The Best July (Almost) Ever

Another sign of the mega-bubble... ARKK is sort of back... The hype-cycle peak... Capex and bovine excrement... 500-to-1 leverage... 'Crieth in the wilderness'... Be a real investor (even though it won't feel that great right now)...

Last month was one of the best Julys for stocks in history...

The S&P 500 Index hit 10 new all-time highs last month. That's the index's third-best July performance since 1928, according to our friend Jason Goepfert at SentimenTrader.com. The index hit 11 new highs in July 1929 and 13 new highs in July 1954.

Typically, stocks don't outperform in July. January and November, on average, tend to have more new all-time highs than other months.

It's just another sign that we're in a mega-bubble.

And the speculative mania continues...

The latest example comes from one of the usual suspects: Cathie Wood of Ark Investment Management.

Regular Digest readers might remember that we criticized her firm's exchange-traded funds ("ETFs") in our February 11, 2021 Digest.

They're all loaded with what Wood calls "disruptive innovation" stocks, many of which I'd call cash-burning speculations. But potato, po-tah-to.

The day after my 2021 Digest, Wood's flagship ARK Innovation Fund (ARKK) hit what is still its all-time high share price. Then reality set in, and it spent the next 22 months plummeting 81%.

Buying a bunch of hyped-up speculative stocks just because they're going up is a better way to lose money than make it. Even though ARKK is up 35% since January 1 and a staggering nearly 90% since the April 8 tariff tantrum bottom – outperforming just about everything – ARKK still needs to double from here just to break even from its last speculative peak.

Still, Wood, never one to forego an opportunity to toot her own horn, sent out an e-mail on Wednesday titled, "Have You Seen ARK's ETF Performance Year To Date?" Wood proclaims:

In the first half of 2025, ARK's actively managed ETFs outperformed broad benchmarks by a wide margin – driven by real productivity gains from artificial intelligence, supportive fiscal and monetary policy, and a broadening market rally. Innovation is no longer just a long-term story – it's working in today's market.

ARKK's top 10 companies make up about 61% of the fund's assets and feature profitable megacaps like Tesla (TSLA), Coinbase (COIN), Shopify (SHOP.TO), and Palantir Technologies (PLTR), but the list also includes money losers like Roku (ROKU), Roblox (RBLX), Crispr Therapeutics (CRSP), and Tempus AI (TEM).

And the stellar, profitable companies among the top 10 are not mitigating the much higher risk of the speculative cash-burners. They trade at an average of about 490 times earnings. The average is pulled much higher by Circle Internet (CRCL), trading at 1,873 times earnings as I write, and Palantir, trading at 663 times earnings as I write. But the others are still absurdly valued, between about 54 and 182 times earnings. In short, no matter how great the businesses might be, every single one is a rank speculation right now, not a serious investment.

Wood seizing this moment to tout her risky offerings is like a real-time version of Peter Lynch's four-stage cocktail party indicator.

During the first stage, when Lynch would tell folks he was a professional investor, they'd yawn and find someone more interesting to talk to – like a dentist. But in the fourth and final stage, Lynch would be surrounded by folks pitching their stock picks to him. That's certainly where we are today, except now Wood is the obnoxious party guest and we're Lynch, beset on all sides by manic greed.

Another way to assess the current market froth...

AI is a big driver of today's speculative market. And the Gartner Hype Cycle tells you everything you need to know about that revolution...

The hype cycle is made up of five stages – from the moment the public is made aware of a new technology or investment idea through its peak, disillusionment, and ultimate plateau of acceptance and productivity (if any).

Looking at the chart and thinking about where we are today, does it seem like we're anywhere near a trough of disillusionment for AI? Or does it seem more like a peak of inflated expectations? So little has been achieved with AI at this point that all we really have are expectations – inflated or otherwise.

I'll speak only for myself. The overwhelming majority of my interactions with AI have been garbage. ChatGPT, Gemini, and other so-called generative AI platforms remind me of know-it-all relatives who have heads full of facts and nonsense... and can never seem to tell them apart. Yet, nonetheless, they confidently try to shove both down everyone's throat at holiday gatherings.

And even worse, just like these relatives, AI bots seem enthralled with hard-line political views they won't let go of, no matter how many facts you show them. As the title of one academic paper by three University of Glasgow researchers put it, "ChatGPT is bulls*&t."

But during speculative manias, bovine excrement often attracts large amounts of capital...

