Capital markets performance has been dominated this year by the new administration’s efforts to implement its Make America Great Again agenda. Trump’s Liberation Day tariff plan led to a sharp decline in the S&P 500 as the uncertainty of his tariff focused renegotiation of global trade agreements was greeted with fear, panic, and partisanship. Despite broad skepticism, markets have rallied to new heights as the administration’s trade team has successfully renegotiated new agreements or framework agreements around the world. Combined with nearly $20 trillion in announced foreign investment, and a Federal Reserve in easing mode, the US market has rallied to new market highs. Because we are near record market highs and confidence is high, we are reiterating our past advice of allocating to gold, gold miners, and international equities. In recent months renowned investors and institutions including Jeffrey Gundlach, John Paulson, Ray Dalio, and Morgan Stanley are also allocating into gold and international equities.
The chart below of the S&P 500 ETF (SPY) below shows the 21.4% Liberation Day decline and its 41.5% through October 31, 2025.
The chart below of the S&P 500 ETF (SPY) since 2000, shows its 57% tech bubble decline from its March 2000 peak to its March 2009 bottom and its subsequent 916% rally. The 25-year chart below combined with todays near euphoric sentiment and peak valuations suggests we are near a stock market peak.
Expected Returns:
Expected investment returns starting from high forward S&P 500 multiples are likely to be in the low single digit range. This low equity return profile has been shown by Nobel Laureate, Robert Shiller and by JP Morgan Asset Management in the chart below. Today the S&P 500 is trading at a 22.22 x forward earnings based on estimated average S&P 500 earnings of around $306/share and an S&P 500 closing price of 6840.
Source: JP Morgan Asset Management and IGA research
Expected returns for 10-year US Treasury notes yielding 4.10% don’t appear very attractive to us either. In recent years, the three major credit rating agencies have all downgraded US Treasuries from their highest credit ratings. Furthermore, inflation risks still persists as does the duration risk for 10-year Treasury notes. Since 2020, the performance of 30-year US Treasury bonds, shown in the chart below, has declined 45% from July 2020 to June 2025. Since past performance is often used in asset allocation decisions, these factors are undermining the investment case for US Treasuries and why professional asset allocators have been abandoning the 60% equity 40% bond model as we have been advising.
Asset Allocation:
In the 1970s, the modern portfolio theory, developed by Nobel Laureate, Harry Markowitz, helped popularize the 60% stock 40% bond asset allocation model. We believe that the “60-40” model is fundamentally flawed, today, because the expected returns of stocks, bonds, and cash offer low single digit return prospects. Consequently, allocating away from the S&P 500 and 10-year US Treasuries makes sense. Money markets or cash equivalents are becoming increasingly less appealing as the Federal Reserve is expected to cut the Federal Funds rate further and the shrinking yields on cash equivalents will render this asset class alternative as increasingly unattractive.
Because market timing is hard, asset allocation is the preferred risk management tool of professional and institutional investors. Quantitative measures like Shiller’s CAPE ratio, shown in the chart below, exemplify an institutional methodology to determine expected returns for the S&P 500. Today’s nearly historic 40.2 Cyclically Adjusted PE (CAPE) ratio, combined with our earlier commentary, suggest this bull market is in its late stages and that allocation away from the S&P 500 make sense. A 60% equity allocation to the S&P 500 appears dangerously high and risky.
Likewise, 10-year US Treasury notes should not get a 40% portfolio allocation either because their 4.1% yield is not high enough to compensate for the credit, duration, or inflation risks that they carry. Large foreign investors and foreign central banks are especially unlikely to buy US Treasuries as aggressively as they have in the past due to the weak dollar’s currency impact on their total return. This is especially important for 10-year US Treasury notes of which foreign central banks have historically been massive buyers.
The Federal Reserve has begun cutting the Fed Funds rate from 5.33% in 2024 to 3.87% today and is expected to continue to cut it in the months ahead. Since trillions in short term cash equivalents are priced off of the Fed Funds rate, investors are finding cash, money markets, and cash equivalents are losing appeal.
We believe with these three massive investment asset classes losing their appeal, interest in investment alternatives is growing. Gold and international markets are two alternatives whose appeal make sense and are enjoying good returns.
Foreign and International Equities: Because of the weakening dollar and lower foreign equity prices, we continue to expect outperformance from emerging market equities and foreign stocks compared to the S&P 500 and NASDAQ in the years ahead. The table below from Franklin Templeton shows Emerging Markets are up 33.59% YTD and Foreign Stocks are up 27.21% and outperforming the S&P 500 which is up 17.52% and the NASDAQ which is up 23.5%.
