Wesley Chapel, FL
““Doing well with money has little to do with how smart you are and a lot to do with how you behave.””
Never a dull moment. Just look at the social media battle between President Trump and Elon Musk on Thursday. You can't make it up. And the memes write themselves.
As you know, I strive to tune out the noise and focus on our process.
We focus and even agonize over process because without it, we’re gambling.
There is an old story about Pablo Picasso about a time when he was at a café in Paris and a woman asked if he could do a quick sketch on a paper napkin for her? He picked up a napkin and worked on a sketch for about 5 minutes before handing it back to her. He then proceeded to ask her for a million Francs.
The lady: “It took you only five minutes to draw this!”
Picasso: “No, it took me 40 years to be able to draw this in five minutes.”
This is a clear illustration that the value of something isn’t measured by the time it takes to create it; it’s measured by the skill, experience, and mastery behind it.
Great businesses adapt. Our job is to identify them, buy them when they trade at a fair price, and then hold on for as close to "forever" as possible. I wrote about some, but not all, of our investment selection process last month, and I will come back to finish that up later in this commentary. First, let's take a look at the markets and economic data that were reported over the past month.
We'll start with how the indexes we're tracking in the commentary have performed year-to-date and in May.
If you fell asleep on January 1 of this year and woke up at the end of May, you might look at the market return and think that very little had happened. For those of us who have been awake for the past five months, we know that to be untrue. Equity markets have been extremely volatile and ultimately have gone nowhere, with the S&P 500 up 0.5%. Gold remains the big winner, up 25.3% in 2025, despite posting a flat return for May.
The Top 10 index, which equally weights the ten biggest companies by market cap in the S&P 500, is down less than the so-called Magnificent 7 this year. I continue to prefer the Top 10 over the Mag 7 as an index, even as the Mag 7 beat the Top 10 during May.
With that said, the ten biggest companies by market cap in the S&P 500 changed for the first time in a long time as of May 31, with Eli Lilly (LLY) dropping all the way to the 13th largest company during the month. It now trails Walmart (WMT) at number 10, JP Morgan Chase (JPM) at number 11, and Visa (V) at number 12.
We are not going to replace LLY with WMT. We don't want to get into the habit of actively trading the Top 10 index every time the 10th-biggest company changes because that could bounce back and forth from one month to the next, resulting in unnecessary trading. But, if the situation persists for a few consecutive months, I will feel differently. As of today, LLY has climbed back to a market cap of $728 billion, while WMT has fallen to $781 billion. So, only $53 billion separates them.
I could probably write an entire commentary about that list of the 25 largest companies by market cap. There are so many interesting things in the data. I will just point out a few of them.
First, look at the "Fwd P/E" column. You will see that NVIDIA (NVDA), the AI darling and the second-largest business in the world, carries a multiple of 28.26. This multiple means the current share price is 28.26 times the expected profits over the next (forward) twelve months. Next, look at the "Revenue Growth 5yr CAGR" column, and you will see that NVIDIA has grown its revenue at a compound annual growth rate (CAGR) of 65.9% per year for the past 5 years.
Now, take a look at how many companies have a higher Forward P/E multiple than NVIDIA. I see:
Microsoft at 30.65
Broadcom at 32.92
Tesla at 149.24
Walmart at 36.43
Visa at 29.73
Eli Lilly at 29.53
Mastercard at 34.34
Netflix at 43.29
Costco at 53.18
Palantir at 203.75
So, these companies are all more expensive than Nvidia on this measure. It must mean that these companies are all growing faster than NVIDIA, right?
Wrong!
Take a look at the Revenue Growth 5yr CAGR column again. Not a single one of these companies is growing faster than NVIDIA.
Walmart is only growing at 5%! It’s Walmart! Why are people paying so much for Walmart?! I have a feeling that people paying this price for Walmart will end up very disappointed in their returns from here over the next five to ten years.
Palantir (PLTR) is the 24th-largest company in the S&P 500 despite generating only $3 billion in revenue over the past year. For comparison, Coca-Cola (KO) at #25 earned $47 billion (15 times more!) in revenue over the same period. People are paying obscene prices for PLTR on pretty much any measure you want to use: 100 times sales, 70 times forward sales, 559 times earnings, and 200 times forward earnings.
One of my favorite methods for comparing valuations of businesses across different industries is the EV/EBITDA ratio. It uses the value of the entire enterprise (EV), including any bonds, rather than just the value of all the shares of stock and compares it to earnings before interest, taxes, depreciation, and amortization (EBITDA), which can vary significantly across industries. I consider 15 times or less to be fair for an above average business. Palantir is 700 times! This is absolutely bananas!
