Market Commentary
“The stock market is a mechanism for transferring wealth from the impatient to the patient. ”
As we approach year-end, Mr. Buffet's observation couldn't be more relevant. In last month's commentary, we discussed the importance of discipline and patience in navigating markets. This month, we once again find ourselves at a point where patience and prudence matter more than ever. Enthusiasm surrounding artificial intelligence has pushed valuations to levels rarely seen outside of historic market manias, while beneath the surface, economic realities paint a far more sobering picture.
Stocks spent most of November in the red. It wasn't until the final days of the month that the S&P 500 and its Equal-Weight counterpart eked out a gain, and the Equal-Weight only rose 0.1% when all was said and done. Meanwhile, the Nasdaq, as measured by the QQQ ETF, ended its run of 7 consecutive positive months with a 1.56% loss. But that doesn't really tell the whole story. On November 21, the QQQ ETF was down 8.5% for the month before rallying 6.6% over the final five days. It could have been much worse. Eventually, it will be. Who knows when?
The worst-performing index among those we have been tracking all year in this commentary was the so-called Magnificent 7 (Mag7) index, which finished the month down 1.6%. The Top 10 Index, which regular readers know I prefer to the Mag7, was actually up 3.0% thanks mainly to Eli Lilly (LLY), which rose 24.6% in November, officially reclaiming its spot as one of the world's 10 largest companies by Market Capitalization. It also became the first healthcare company to reach a $1 trillion valuation.
Gold continues to outshine everything else, tacking on another 5.9% gain in November and bringing its total return for the year to 61.5%, nearly taking out its all-time high.
It is worth noting that for most of November, the Equal-Weight S&P 500 Index was actually underperforming the Aggregate Bond Index for the year.
Halfway through December, the Nasdaq and the S&P 500 are both down slightly from the end of November. It increasingly looks like Santa came early, and the Santa Claus Rally may not materialize this year. Don't get me wrong, that isn't a prediction, and I am not betting one way or the other. It is just a comment based on what I see in the technical analysis.
Both the S&P 500 and the NASDAQ 100 charts "look" technically like they might test the November lows (black horizontal lines) after falling out of their upward-sloping channels and either failing to break out (SPY) or putting in a lower high (QQQ).
Both the intermediate- and long-term trends for each, as measured by the 50- and 200-day moving averages (DMAs), remain up.
The NASDAQ is sitting right on its 50DMA, which is acting as support, for now. If it closes below the 50DMA, I will have greater confidence that a test of the November lows is next, as that is the next real line of support.
The S&P 500 chart looks a little better, but leads to similar analysis.
When technical analysis shows a price falling out of an upward-trending channel, it doesn't always lead to a correction. But when a correction occurs for an asset in an upward-trending channel, it always starts with the price falling out of the channel. So, this is something to keep an eye on.
In fact, that is how the correction began earlier this year. I wrote about this and shared a similar chart in my March 2025 commentary.
Here is the chart:
I think we all know what happened next.
The Hidden Recession
Perhaps the most alarming data point that few are discussing: According to independent analysis of the Federal Reserve's Beige Book report, less than 20% of the U.S. population currently lives in regions experiencing economic expansion. Said another way, over 80% of Americans are living in areas experiencing recessionary conditions. This figure has doubled since the beginning of 2025 and is currently higher than at any other time in the last 20 years, except for the Global Financial Crisis and the COVID crash.
Let that sink in. While the S&P 500 trades near all-time highs and talking heads celebrate the "AI revolution," the vast majority of Americans are experiencing an economic contraction. The recession isn't coming—it's already here for most people. The disconnect between Wall Street and Main Street has never been wider.
As readers of this commentary, you are already familiar with the ongoing disconnect in our economy, which I've been discussing for months, if not years. I have highlighted the "K-shaped" economy, where those who own assets prosper while those who do not struggle.
Black Friday sales data provided another concerning datapoint. Sales rose 9% to a record $11.8 billion in online spending, which is all you will hear about in the headlines designed to pump the stock market even higher. That sounds great, right? Look deeper.
Order volumes actually fell 1%. Consumers are spending 9% more money to buy 1% fewer items. While aggregate sales figures suggest consumer resilience, order-level data reveal that shoppers are becoming increasingly price-sensitive.
Average order values increased, but not because consumers are feeling flush—it's because of the hidden tariff-tax and persistent inflation, which have made everything more expensive. Consumers are searching for value, engaging in comparative price shopping, and pulling back on purchase quantities even as nominal spending appears solid. Walmart and the dollar stores continue to report that high-income customers are driving their strong results.