We own iShares MSCI EAFA ETF (EFA) for foreign equity exposure, but the Vanguard Emerging Markets Stock Index Fund (VWO) and iShares Core MSCI Emerging Markets ETF (IEMG) are good foreign ETF alternatives to reallocate to from the S&P 500 and the NASDAQ 100.
Gold and Gold Mining Stocks:
Gold and gold mining stocks have been top performing investments this year and one of Income Growth Advisors’ great client successes. The SPDR Gold Shares ETF (GLD) is up 52% year-to-date and the VanEck Gold Miners ETF (GDX) is up 109.7%, even after gold’s recent 10% pullback from $4375/oz.
Below is the year-to-date chart which shows gold’s 52% rise and its recent pullback from $4375/oz.
Our technical forecast and chart of where gold prices could go are shown below. Based solely on the size of the last two major trough-to-peak bull markets in gold, we believe a price rise in gold to $6519/oz. is possible this cycle.
We believe that gold prices can continue to rise due to foreign central banks now acquiring gold, gold’s growing appeal as a safe haven asset, and as an investment alternative to US stocks, US Treasury bonds, and money markets.
Furthermore, the dollar’s weakness appears to be based on the growing financial instability of the US government which has allowed its debt and deficits to grow. According to Jeffrey Huge’s November Letter #51 “the federal debt has doubled since hitting $19 trillion in July 2016. Under the first Trump administration, the government added approximately $7.8 trillion to the federal debt — a 39% increase. Under the Biden administration, the government added approximately $8.4 trillion to the federal debt — up another 30%. Since January 20, 2025, the federal debt has grown by an additional $2.2 trillion. At the current rate of change, it’s not inconceivable that the U.S. federal debt will exceed $50 trillion before the end of the decade. Perhaps most concerning is that while the federal debt has doubled in less than 10 years, GDP is up a mere 62% over the same period. Today, the nation’s debt-to-GDP ratio is an alarming 125% [$38T / $30.5T]. Put differently, it now takes $1.25 of debt to produce $1.00 of GDP.” We don’t expect this overly indebted status to end any time soon.
While an estimated price of $6519/oz. of gold sounds incredible, history has shown that gold prices can rise sharply over protracted gold bull markets. Furthermore, once price momentum and investment success start to be recorded, quantitatively based investment models use that momentum and past performance in their asset allocation decision methodologies. Stated alternatively, a feedback loop where higher prices will drive new buying. Market behavioral economists will argue positive feedback loops can lead to a euphoric peak where people buy the asset, in this case gold, based on the greater fool theory. That is investors instincts will be driven by the blind belief that there will always be another “greater fool’ to buy gold at a higher price. This psychological phenomenon is called “irrational exuberance” and often marks major market peaks. We think that gold markets have not reached their peak and irrationally exuberant behavior does not appear broadly in gold markets or the gold mining sector.
While investing based solely on market psychological appears like pure speculation, we do derive comfort from historic cyclical precedents. The chart below from Topdowncharts.com shows that Gold ETFs are less than 2% of all ETF assets today, well below the 6-8% levels seen during the last gold market peak from 2009 – 2011 which followed the great financial crisis. Today’s modest gold ETF ratio suggests a potential doubling or tripling in the coming years for gold and gold mining stocks is reasonable.
In September, Morgan Stanley’s Chief Investment Officer, Mike Wilson, recommended portfolios include 20% of their assets be invested in gold. Likewise, DoubleLine CEO Jeffrey Gundlach believes portfolios can hold up to 25% in gold (see Gundlach YouTube at 21 minutes.). Gundlach, who sees a new investment paradigm unfolding, also favors international stock and bond investments which should be aided by a weak dollar in the future.
With top investors and strategists advocating larger allocations to gold, we believe a sea change in investing may be at hand and that gold could be in a multiyear bull cycle like the 1970s. This investment sea change is captured graphically by Crescat Capital’s Tavi Costa, in the chart below, showing how Foreign Central Banks today are buying more gold than they are buying US Treasuries. This investment preference re-rating, by foreign central banks, last occurred in 1996. Continued dollar weakness and attractive investment return prospects are likely to drive higher gold prices as foreign central banks continue to buy more gold than US Treasuries.