Palantir is a great business, and I think will become an even greater business in the years to come. But anyone paying this price for it (as an investment) needs to have their head examined.
The final thing I will point out from the list of Top 25 is that Apple (AAPL) was no longer the largest company in the world at the end of May. In fact, it was in the third spot and has lost its $3 trillion handle.
Let's go back to NVIDIA for a moment. The company reported quarterly earnings on May 28, showing its 5th consecutive quarter of slowing revenue growth. To be clear, their revenue still grew at 69% from a year ago, which is incredible, but that is down from 262% at its recent peak.
As revenue growth has slowed over the past year, NVIDIA's stock has basically gone nowhere. In fact, NVIDIA has underperformed the S&P 500 and Nasdaq since June 2024.
This is what happens when you overpay for a great business that is at its peak growth. In June of last year, NVIDIA was trading at 40 times sales and almost 80 times earnings.
Today, it trades at about half of those multiples. So, even at roughly the same share price as a year ago, the stock is actually cheaper.
Analysts expect the company's revenue growth to continue slowing for at least the next couple of quarters. Until that trend changes, I question how much higher the stock can go. I am not willing to buy shares at this price. My "buy up to" price is currently $90, which is approximately what we paid to add it to the Elevate Capital Strategy on the morning of April 7. So far, so good.
Inflation
Many are focused on what the Trump Tariffs will do to inflation. I even wrote back in my February commentary:
"At best, tariffs will be inflationary. At worst, they will cause a depression."
But the reality is that price increases are a symptom of inflation. Prices can also rise for other reasons, such as additional taxes or supply and demand imbalances. So, to correct myself, tariffs, which are essentially just taxes by another name, will put upward pressure on prices as countries and corporations pass these taxes on to consumers through increased prices.
The questions I have are:
How much upward pressure will tariffs have on prices?
How long will that last?
There is an argument to be made that tariffs will cause a sort of one-time shift higher. However, with the way these tariffs are being rolled out country by country and product by product, it could take some time for that one-time shift higher to make its way through.
What is not being discussed much is that the Fed has resumed increasing the overall money supply, as measured by M2. This is real inflation. As the currency in circulation increases or inflates, it causes each dollar in circulation to be worth less, and that is what causes prices of all goods and services (really anything priced in dollars) to rise.
As you can see in the chart above, M2 recently hit a new all-time high.
Meanwhile, both the Consumer Price Index (CPI) and the Fed's preferred inflation gauge, Personal Consumption Expenditures (PCE), reached cycle lows last month, although both measures remain slightly higher than the Fed's stated target of 2%.
I suspect that we will begin to see a reacceleration in CPI and PCE when the May data comes in. The CPI release is scheduled for June 11, and the PCE is June 26.
There is also a Fed meeting scheduled for this month. The central bankers will meet on June 17-18, with their decision on what, if anything, to do with their policy rate coming after the meeting concludes at 2 pm ET on the 18th.
Here are some key takeaways from their meeting on May 7 and Chairman Powell's subsequent press conference:
Policymakers voted unanimously to keep their benchmark rate unchanged, at a target of 4.25% to 4.5%, while saying in their statement that “uncertainty about the economic outlook has increased further.” The risks of both higher unemployment and higher inflation have risen, they said.
Powell repeated language he has used for months now with regard to the potential to resume cutting rates: “We don’t think we need to be in a hurry.” He said that there are cases where it would be appropriate to cut or to stand pat, and “I couldn’t confidently say that I know” which it’s going to be.
Powell brushed off political pressure from President Donald Trump to cut rates, saying that “doesn’t affect doing our job at all.” He also said that he’s never asked for a meeting with any president, “and I never will.”
The Fed chair echoed Trump administration officials in expecting that the first-quarter GDP figures – which showed a decline from the previous quarter – will be revised higher. Job creation is “fine,” wages are “in good shape,” and layoffs aren’t at high levels. As for inflation, that’s “moving sideways at a fairly low level,” he said -- even if above the Fed’s target.
GDP
The standard formula for calculating Gross Domestic Product (GDP) is:
GDP=C+I+G+(X−M)
where:
C = Consumption (spending by households)
I = Investment (business expenditures and household purchases of new housing)
G = Government Spending (expenditures on goods and services)
X = Exports (goods and services sold abroad)
M = Imports (goods and services purchased from abroad)
The term (X−M) represents Net Exports. This formula captures the total market value of all final goods and services produced within a country during a specific period.
On April 30, GDP in the first quarter of 2025 was initially reported at -0.3%, but as Jerome Powell predicted in the last bullet point above, it was subsequently revised higher to -0.2% in the second estimate on May 29.
