Market Factors: Two big reasons to worry about your portfolio

This edition of Market Factors begins with two ways that markets are looking 2000-like and goes on to explain why I don’t think U.S. copper tariffs are going to happen. The diversion covers a really interesting experiment turning carbon dioxide into methanol and as always we look ahead to the important data releases for the coming week.

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Equities

Valuations and market concentration are reasons for concern

I am growing concerned. There are two unsettling signs of excess in global markets reminiscent of the year 2000 that will be painful to correct, not just in the S&P 500 but also the domestic equity market.

The first cause for concern is valuations, as outlined by Torsten Slok, partner and chief economist at Apollo Global Management. In a Wednesday report, Mr. Slok emphasized that forward price-to-earnings ratios for the largest decile of S&P 500 stocks are now significantly more expensive than the heights reached in early 2000.

The average forward PE of the smallest nine deciles (in terms of market cap) in the U.S. market is also higher than the 2000s peak, as is the average PE for the S&P 500 as a whole.

Strategists like Savita Subramanian at BofA Securities have argued compellingly that modern markets deserve a higher multiple. The tech-heavy current market is far more profitable than companies of the distant past that had to build new factories to expand production.

Still, Ms. Subramanian concedes that valuations are the single most important indicator of market returns for the next decade and her expectations for S&P 500 performance in the upcoming ten years are low – basically flat plus the dividend yield.

The second sign of excess was highlighted by Scotiabank strategist Simon Fitzgerald-Carrier, who warned clients about market concentration in U.S. markets.

Mr. Fitzgerald-Carrier estimates that the largest decile of U.S. stocks account for 76.2 per cent of the S&P 500, a new record. The Magnificent Seven still account for a third of the S&P 500 despite Tesla’s 22 per cent decline and Apple’s 17 per cent drop year to date.

A U.S. technology sector swoon will take Canadian tech stocks with it. The TSX doesn’t have anything like the tech concentration U.S. markets enjoy (or endure, depending on timing), but Shopify Inc. remains the second largest company in the domestic benchmark behind Royal Bank.

Shopify, Constellation Software Inc., CGI Inc. and Celestica Inc. add up to a not-insignificant 8.3 per cent of the S&P/TSX Composite. In the event of a drastic correction in global technology stocks, the TSX will have a hard time overcoming the drag presented by these companies.

The aggravating fact remains that no one has been able to consistently call market tops so I’m not about to try now. At the same time, I will be very careful to avoid excess risk in my portfolio by keeping the beta – sensitivity to market movements – below 1.0 by emphasizing non-technology stocks.

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Metals

Copper tariffs equal U.S. shooting itself in the economic foot

I’m not going to TACO (Trump Always Chickens Out) trade copper myself but I think it’s a viable strategy. A big U.S. copper tariff would be very bad for exactly the type of business the White House wants to encourage, which implies it won’t be universally imposed.

The United States imported 53 per cent of its copper consumption in 2024 so its far from self-sufficient. Morgan Stanley analysts believe the blanket 50 per cent tariff announced by president Trump would result in a US$2.25 per pound increase in the commodity price.

Copper’s already trading at decade-high prices and another US$2.50 per pound would not be absorbed easily. There would be demand destruction at the higher prices – aluminum wire sales would definitely go up – but there would still be significant financial pain.

The electrical power demand from AI-related data centers alone makes the copper tariff a bad, inflationary idea. One of Mr. Trump’s (insane, in my opinion) goals is to remake the country into a manufacturing powerhouse. This would require a lot of materials, including copper. A soaring commodity price makes building manufacturing capacity less profitable and thus less likely.

There is a chance that the White House exempts Chile, a country capable of replacing exports from all other countries, from the tariff.

Diversions

An interesting solution for carbon dioxide

I am not announcing that the climate crisis is over but new research from South Korea sounds like the type of progress that will directly improve the situation. Professor Jungki Ryu from the Ulsan National Institute of Science and Technology and Professor Jongsoon Kim at Sungkyunkwan University have developed a copper-based catalyst that can convert carbon dioxide into methanol.

The description of the process on the phys.org site does not include energy requirements (they could be high enough that it doesn’t make any environmental sense) or scaleability so the potential as a climate panacea are unclear.

Methanol is useful – it’s the basis for necessary chemicals like formaldehyde, an alternative fuel for internal combustion engine and a store of energy. If it’s possible to take an environmental toxin and turn it into an economically viable substance on a big scale that would be a big, big deal.

The essentials

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Globe Investor highlights

After Tuesday’s inflation data, markets and economists agree that you can pretty much forget about a Bank of Canada rate cut this month. And prospects are dimming for the rest of this year, as well.

These 10 TSX stocks bought back the most shares last month – and for INK Research’s Ted Dixon, four look like good buys. For more stock-picking inspiration, check out this Number Cruncher on nine high-flying Canadian stocks with strong momentum

The most popular story on Globe Investor this week looks at how a retired bank manager used a ‘blazingly simple’ – and conservative – dividend strategy to generate strong TFSA returns

The surprising investment that has outperformed stocks and Canadian real estate so far this century. Hint: it’s a commodity

The Globe’s Tony Keller says the market is in denial over Trump’s tariffs

What’s up next

International Securities Transactions for June on Thursday and industrial product prices on the 21st are the only two notable domestic economic releases in the coming week.

The domestic earnings calendar is starting to heat up. Canadian National Railway Co. reports next Tuesday (C$1.882 per share expected). Next Wednesday will see Rogers Communications Inc. (C$1.085), First Quantum Minerals Inc. (loss of US$0.02) and Waste Connections Inc. (US$1.246).

Advanced retail sales for June is the only U.S. economic release of wide interest in the next week but the earnings schedule is busy. PepsiCo Inc. ($2.03 per share expected) reports on Thursday along with General Electric Co. ($1.435). Domino’s Pizza Inc. ($3.94) releases results on Monday followed by Northrup Grumman Corp ($6.816), Coca-Cola Co. ($0.833), RTX Corp. ($1.453) and Intuitive Surgical Inc. ($1.93) on Tuesday. Next Wednesday we’ll get Moody’s Corp. ($3.336), Tesla Inc. ($0.435) and Alphabet Inc. ($2.166).

See our full earnings and economic calendar here