The "trade-down" phenomenon is real and accelerating. This isn't just about low-income stress; it's about broad-based economic pressure forcing behavioral changes, including for those in historically "high-income" cohorts. The middle is getting squeezed out.
This defines a "K-shaped" economy: high-end customers at the very top are doing fine. Everyone else is struggling.
S&P 500 Return Concentration
I have consistently reminded you, dear reader, that the S&P 500 has never been more concentrated in just a few expensive stocks. It is the basis for the Top 10 "factor" continuing to outperform. As passive investors mindlessly pour money into the biggest 10 stocks, the S&P 500 follows its own K-shaped path, with the biggest getting bigger and the smallest struggling.
I won't belabor that point any further. But I did see something interesting the other day that is a little different way to look at it.
53.6% of the S&P 500's return has come from just five of the Mega caps: NVIDIA (NVDA), Broadcom (AVGO), Alphabet (GOOGL), Microsoft (MSFT), and Apple (AAPL)!
S&P 500 is up 958.88 points, and these companies are responsible for 514.12 of those points - 53.6%.
I recently listened to an excellent Bloomberg Odd Lots podcast featuring Jeffrey Gundlach, founder and CEO of DoubleLine Capital. I'd encourage everyone to give it a listen.
Gundlach's central thesis: almost all financial assets are now overvalued—stocks, bonds, and private assets. He specifically called out private credit as "the next big crisis," comparing it to the subprime mortgage bubble of 2006-2007.
This is return concentration, not just allocation concentration. In case you were wondering, these five companies are about 29% of the S&P 500 allocation.
Perhaps 2026 will see a rotation out of the top 10 stocks and into the forgotten 490. Time will tell. We have added an allocation to small caps within our stock strategy. Small caps have actually held up better than large caps over the past month and a half, up about 2% compared to a 0.8% loss for the S&P 500 and a 3.5% loss for the NASDAQ. So, we are positioned to take advantage if we see a continued rotation.
The AI Bubble Debate
As much as I would like to skip it, let's hit a few quick points on the AI Bubble debate.
Like every other professional investor, it seems, I can't go anywhere without being asked if there is a bubble in AI. Of course, I have written about this enough for readers to know where I stand. For the new readers out there (thank you for joining us!), I do think it is a bubble. But not just in AI. It's the mother of all bubbles.
Of all the characters in The Big Short, fund manager Michael Burry (depicted by Christian Bale in the movie version) seemed the least likely to grant Michael Lewis a follow-up interview. Burry was one of the first to see the subprime housing market crisis coming, and he actually helped Wall Street banks develop the credit-default swap, the instrument that allowed short sellers to make their bets against the market. Lately, Burry has been in the news again because his fund has taken short positions against tech giants Nvidia and Palantir. Now he finally sits down with Lewis as part of this series.
Burry recently launched a newsletter called Cassandra Unchained.
And it can go on and on and on, for longer than anyone thinks possible. Someday it will end, and trailing stops will get us out early in the inevitable crash. Until then, hold on!
But given the level of interest in the AI bubble question, I might as well make a few comments.
Back in my October commentary, I raised a red flag on Oracle's $300B OpenAI deal in my monthly commentary when I wrote:
"Last month, Oracle's stock spiked 40% partly on news that OpenAI would spend $60 billion annually for five years, totaling $300 billion on cloud services. There are a couple of problems with this. First, OpenAI doesn't make any money. In the first half of 2025, it lost $13.5 billion. Second, the cloud computing facilities that would deliver these services haven't been built yet. Third, there isn't enough energy to power facilities on this scale even if they did exist. However, the market is pricing the stock as if these sales have already been booked and the money is in the bank."
Fast forward to today: ORCL is down 45% from its highs and 21% from pre-announcement levels.
On December 10, Oracle reported earnings that on the surface looked solid: the company beat adjusted earnings per share expectations and posted strong cloud growth. But the stock plunged in after-hours trading and is now down 15% from its closing price before that earnings release. Meanwhile, credit markets are signaling concern about the company's financial sustainability.
A credit default swap (CDS) is essentially insurance against a company defaulting on its debt. When you buy a CDS, you're paying an annual premium—measured in basis points—to protect against the company failing to make its debt payments. The higher the CDS spread, the more expensive insurance becomes, indicating the market perceives higher default risk.
Oracle's five-year credit default swaps have exploded from 43 basis points (0.43%) in September to 148 basis points (1.48%) as of December 12—more than tripling in three months. This level hasn't been seen since the depths of the 2009 financial crisis. For context, Microsoft, Alphabet, Amazon, and Meta all trade in the 1.5% to 3.1% implied default probability range. Oracle's CDS pricing now implies a ~11% probability of default within five years.