The Bureau of Economic Analysis (BEA) reports quarterly GDP three different times for each quarter. The first estimate is referred to as the "advanced" estimate, followed by a second estimate one month later and a final estimate one month after the second. We will get the final estimate on June 26.
Going back to the GDP formula, the final (X-M) term heavily impacted the first quarter GDP growth, and more specifically, the "M." Imports increased at a 41.3% annualized rate, with goods imports spiking 50.9% as businesses rushed to bring in goods ahead of anticipated tariffs. This surge in imports created the largest negative contribution from net exports on record, subtracting 4.8 percentage points from GDP growth in the quarter.
As long as the tariffs remain in play, I suspect the current quarter will see a big, if not total, reversal, with imports coming in near record lows and providing an offsetting boost to GDP.
While some might frame this decline in GDP as being "halfway to a recession," which is generally defined as two consecutive quarters of declining GDP, I think it is more likely that last quarter and the current quarter are probably a little too noisy to be useful signals.
What is less clear to me is how the GDP will evolve after that if the proposed tariffs remain unchanged.
GDP & Inflation Model
Combining these two, I suspect that we are currently in a "Quad 2" environment, where the rates of change in both GDP and Inflation are rising. Quad 2 generally leads the Fed to be hawkish and to maintain a more restrictive monetary policy through a relatively higher policy rate, despite President Trump pressuring "Too Late" Jerome Powell to cut rates. As mentioned before, we'll see what they do on June 18.
Tariffs
Returning to tariffs, I stated on the Elevate Market Chat, recorded on May 15 and published on May 20, that there was a chance that by the end of May, a court would rule the "Trump Tariffs" illegal.
I said, "Every other tariff act was an act of Congress, like the Smoot-Hawley Tariff Act back during the Great Depression years. It's called the Smoot-Hawley Tariff Act because it was an act of Congress where a bill was introduced by those two members of Congress. It wasn't the "FDR Tariff."
I went on to suggest that the Chinese were aware of this possibility. A 90-day pause might just get you to the point where the court rules against these tariffs, and then the motivation to make a new trade deal will be gone.
On May 29, the U.S. Court of International Trade ruled that President Trump's tariffs were illegal. The court ruled that the International Emergency Economic Powers Act did not grant him the power to enact such sweeping measures. The U.S. Court of Appeals subsequently granted a stay on appeal, pausing the Trade Court's ruling and allowing tariffs to remain in effect while the appeals process continues.
Sorry, I know this is hard to read… but I find it fascinating, and instructive. I will see if I can figure out a way to make it more readable going forward as I suspect we are not done with the tariff drama.
The amount of back-and-forth on the tariff front is nearly impossible to keep up with. Trump seemingly responded to the ruling by announcing new steel and aluminum tariffs, raising them to 50%.
For now, the most important dates to keep in mind are July 8 and August 11. July 8 marks the expiration of the 90-day pause on reciprocal tariffs for all countries except China, and August 11 marks the expiration of the 90-day pause on reciprocal tariffs for China.
The most important fact to understand is that today, the baseline tariff rate for virtually all goods from all countries is 10%, with goods from China at 30%. The average effective tariff rate at the start of 2025 was 2.3%. Tariff rates of 10%+ have not been seen in this country since 1946. 10% is being generous, analysts at Yale’s Budget Lab estimate that even after the recent reprieve, consumers will face an average effective tariff rate of almost 18%.
Yes, this really goes back to 1900!
I am not surprised that we haven't seen more trade deals announced despite the Trump Administration's repeated claims that such deals were imminent. So far, the only deal we have is with the UK, announced on May 12. This deal increased the UK's effective tariff rate from 1.2% to 10%, an 8-fold increase, with exclusions for certain items. Interestingly, the UK is one of our closest allies and one of the few countries with which we have a trade surplus rather than a deficit. The UK agreement was probably the easiest deal to get done, and the implications for the tariff rate on countries with which we have a trade deficit are stark.
S&P 500 Technical Analysis
Moving on to some technical analysis of the S&P 500, you will see that both the long-term trend, as measured by the 200-day moving average, and the intermediate-term trend, as measured by the 50-day moving average, have turned up.
You should also notice that the index is now above both the moving averages. It is only 2.3% from the all-time high of $612.93.
I can be as fundamentally bearish as I want, and I have good reason to be, but it doesn't make any sense to fight the trend. One potentially bearish technical indicator is that the market has not yet broken through its previous all-time high, and there is no guarantee that it will. I expect the $612.93 level to act as resistance, especially after such a big bounce from the lows. I won't be surprised if the rally stalls, even if just for a few days, right around there or even here.
