Monthly Outlook: November 2025
As we work through this spooky time (I’m thinking Halloween, not markets), we can reflect on the six-month rally that has led stock markets to new highs on a weekly basis. Since the mini crash in early April, caused by Trump’s Tariff Tax announcement (and then equally abrupt reversal), markets have ripped higher with barely a down day. Never mind peak valuations or softening fundamentals, it’s full steam ahead!
The rally has been led by artificial intelligence (AI) stocks, primarily, as investors will pay any price to get onboard with technology that will change the world. Does it bother anyone that Tesla trades at 279 P/E, Nvidia trades at 79 P/E, or Palantir trades at 608 P/E? Nah, you just need imagination! If you project future earnings of these AI companies to be “infinity” (or at least huge), you can justify anything.
Back in 2000, at the peak of the internet bubble, P/Es were too high to justify, so investors started talking about “price to eyeballs” meaning price to viewers of internet sites. Today, in the AI bubble, P/Es are, again, hard to justify. Maybe we’ll make up the valuation metric, “price to compute”, with the word “compute” referring to all AI investment in CPUs and GPUs, learning algorithms, and data centers.
Self-reinforcing Loop
The S&P500 index comprises about 500 of the biggest U.S. companies on the market. It’s a market capitalization (market cap) weighted index where companies are weighted based on their enterprise value. It’s considered a “mega cap” and “large cap” index. Here’s the interesting part: The top 10 stocks comprise 37% of the whole S&P500. The bottom 440 stocks weighting is equal to the top 10 stock weighting. Who are these top 10 mega-cap stocks? AAPL, MSFT, GOOG, AMZN, NVDA, META, Broadcom, TSLA, JP Morgan, and Berkshire Hathaway. Basically the “Mag 7”, as they’re called. Such concentration is a bit unusual for markets.
Today, about 53% of managed assets are in index funds and ETFs. As investors buy index ETFs like SPY (S&P500) or QQQ (Nasdaq 100), more money goes to these mega-cap names, which pushes their prices higher. And as their prices go higher, investors add more money, and so on and so on. It’s a self-reinforcing loop of momentum and performance chasing. As a result, their valuation metrics have gone through the roof and are now at 100-year peak levels.
But just because valuations are high, it doesn’t mean the rally is over. Although we now have a bubble in Mega-cap US Growth stocks (think Mag 7), the self-reinforcing loop can (and will) push the bubble higher – until a catalyst comes along to break the fear of missing out (FOMO) psychology. History of markets strongly suggests that some kind of catalyst will eventually come along, and the unwinding of the bubble could lead to significant stock market declines. But that could be in 2 months or 2 years.
Diversification Opportunities Beyond Mag 7
Artificial intelligence is the hot invention of the decade. History is full of examples of exuberance over the new “technology” of the era. We had railroads in the 1870s, radio in the 1920s, internet in 1990s, and so on. All of these did, in fact, change the world. All of them drew in large pools of investment that resulted in bubbles initially, followed by busts, and then eventual recovery and broad-based gains.
Many times, the initial “hot stocks” go bust and aren’t the same ones that eventually do well. In the 1970s, we had the “Nifty 50” blue chip stocks. Only 27 of them survive today. In 1999, we had the “dot com” bubble that eventually busted in the “tech wreck” of 2001-2, when the NASDAQ lost 83%. Many of those internet stocks are gone today. Today, we have the Mag 7 and hundreds of other smaller AI players. If history is any guide, more than a few of these will not be around in 10 years, though I’m sure that AI is here to stay, in general.
The great news is that beyond the Mag 7 and AI, there are still plenty of solid investments that we can buy that are more reasonably priced. US Value and US Small stocks, International and Emerging Markets stocks, Bonds, Commodities, and so on. These markets are all trending higher and have lots of potential as the rally broadens out into lagging markets. US Tech stocks have been the best sector for several years. It’s very likely that another sector will take the lead next year, and we’re ready for it.