If you look at the bottom panel of the chart above, you'll see that Oracle is in the midst of its second-largest drawdown in the past 20 years. The only time the stock declined more from a peak was during COVID. You might be thinking that this is a great contrarian time to buy the stock, and you may be right. However, I am not too excited about buying it here. Here's why:
Oracle's 12-month Free Cash Flow (FCF) is expected to average -$22 billion over the next six quarters, after averaging over +$10 billion for the past 30 quarters (excluding the past three).
In the most recent quarter, consensus expectations were for about -$6 billion of FCF... instead, the company reported -$10 billion.
On top of that, the new business it is pursuing comes with vastly lower profit margins.
This is what an unsustainable trajectory looks like. Oracle must now borrow tens of billions annually just to keep up with its AI infrastructure spending commitments. The company has become the largest issuer of investment-grade corporate debt outside the banking sector.
Additionally, the big news from last quarter about OpenAI was subsequently updated with a headline reading, "Some Oracle data centers for OpenAI delayed to 2028 from 2027."
I, for one, am SHOCKED... not!
As Ken would say, "insert facepalm emoji."
Nobody can say I didn't warn them.
Microsoft's Reality Check
World-class company Microsoft recently provided an early warning signal that the AI adoption curve may be bumpier than the hype suggests. Early this month, reports emerged that Microsoft has lowered sales growth expectations for its AI products after many salespeople missed their targets. The report also claimed that multiple divisions at the company scaled back growth goals following underwhelming performance throughout fiscal 2025, which Microsoft later refuted.
Corporate customers are pushing back. They're struggling to measure the return on investment from AI tools. Integration challenges are significant. The technology doesn't work perfectly in many real-world applications. Companies want to see proven ROI before committing to expensive AI deployments, and Microsoft hasn't been able to demonstrate that convincingly enough to meet its ambitious targets.
Microsoft has been positioned as a leader in bringing AI to the enterprise. If they're struggling to convince customers to pay up, what does that say about the broader monetization timeline for AI? The technology may be incredible, but if companies can't figure out how to profitably deploy it, the revenue ramp will be much slower than Wall Street expects.
Thankfully, unlike Oracle, Microsoft has plenty of other businesses gushing free cash flow.
To wrap up the AI bubble section, I want to strongly encourage you to read or listen to the latest Memo from Howard Marks.
You can find the text here and hit play on the nearby YouTube video.
Here is a recap:
Legendary investor Howard Marks released his latest memo in early December titled "Is It a Bubble?" His analysis of the current AI enthusiasm is essential reading.
Marks makes several critical observations. First, he distinguishes between two types of bubbles: "inflection bubbles," based on truly transformative technologies (such as railroads, electricity, and the internet), and "mean-reversion bubbles," based on financial engineering without fundamental progress (such as subprime mortgages). AI clearly falls into the former category—it is genuinely transformative. But even transformative technologies can be dramatically overpriced.
Marks discusses research by others that concludes that bubbles are necessary to rapidly build out infrastructure for new technologies. Without the speculative mania of the late 1990s, this third-party research asserts that we wouldn't have the fiber-optic networks that enable today's internet, and that without the current AI bubble, we wouldn't see the breakneck pace of data center construction and chip development. Bubbles accelerate technological adoption by compressing decades of normal investment into just a few years. I am not sure Marks agrees.
Marks points out that historically, the companies and investors funding this type of speculative buildout will largely see their capital destroyed. The technology succeeds, but most of the investors lose money. As Marks puts it: "The key is not to be one of the investors whose wealth is destroyed in the process of bringing on progress."
His recommendation? Maintain prudence and selectivity. Don't shun AI entirely, but don't go "all-in" either. Acknowledge the transformative potential while respecting the bubble risks.
In his postscript, he shifts gears from valuations to a deeper societal concern: AI will eliminate millions of jobs faster than new ones emerge. He views AI fundamentally as a labor-saving device, with Vanguard estimating that 43% of work tasks could be automated across four out of five jobs.
I don't think I share his concern. People have always assumed that new technology would put everyone out of work, but time and time again, we have seen that technology makes workers more efficient and opens up new industries that can't even be imagined today.
But his core argument questions the optimists' promise that new jobs always emerge after technological disruption. Marks finds this unconvincing. Entry-level roles, junior lawyers, radiologists, truck drivers, and many other professions face replacement. He rightly asks: "...if we eliminate large numbers of junior lawyers, analysts, and doctors, where will we get the experienced veterans capable of solving serious problems requiring judgment and pattern recognition honed over decades??"
