that limits losses in downturns.
Stay Disciplined My Friends,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
The stock market is the best place to invest for the long term — generating annual returns of around 10% over 20- or 30-year periods. Unfortunately, those returns are far from consistent in the short term.
So how inconsistent are they?
To answer that, let’s look at the annual gains for the S&P 500 over the last 30 years (1995–2024). This period is particularly interesting because it includes:
two massive bull markets
two devastating bear markets
The chart above shows the annual returns for each of those 30 years. (Returns exclude dividends.) Over the entire period, the average annual return was roughly 10%.
Consistently inconsistent, right? Few individual years land anywhere near that average.
The "experts" tell us that the stock market is rational - that it is continuously repricing based on the most current and complete information. They also suggest that the market is forward looking and focused on the long-term future. The data suggests that the opposite is true.
Sorting the yearly returns from best to worst provides additional insights.
20 of the 30 years delivered gains of 10% or more.
5 of the 30 years delivered losses of 10% or more.
This is the reality of stock market investing:
Most of the time—about two out of every three years—the market posts sizeable gains.
A small percentage of the time—roughly one out of every six years—investors endure large losses.
The remaining years deliver modest or flat results.
Stock market gains should not be this inconsistent. After all, the underlying businesses are far more predictable. The companies in the S&P 500 typically grow profits by 8% to 9% per year, with only rare down years where profits fall by 15% to 20%. Sales and profit growth are usually steady.
It’s not business results that create wild market swings—it's human emotion.Investors repeatedly overreact to both good news and bad news. Excessive pessimism (fear) drives stock prices far below fair value, while excessive optimism (greed) pushes them into the stratosphere. As long as humans make investment decisions, volatility will remain the norm.
Of course, this volatility makes investing uncomfortable. We all love the 20% up years, but those 25% down years are painful.
The investment industry’s traditional solution is simple: buy and hold. Ride the market up, and hold on for dear life on the way down. They often suggest adding low-yield bonds for “protection,” even though bonds offer meager 3% returns—and, as we saw in 2022, bonds can lose money too.
If you’re satisfied with annual returns of 7% or less, then the standard advice works fine.
But I wasn’t satisfied with “buy and hold.” Watching my stocks drop 40% in a few months seemed dumb. And I’ve never liked bonds—weak returns and real downside risk.
So instead, I decided to embrace market volatility.The stock market cycles through well-defined patterns. Using the same investment approach in every cycle never made sense to me.
I built a data-driven model that identifies these market cycles and adjusts the investment strategy accordingly—investing aggressively (100% in stocks) during growth cycles and moving out of stocks during downturns.
The result: You can capture big gains and avoid big losses.
Below is the distribution of annual gains from my system over the same 30-year period. Losses still occur—no system can eliminate them—but they can be significantly reduced, and without sacrificing strong returns in the up years.
Stay Disciplined My Friends,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
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