This one is no different. Hundreds of billions of dollars are flowing into data centers, power generation, semiconductors, and the like for the coming AI revolution.

Just consider what the "Magnificent Five" – Microsoft (MSFT), Alphabet (GOOGL), Amazon (AMZN), Meta Platforms (META), and Nvidia (NVDA) – are spending on AI. Here's what their capital expenditures ("capex") look like over the past nine fiscal years (some have noncalendar fiscal years):

Their capex has risen from nearly $31 billion to more than $240 billion in the most recent fiscal year – a massive eightfold increase. It's reminiscent of the 1990s race to build fiber optic networks that bankrupted companies during the dotcom boom. The difference is that these companies are funding AI from their retained earnings instead of taking on massive debts, so they can probably keep this up longer... perhaps inflating the market bubble much higher in the coming months and years.

I don't know the future. AI may very well transform our lives the way the Internet did. But I know how past speculative episodes have worked out financially. Money pours into the technology before there's much of a business, and much of that investment is wiped out in the ensuing bust – leading to the trough of disillusionment on the Gartner Hype Cycle and a steep bear market.

Given the enormous gains these stocks have seen recently, the disillusionment could be quite uncomfortable. Three of the Mag Five stocks are up between 140% and 200% over the past five years. Nvidia is up around 1,500%. The more upside in the mania, the more downside in the bust.

I'm not saying these companies aren't doing incredible things or that they don't have some of the most amazing businesses in history. I'm only saying that paying exorbitant multiples of earnings for companies has worked out very poorly for investors in the past. I have no reason to believe this time is different.

But the "this time is different" sentiment is often in the air when great masses of investors push stocks to unprecedented heights based on their unbridled optimism about some new technology.

If you doubt the market is in a frenzied state, check this out...

German market analyst Holger Zschaepitz recently published a list of market excesses (based on a Goldman Sachs report) on social platform X:

Key signs of the current frenzy:

Penny stocks, loss-making companies, and high-multiple stocks [with enterprise value-to-sales of more than 10 times] are trading at unusually high volumes.

Call options now make up 61% of options activity – the highest share since 2021.

Popular retail favorites like meme and AI stocks are up 51% since April, far outpacing the S&P 500.

Short squeeze alert: Stocks heavily shorted by investors have surged more than 60%, marking the third-largest jump in 30 years.

Zschaepitz might want to add currencies to the list. Bloomberg Law recently published an article with the headline "Leverage of 500-to-1 is Luring Day Traders to Currency Markets." That's big leverage, day trading, and currencies all packed into one headline – a speculative three-for-one deal!

I would also add bitcoin-treasury companies. The leader of that pack is Strategy (MSTR). It now owns around 600,000 bitcoin, which it buys by selling equity and plenty of debt.

The company has no revenue or cash flow, so there is no way the market will allow it to keep taking on debt to buy bitcoin forever. After all, no bank would endlessly lend you money.

As a recent Financial Times article showed, bitcoin-treasury companies are having to use mathematical contortions to show investors how wonderful they're doing. It's just "an exciting new way to rationalize nonsense." Great businesses don't do that. They just make more profits than they could possibly reinvest and pay out the difference to shareholders.

Let's be clear here: I'm not bashing bitcoin. I like bitcoin. It may be a great innovation that will one day stop fluctuating like a cross between a tulip bulb and meme stock. If – and when – it stops doing that, it could become a serious store of value.

That's why I own a little and have recommended The Ferris Report subscribers do the same. I think it's worth an intelligent speculation. But borrowing money to buy it is a totally different matter, and I urge you not to do it.

Still, even if you avoid ARKK, Strategy, and Zschaepitz's frenzy list, you should always remember one thing...

Like all market bubbles, it's nearly impossible not to get caught up in this one...

Even if you're buying the biggest, "safest" stocks, so is everybody else. And when everybody decides to dump them, it will be like somebody yelled fire in a crowded theater with one little exit door at the back.

Most bonds won't save you either, since government reports – mainly the consumer price index ("CPI") – on inflation are probably less reliable than ever right now. In short, inflation is likely much higher than what's being reported. Torsten Sløk at Apollo Global explained why the CPI has recently become less reliable than ever in a recent blog post:

When data is not available, [Bureau of Labor Statistics] staff typically develop estimates for approximately 10% of the cells in the CPI calculation. However, the share of data in the CPI that is estimated has increased significantly in recent months and is now above 30%...