A pullback from here to the rising 200-day, which would now act as support, is a very reasonable expectation. Such a pullback might present a good little dip to buy for those with cash in their accounts. Most of our portfolios allocated to the Elevate Capital Strategy are fully invested and have been for weeks. The only exceptions are new clients. Our Elevate Capital Low Volatility Strategy is also nearly fully invested, but we still have some cash to deploy.
As always, there are so many more interesting items than I can reasonably cover in one commentary, and I do want to add a few details to what I wrote about last month regarding our investment selection process, so I will move on for now, and maybe leave you with one more insightful current event before wrapping up.
Investment Selection Process
To recap what I covered last month, we utilize both top-down and bottom-up approaches to analysis.
Our macroeconomic top-down approach begins with inflation and GDP, focusing on the rates of change for each to identify the current macroeconomic environment. Understanding which of the four potential quads we are in helps us know which asset classes, sectors, and industries are likely, but not guaranteed, to provide the best risk-adjusted returns.
Our company-focused, bottom-up approach begins with “the pods.” It then focuses on the rates of change for each, starting with revenue growth, margin expansion, and capital allocation.
When analyzing individual companies, we employ several methods or models that ideally converge on an intrinsic value estimate. The methods are:
Price Implied Expectations (PIE)
Reverse Discounted Cash Flow (DCF)
Expected Earnings Growth (EEG)
Relative Value.
What I didn't write about was how we find the best businesses to analyze. We obviously can't analyze them all. According to the Bloomberg Terminal, there are 14,441 equity securities listed for trading on U.S. exchanges. Even if we could analyze them all, I wouldn't want to because most of these businesses are terrible investments. By definition, only half are above average, and of those, only a handful are truly great companies.
We find those companies by using technology to screen for businesses that consistently generate the best growth, margins, cash flows, and returns on investment (ROI).
In the screenshot above, you can see how this works in the Bloomberg Terminal. We start with 1,723,875 securities and whittle it all the way down to only 41 businesses that meet this strict criteria.
Adding a filter for actively trading securities cuts the number almost in half. Then, by eliminating multiple securities from the same company and filtering for only those trading on U.S. exchanges, the number of matches is reduced to 14,441.
From there, we start filtering for operating metrics, such as a 5-year compound annual revenue growth rate of at least 9%, profit margins of 10% or more, and earnings per share growth of 12%. We are left with 338 businesses.
Adding a filter for at least 80% of net income becoming free cash flow, a return on invested capital of at least 15%, and a net debt-to-EBITDA ratio of less than three leaves us with only 41 businesses to analyze.
In there, we are sure to find some gems. Likely, we will find some that are never discussed at cocktail parties or on CNBC. You can be confident that these are 41 of the best businesses on the planet earth - the only thing we don't know is whether they trade at a fair price. So, we put them through our models to find out. Some we buy, and others we add to our watch list so that we can buy them if/when the price drops to a point where we think it is reasonably priced.
One last thing we do with the screening technology is set it up to receive an alert whenever a new company is added to the list or one that no longer meets our criteria is removed.
This is just one example of many different screens that we use to identify the world's best businesses to analyze more deeply.
On that note, I still haven't written about our risk management strategies, such as trailing stops and position sizing, that we use to limit downside when we are wrong. Nor have I written about how we use technical analysis or momentum to help us determine the right time to buy.
A great business that is trading at a fair price but is falling dramatically could always get even cheaper. We generally don't just run out and buy a great company because it has fallen to a reasonable price. We prefer to see at least a reason to believe the bottom is in and the beginnings of a new up-trend are taking shape.
However, I will have to wait for another commentary to write about these tools, as this one has become quite lengthy, and I want to respect your time.
I will leave you with a short minute-and-a-half clip of Jamie Dimon, the CEO of JP Morgan Chase, discussing credit (bond) risk and an extraordinary amount of complacency in the stock market today. Enjoy.
I hope you found this commentary useful. 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?
Please let me know!
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 markets last month.
Shane Fleury, CFA
Chief Investment Officer
Elevate Capital Advisors
Legal Information and Disclosures
This commentary expresses the views of the author as of the date indicated and such views are subject to change without notice. Elevate Capital Advisors, LLC (“Elevate”) has no duty or obligation to update the information contained herein. This information is being made available for educational purposes only. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Elevate believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. This memorandum, including the information contained herein, may not be copied, reproduced, republished, or posted in whole or in part, in any form without the prior written consent of Elevate. Further, wherever there exists the potential for profit there is also the risk of loss.