If governments resort to universal basic income to support the jobless, Marks sees compounding problems. Fiscally, job losses mean lower tax revenue and higher entitlements, creating unsustainable deficits. More fundamentally, jobs provide purpose, structure, and self-respect. Subsistence checks cannot replace that. He cites the link between manufacturing job losses and opioid addiction as evidence of this psychological cost.
The political danger concerns Marks most. Billionaires on the coasts will be blamed (perhaps rightly) for technology that impoverished millions. This creates fertile ground for social division and populist backlash.
His final point is sobering: even if AI stocks aren't a bubble, the technology itself could create massive unemployment and social instability. That is a problem no amount of stimulus can solve.
Conclusion
As always, there is so much more to discuss, from the recent bankruptcies of Tricolor and First Brands to BlackRock's write-down of its private loan to Renovo Home Partners to zero. I am going to spare you the details and my thoughts for now. Suffice to say, it's not great. As Jamie Dimon (CEO of JPMorgan Chase Bank) noted on their recent earnings call,
"My antenna goes up when things like that happen. And I probably shouldn't say this, but when you see one cockroach, there are probably more... everyone should be forewarned on this one."
JP Morgan lost $170 million in the Tricolor bankruptcy. Tricolor Holdings, a used-car lender that focused on providing loans to undocumented immigrants, filed for Chapter 7 bankruptcy.
Shocker. I had no idea what Tricolor was until I read a recent report by Dan Ferris. It blew my mind.
The report said, in part:
"On the surface, Tricolor appeared to be a used-car empire stretching across Texas, New Mexico, Arizona, California, Nevada, and Illinois. But its real business was making car loans to buyers with no credit history and no Social Security number, including undocumented ("illegal") immigrants.
Many of its borrowers don't even have a driver's license.
Tricolor knew who its customers were and catered to them brilliantly. It's right in the company name: "El Tricolor" is a nickname for Mexico's national flag, national soccer team, and sometimes the country itself.
President Joe Biden's loose border immigration policy was great for business. Tricolor Holdings' dealer network grew 50% between 2018 and 2021. From roughly $200 million in 2020, the company's annual lending volume quintupled to $1 billion at the time of its bankruptcy."
Pretty wild.
There will be more. Whether AI-related or not. Remember, this is the mother of all bubbles, not just an AI bubble.
Looking Ahead
As we close out 2025, the concentration of returns in a handful of AI stocks, the deterioration in credit markets, the hidden recession affecting most Americans, and the mounting questions about AI monetization timelines all point to a market that has gotten ahead of reality. Despite these early warning signs, patience and discipline will be rewarded far more than betting on a crash and hiding out in cash.
The consensus is looking for a new dovish Chairman of the Federal Reserve in 2026 who is more likely to cut interest rates at the request of President Trump. The market is currently expecting at least two rate cuts next year. I think it could be more. I expect short-term rates to fall, and long-term rates to rise. We have begun shifting allocations toward short-term bonds across our portfolios in most risk categories to position for this.
If the expectations play out, Gold will continue to rally.
I remain fundamentally cautious but continue to hold positions where technical momentum justifies them. We have stops in place to protect against the inevitable reversal. The momentum can continue longer than seems rational—bubbles always do. But when sentiment shifts, it will shift quickly.
Buffett's wisdom about wealth transfer from the impatient to the patient has never been more relevant. Those with disciplined risk management who avoid getting swept up in speculative manias will be positioned to acquire quality assets when prices eventually reflect reality.
Finally, at the end of a year like this, it is worth pressing pause to remember why we celebrate Christmas. I believe that in Jesus Christ, God stepped into our broken world, not to condemn it, but to rescue sinners and offer forgiveness, hope, and new life through his death and resurrection. Choosing to follow Jesus is the most liberating decision anyone can make, because it frees us from slavery to sin and anchors our hope in Him. All of which is infinitely more important than what the market will do in the year to come.
I hope you found this commentary both useful and enjoyable. Please tell me what you think - good, bad, or otherwise.
Would you recommend it to people you know? Why or why not? What about our portfolio management and financial planning services?
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Until next time, I thank God for each of you, and I thank each of you for reading this commentary.
Clients, I encourage you to click here to access your personalized performance portal and see how your portfolio performed compared to the market's last month.
Shane Fleury, CFA
Chief Investment Officer
Elevate Capital Advisors
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