My Patience Is Running Thin Amid Overbought Market

Enthusiasm over artificial intelligence continues to power the rise in the Nasdaq and the overall market. The tech-heavy index rose in each of the five daily trading sessions last week. In all, it climbed 2% to end the week at all-time highs. 

Oracle ORCL is a nice microcosm for the changes AI is bringing to the economy and the markets. The company soared last week after disclosing a massive increase in its remaining performance obligations, or RPO, while posting slightly disappointing quarterly results. At the same time, the database giant recently announced its latest rounds of layoffs despite a huge order backlog.

The market will finally get its much-anticipated cut to the Feds Funds rate this week. Whether this powers the next leg up in the market is anyone’s guess at this point. I have given up trying to forecast the short-term direction of equities. The market seems to be heavily driven by momentum and a fear of missing out. Nvidia’s NVDA market cap has already surpassed the annual gross domestic product of U.K. and France. At this rate, it will surpass the annual GDP of Germany, the largest economy in Europe, by year's end.

Year-over-year earnings growth in the S&P 500 looks like it will come in around 7% for Q2 and Q3. On a trailing 12-month earnings basis, that gives the S&P 500 price-to-earnings-to-growth ratio of nearly four. The index also now pays a historically low just under 1.2% dividend yield at a time when the risk-free 10-Year Treasury has a yield of 4.1%.

The central bank has a very delicate balancing act here and if I was Chairman Powell I would be counting the days until my retirement in May. Inflation remains sticky, which investors were reminded of again last week with a slightly hotter than expected August consumer price index reading. It should be noted that inflation was above the consensus due to services, not goods. The shelter component also makes up just over 40% of the CPI calculation. With rents moderating and home prices starting to fall, this should be a positive for inflation going forward.

In addition, a few quarter-percentage-point rate reductions are not going to help the struggling residential and commercial real estate sectors other than very incrementally. The delinquency rate on commercial mortgage-backed securities against office properties already is past its peak during the Great Financial Crisis and delinquency rates against multi-family properties have more than doubled over the past 12 months to nearly 7%. And multifamily makes up roughly 45% of the approximate $4.8 trillion in commercial real estate debt outstanding.

Several housing markets like Austin and Oakland have already fallen by more than 20% from their peak, and many other like New Orleans and San Francisco not far behind. With average new home prices now under the average existing home prices, we still have a long way to go on the downside.

Finally, the jobs markets are clearly starting to crumble based on recent Bureau of Labor Statistics jobs reports and sharp revisions to prior estimates. With corporate managements starting to go into planning mode for 2026 with the advancements in AI, it is hard to see a hiring market that will be anything stronger than tepid in the coming year.

The combination of a faltering jobs market and falling home prices is a toxic combination for consumer confidence, which is already in the dumpster. In short, the market feels it's priced for perfection -- a scenario that seems as unlikely to unfold as my Cardinals winning the Super Bowl this year.

So, while some investors might cheer this week’s Fed Funds cut, it will be no panacea to what ails the economy. Therefore, I continue to be positioned quite cautiously within my portfolio while fully admitting it is getting increasingly difficult to remain patient in what is a quite overbought market.

At the time of publication, Jensen had no position in any security mentioned.