We prefer owning gold mining stocks over gold because gold mining stocks are fundamentally inexpensive and easier to buy than physical gold. Equity investors are likely to be drawn toward gold mining stocks due to their impressive returns, compelling earnings, earnings growth prospects, and rising gold prices. The Table below by Crescat Capital shows gold miners are trading at 16.2 times earnings and their earnings growth is 129%. This compares favorably to the Mag 9 AI stocks whose trailing PE is 38.2 times and earnings growth is 23%. On a PE to growth rate basis the Mag 9 AI stocks’ PEG is 1.6 compared to 0.13 for gold stocks. That valuation differential is ten-fold favoring gold miners over the massively over-owned Mag 9 AI sector. Crescat Capital CEO, Kevin Smith, CFA, believes that there is an impending tech bubble collapse and that gold miners will be likely beneficiaries. We agree with Smith’s investment perspective. During this spring’s Liberation Day decline, our gold and gold miner positions rose while the equity markets tanked, because, historically, gold and miner share prices are negatively correlated to the S&P 500.
Jeffrey W. Huge, CMT and Kevin Smith, CFA are among the skeptics of today’s technology boom. In support of the bear case for large cap tech and the AI boom is the concern that the huge cap ex spending currently occurring is risky because bankable business models which generate an economic return for this cap ex spending is unproven. Consequently, recent debt financings by large cap technology companies could signal another potential risk for this technology boom. The chart below, from Jeffrey Huge, shows that the growing use of debt finance by leading tech firms could be ominous.
Source: Jeffrey Huge, CMT, Huge Insights
Another potential risk to today’s capital expenditure boom is their seemingly circular funding strategies. Astute observers worry that tech companies are financing their own demand. The chart below of circular cap ex transactions can easily be seen as the prelude to a cap ex collapse in the tech space and not the Golden Age of US AI dominance as headlines seem to imply.
Source: Jeffrey Hughes, CMT, Huge Insights, Morgan Stanley, and WSJ.com
While predicting bubbles and cap ex cycles is incredibly difficult, stock market cycles do show a strong correlation between record margin debt levels and market peaks. This debt-to-market peak relationship also is cited in the chart below. It suggests the S&P 500 market is due for a correction.
The following chart from Huge Insights also shows excessive systemic leverage today by combining leveraged ETFs with total margin debt. This chart also looks ominous since it mirrors the historic market peaks in 2000 and 2008. Yikes!
Conclusion:
The S&P 500 has rallied sharply back from its Liberation Day decline in March. High valuation metrics, record margin debt, high systemic leverage, historic tech cap ex levels, and optimism suggest that the S&P 500 is at risk of a sharp decline. If the tech sector cracks or the S&P 500 corrects, we could see a cyclical peak unwind in the years ahead.
Consequently, allocating to noncorrelated attractive investment vehicles is a shrewd risk management strategy for investors large and small. Due to the declining dollar and cheap foreign market valuations, diversifying into international and emerging equity and bond markets could provide outperformance to US benchmarks like the S&P 500 and mega cap tech.
Gold and gold mining stocks, in particular, appear to offer both negative correlations to the S&P 500 and compelling return prospects. Consequently, allocating away from mega cap tech and the S&P 500 and into gold and gold mining stock should improve portfolio returns while lowering portfolio risk.
There is growing evidence of a seismic shift away from the Modern Portfolio Theory’s traditional 60% equity 40% bond allocation to include gold and gold mining stocks. Allocations as high as 25% have been advocated by Jeffrey Gundlach of DoubleLine. We don’t know where this market cycle will take us, but Crescat Capital’s valuation comparison of Magnificent 9 AI stocks versus gold mining stocks suggests we could be early in a multi-year cycle where gold investors may experience great returns and reduced equity risk. Allocations to international equities and bonds should also have similar benefits to gold mining stocks, a reallocation move also favored by Jeffrey Gundlach.
Income Growth Advisors, LLC clients own Gold and Silver ETFs: SPDR Gold Shares (GLD) up 52% YTD, VanEck Gold Miners ETF (GDX) up 109.7% YTD, Van Eck Junior Gold Miners (GDXJ) up 114% YTD, GAMCO Global Gold, Natural Resources & Income Trust (GGN) up 24% YTD, and iShares Silver Trust (SLV) up 66% YTD. We have taken more aggressive positions in Blue Lagoon Resources, Inc. (BLAGF) up 400% YTD, Osisko Development Corp. (ODV) up 90% YTD and Coeur Mining Inc. (CDE) up 160% YTD. If we are in the beginning of a commodities super cycle or gold bull market, we believe that substantial upside still remains for this group and these names. Furthermore, they may prove a great hedge against a challenging equity market if this proves to be a major market peak.