Market Outlook

June 1, 2026

Damn The Torpedoes, Full Speed Ahead

With apologies to Admiral Farragut and a prod from Google that 1864’s torpedoes were actually mines (and not torpedoes as we know them), it is no less impressive that he lashed himself to the mast of the USS Hartford and steered a course through Mobile Bay to engage the Confederate fleet head-on.

With further apologies to those investors who have bid up prices of memory chip and storage players (think SanDisk, Micron and Intel), you’re probably no Farragut, but you don’t lack courage!

What you may also have in common with the Union commander is that you know to look ahead. For if you were looking back at earnings, you’d realize that you’re paying a hefty premium for slack sales and earnings growth. But as AI infrastructure needs have expanded, and promise to accelerate, forward P/Es have collapsed to the point where some tech are priced like value stocks.

Consider Micron. Its trailing P/E is above 40, which is twice as high as its 10-year average. But if one considers the exponential demand for certain of its chips, and the expected growth in earnings, its forward P/E drops to around 12. SanDisk’s case is even more dramatic. Even though its share price is up 4,000% or so in the past year, its earning growth is expected to be so immense that its forward P/E has collapsed towards 10.

With major U.S. equity indexes breaking record after record over the past eight weeks, and the P/E of the overall market rising, it’s odd that the usual investor fears have evaporated at a time of heightened volatility (though in recent weeks said risk has fallen owing to the promise of a U.S.-Iran peace accord) and a variety of economic indicators moving in the wrong direction. As such contradictions sometimes occur during market bubbles, a discussion of risk is always worthwhile.

There’s a basic maxim that investors must be compensated for risk, or at least the perceived risk.

On one end of the risk spectrum are so-called riskless Treasurys. On the other end are equities. With the benchmark 10-year Treasury yielding 4.55% at month-end, it follows that stock investors should demand a premium of several percentage points more.

According to Seeking Alpha, "with the Samp;P 500 trading at just over 32 times earnings, the current Samp;P 500 earnings yield is 3.1%." However, with the 10-year yield far higher, this mis-match means that stocks are too expensive. And, of course, if one were to isolate the tech sector, this mismatch is exponentially greater. Of course, the justification for today’s elevated stock valuations is the belief that tech’s sales and earnings growth are poised to go hyperbolic. Needless-to-say, one can only hope that’s true, as any contraction in earnings would weigh heavily on share prices.

Nevertheless, recent events show that there are always unanticipated events that can add difficult-to-quantify risks to the market (such as the war), and before that, the on-again-off-again tariffs that neither businesses nor the financial markets had priced-in.

Apart from expanding P/Es, stock investors have all but overlooked the disconnect between Main Street and Wall Street.

Consumer confidence has been plunging to multi-year lows. The main culprits on the homefront are high fuel prices and inflation — both of which are linked and may be transitory. Then again, maybe not.

Inflation has been sticky for years, and it’s likely that out-of-control federal spending is contributing to the problem by pumping borrowed money into the economy. (You may have read last month that the federal debt is now the size of the U.S. economy?)

Last week, the new Fed chief, Kevin Warsh, was greeted with the news that headline PCE (personal consumption expenditures) accelerated in April to an annual rate of 3.8%. That’s up from 3.5% in March, and 2.8% in February. While higher fuel costs contributed to the increase, housing, food, and health care remain problems for Main Street. Notably, for the first time in years, real wage growth turned negative in April. (Personal income growth slowed to 2.5%, below CPI’s 3.8% pace.) And while tech-related layoffs (to pay for AI expenditures) are grabbing headlines, Main Street has its own concerns that AI may eliminate their jobs. Little wonder that consumer spending has slowed and shifted to essentials — a development of greater consequence for Americans with lower incomes and higher debt. So while the equity market isn’t especially concerned, the bond market has priced in a 40% chance that the Fed will raise rates later this year.

Another market risk is the Samp;P 500’s historic concentration. While 36% is definitively tech, companies integral to tech and AI arguably broaden that exposure to about 50%. Presently, the 10 biggest companies in the Samp;P 500 account for 40%+ of its market cap. At the height of the dot.com bubble, that figure was "only" 27%.

So it’s an uncomfortable truth that much of the market’s strong performance rests upon tech generally, and AI in particular. We owe it to ourselves to recall lessons from the dot.com bubble which, after all, took 15 years to reclaim its March 2000 peak.

The essential difference in the years leading up to that crash versus now is that tech spending dried up after Y2K. (There was also the 9/11 terrorist attack.)

In the late 1990s, earnings were few and far between: some companies that are household names (and are again dominant players) had no P/E because there were no earnings! And while AI is now only a small part of revenue and earnings for most tech goliaths, soon AI will be their cash cows.

Between now and that point there will almost certainly be selloffs and a correction or two. But the durable lesson from the dot.com bust (and Admiral Farragut) is perseverance in the face of risk.

— John Bonnanzio