In other words, almost a third of the prices going into the CPI at the moment are guesses based on other data collections in the CPI.

Sløk isn't the first to demonstrate how bad the CPI is at measuring inflation, but the story never seems to get much traction. It's almost like the government and financial media don't want you to know how bad inflation really is at any given moment.

All of this is to say, the traditionally "safe" stocks or bonds you own right now might not be as safe as you think.

Most people buying publicly traded securities right now aren't investing at all. They're speculating without knowing it by simply buying S&P 500 Index funds in their 401(k)s every two weeks.

I've been warning about putting too much of your 401(k) contributions into the S&P 500, since, by some measures, it's more expensive than it has ever been. But as long as the market keeps moving higher, I'm prepared to remain the "lone" voice crying out, like from the book of Isaiah 40:3...

The voice of him that crieth in the wilderness, Prepare ye the way of the Lord, make straight in the desert a highway for our God.

Crying in the wilderness, as I practice it, is less likely to "prepare you the way of the Lord" and more likely to make you look financially suicidal – right up until it makes you look like you knew what you were talking about all along.

The best piece of advice I can give you right now is to keep being a real investor. Buy more reasonably valued stocks and bonds and cut your exposure to speculation wherever you find it. It won't make you feel that great as the rest of the market soars out of sight. But you'll be better prepared for a bear market.

New 52-week highs (as of 7/31/25): Allegion (ALLE), Constellation Energy (CEG), DXP Enterprises (DXPE), Comfort Systems USA (FIX), GE Vernova (GEV), Lincoln Electric (LECO), Lumentum (LITE), Altria (MO), Microsoft (MSFT), S&P Global (SPGI), Vistra (VST), and Utilities Select Sector SPDR Fund (XLU).

In today's mailbag, more feedback on the Federal Reserve's concern about tariff-related inflation... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"I take your point that businesses want certainty. We're on a path to reshoring (in every business geopolitical theater).

"Tariffs have nothing to do with Fed rates. But they DO indicate that substitutes MUST be found on this continent. No one will invest with rates at this level.

"Lowering rates won't overheat the economy. It isn't that robust at the moment. But people wanting to finance a car or a home or build a business are handcuffed, while EU is at 2%." – Subscriber Martin C.

"If inflation rises as the Fed thinks will happen, will the Fed raise interest rates? That's very likely and then what happens to the economy? Companies will lay off more employees, people will be more careful in spending their money, etc. Is the Fed driving us into a recession? I hope my thinking is totally wrong." – Subscriber Norman B.

Corey McLaughlin comment: That would be a likely scenario if inflation really did take off again, but I don't think the Fed intends for a rate hike to be its next move.

Fed Chair Jerome Powell said something interesting on this subject (that didn't get much attention) during his press conference on Wednesday...

You could argue we are a bit looking through goods inflation by not raising rates. We haven't reacted to new inflation... I think the base case, a reasonable base case, is that these are one-time price effects.

After taking some time to read between the lines of the "Fed speak" over the past two days, here's what I think...

Powell doesn't want to cut rates while data is showing inflation accelerating, even if it is for a relatively brief period. I suspect that's because cutting rates when the pace of inflation is rising could lead to even more inflation expectations and reality in the market.

(We saw this when the Fed cut rates last fall and the 10-year Treasury yield took off higher. And we saw it in a different, big way when the Fed kept rates at rock-bottom levels in 2021 as what it had theorized as "transitory" inflation took off higher during the pandemic.)

This is the world we live in. We saw 40-year-high inflation not too long ago, and interest rates are already higher than they've been for most of the past 18 years.

Still, in general, the message Powell is sending is that he's inclined for the Fed's next move to be to lower rates, but he isn't ready to pull the trigger just yet. However, the jobs market ("maximum employment" is the other half of the central bank's "dual mandate") might lead the Fed to lower rates sooner rather than later.

As we wrote yesterday, the Fed says it's waiting to see the effects of tariffs on inflation, so the jobs market will take prominence in influencing rate decisions. And if the labor market weakens substantially, the expectations for rate cuts would likely be proven correct.

Today's weaker-than-expected "nonfarm payrolls" report for July may provide evidence needed for cuts.

It showed just 73,000 jobs added for the month, an unemployment rate ticking higher to 4.2%, and, most notably, major "revisions" to the prior two months of data that cut more than 250,000 new jobs out of the record.

Good investing,

Dan Ferris
Medford, Oregon
August 1, 2025