Welcome back! Trading resumes this morning after the long weekend for President’s Day — we’re covering the resilience of the S&P 500, DOGE’s scrutiny of taxpayer data, and more. Was this email forwarded to you? Join over 190,000 self-directed investors and sign up here.

What could derail soaring stocks?

Seven weeks into 2025 and four into Trump 2.0, uncertainty is high but investors don’t care. 

Not only did the S&P 500 finish Friday within spitting distance of its record, but the market continues to broaden beyond the Magnificent Seven — a group that’s accounted for about three-quarters of the benchmark’s annual returns for the last two years.

Case in point, to start 2025, the equal-weighted Nasdaq 100 hovers at an all-time high and it’s outperforming its market-cap-weighted counterpart, signaling that investors are spreading their bets. 

Still, Goldman Sachs cautioned in a recent note that surging stock returns coupled with high valuations open the door to a double-digit pullback. The growing role of US stocks on the world stage, booming tech sector and rising single-stock concentration all magnify vulnerabilities, too.

Naturally, there’s a caveat: 

“These factors have emerged as a function of strong fundamentals, not as the result of speculation or irrational exuberance,” Goldman Sachs said.

“The growing dominance of the US equity market has simply mirrored its relative profit growth since the financial crisis.”

In any case, bearish misgivings abound.

• Will President Trump follow through on tariffs?

• How badly is the Fed losing the inflation battle?

• Is China’s DeepSeek a legitimate threat to America’s massive AI spending plan?  

And yet investors remain unfazed. If anything, rising worries have coincided with even stronger risk appetite. 

“Stocks are hitting all-time highs despite inflation and tariff concerns because key market drivers have shifted in a supportive direction,” said Jessica Inskip, director of investor research at StockBrokers.com.

She pointed to the falling 10-year yield as well as the recent dip in US dollar strength as notable bullish catalysts for equities.

Indeed, the numbers point to froth. S&P 500 names are trading at roughly 22 times forward earnings, according to FactSet — well above the 10-year average of 19 and inching toward the dot-com peak of 26.

What’s more, the index’s CAPE ratio — which compares current prices to the last decade of earnings — sits at 38, meaning today’s market is more expensive than it has been 95% of the time since 1957.

So why are stock valuations so stretched? The better question might be how long they can stay that way while economic uncertainties persist. 

Stocks have shrugged off momentary dips tied to tariff headlines and inflation reports, rebounding sharply each time. 

A rebound in the 10-year Treasury yield above 4.75% would put pressure on S&P 500 valuations, in Inskip’s view, particularly among growth names.

And while unlikely, a disappointing earnings report from Nvidia — the darling, linchpin, and leader of the AI wave — could sentiment in a hurry. 

“But my biggest concern is the growing deficit,” Inskip said.

“It would trigger [bond] vigilantes and create a large supply of Treasury’s. Where would the demand come from? We don’t know — [so] uncertainty and volatility.” 

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Elsewhere:

📊 A busy shortened trading week. The Fed will release minutes from its January meeting, and investors will also get new data on the manufacturing and services sector as well as consumer sentiment. Alibaba and Walmart headline 46 corporate earnings reports among S&P 500 names. (Yahoo Finance)

🏦 Fed governor Michelle Bowman seeks more inflation data. She said Monday that she wants increased conviction that prices will continue to cool this year before any rate cuts happen. The Fed’s benchmark rate is “now in a good place,” she said, and holding steady allows for more time to assess White House policies. (Reuters)

🤝 DOGE officials keep hunting for government waste. The department spearheaded by Elon Musk has discovered millions of social security numbers receiving regular government payouts despite being older than 125 years old. The team is now working to secure access to personal taxpayer information via the IRS. (WSJ)

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Rapid-fire: 

• Southwest Airlines will cut 15% of its corporate workforce it the company’s first-ever layoffs (Barron’s)

• The average 30-year fixed mortgage rate in the US has stayed above 6% for more than two years (Barron’s)

• Rising US-China uncertainty is pushing more and more US businesses to move their production outside China (WSJ)

• DeepSeek has fueled a $1.3 trillion China stock rally (Bloomberg)

• US retail spending dropped in January for the first time in August (CNN Business)

• The Japanese Yen could lose its strength as the bank of Japan is expected to raise interest rates further (WSJ)

• Nation states, pensions, and banks are all scrambling to buy bitcoin (Pomp Letter)

• Big banks are scrubbing their public mentions of DEI and diversity efforts (WSJ)

Last thing:

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