This edition of Market Factors begins with a growing list of potential market hurdles from long-time economist and pundit Ed Yardeni. Section two describes a stock selection screen that\u2019s working now and the diversion outlines my dwindling list of favourite podcasts. <\/p>\n
Eight big worries<\/p>\n
Ed Yardeni is a respected longtime investment professional and I mean loooong time. He, for instance, was the chief economist for E.F. Hutton, a company that was acquired in 1987. Mr. Yardeni\u2019s latest report finds him still bullish but admitting that his growing concerns \u2013 he calls it a worry list \u2013 has him waffling a bit.<\/p>\n
The first of his worries is geopolitics, specifically the potential for a wider conflict in the Middle East. Recent escalation by Iran has pushed crude prices well above US$100 per barrel. <\/p>\n
Worry number two is inflation shocks becoming a constant pattern. The U.S. economy remains strong enough that energy costs, AI-related inflation and tariff-caused higher prices have been easily passed on to consumers. This may not remain the case and profits would be threatened as a result. <\/p>\n
Worry three is related to number two – a wage price spiral similar to the 1970s. This involves higher prices leading to widespread wage demands (which do need to happen, just not incessantly), which in turn leads to higher prices and more wage demands. Wage price spirals are terrible for equities. <\/p>\n
The fourth worry is that the Fed will announce hike after hike for the foreseeable future. This would both slow the economy and demand and also raises the cost of capital for companies. Again, terrible for profits.<\/p>\n
Worry number five is that higher interest rates lead to a deteriorating U.S. fiscal outlook. U.S. federal debt just crossed the US$40-trillion mark and the need for Treasury issuance is constant. Significantly higher government borrowing costs could potentially cause a rapidly rising deficit and eventually a crisis of confidence in U.S. debt. <\/p>\n
The sixth worry \u2013 the one that concerns me most \u2013 is a slowing AI capital spending boom. This would immediately reduce profit expectations in the dominant data centre equipment providers like Nvidia that have been leading the market. <\/p>\n
Worry number seven concerns the imminent U.S. congressional elections. Mr. Yardeni is concerned that elections will result in even more partisan behaviour and an environment cantankerous enough to threaten debt-related legislation. Democrats will certainly want to reverse some of President Donald Trump\u2019s corporate tax cuts and the president\u2019s plan to send US$5,000 to people who vote for him would be disastrous for public finances in addition to being ridiculous. <\/p>\n
The eighth worry is that large-scale technology IPOs will limit market upside. Anthropic is among the likely issuers and could confirm a market cap of two trillion dollars. OpenAI is also reportedly mulling going public. These big new issues will divert funds from existing winners, and the spreading out of investment will limit stock price gains across the board. <\/p>\n
Mr. Yardeni listed important reasons to be bullish, including Baby Boomer and ongoing AI-related spending, but there are darker clouds on the horizon for markets. Potentially this is just the usual wall of worry that equities climb, but markets are prone to worsening sentiment changes at the same time. <\/p>\n
EquitiesScreening for winning stocks<\/p>\n
BofA Securities\u2019 Research Investment Committee (RIC) argued persuasively that investors should be using free cash flow multiples to pick U.S. stocks.<\/p>\n
The most recent RIC report noted that quality stocks with high free cash flow have been the best performing factor (stock selection criteria) of the past 30 years. At an index level, the S&P 500 free cash flow yield is close to all-time lows and stocks with higher free cash flows are up 43 per cent year to date. <\/p>\n
With free cash flow so low it is incongruous to hear that the earnings outlook has rarely been as bullish as it is now, but that is the case. The hyperscaler tech companies are responsible for this anomaly – data centre spending turned their cash flow negative for the first time since at least 2007. <\/p>\n
The RIC team is recommending the VictoryShares Free Cash Flow ETF (VFLO-Q<\/a>) which is up 38 per cent year to date as of Monday morning. Average valuations in the ETF are attractive – the forward PE ratio is about 13, versus 19 for the S&P 500. Sector exposure is heavy in health care and energy.<\/p>\n Open this photo in gallery:<\/a><\/p>\n Andrey Dyachenko\/iStockPhoto \/ Getty Images<\/p>\n DiversionsI was on a podcast<\/p>\n I was a guest<\/a> on the Globe and Mail\u2019s award-winning podcast The Decimal last week and you should listen to it if you get a chance. The experience got me thinking about the podcast format in general as my consumption has changed a bit over the last year. <\/p>\n NFL football season has begun so I won\u2019t miss an instant of Jeremy Reisman\u2019s Pride of Detroit podcast covering my beloved Lions. I frequently listen to Jeff Rison\u2019s Detroit Lions podcast on Youtube as well. <\/p>\n The Watch remains my favourite pod, with Chris Ryan and Andy Greenwald discussing television mostly but also movies and whatever topics come up during what is almost always an entertaining discussion. What separates a great from good podcast in my opinion is that you will click and listen even if the topic is something I don\u2019t care about. That\u2019s the case with The Watch. <\/p>\n I haven\u2019t been listening to much else, and that\u2019s the change. I dipped back into Yasi Salek\u2019s Bandsplain podcast for the more than 14-hour Madonna marathon because I\u2019m a child of the \u201880s and obligated to do so. I listened to the Pretty in Pink edition of Ms. Salek\u2019s soundtrack series for similar reasons. <\/p>\n The Rewatchables podcast is still good but I only listen if I love the movie being featured. The recent Aliens episode was great. <\/p>\n That\u2019s about it though. Podcasts remain a great format \u2013 they have mostly replaced talk shows, after all – but maybe the novelty has fully worn off. <\/p>\n The essentials<\/p>\n Looking for our updates on market movers, analyst actions, stock technicals, insider trades and other daily, weekly and monthly insight? Click here<\/a> to visit our Inside the Market page.<\/p>\n Globe Investor highlights<\/p>\n Why the biggest risk<\/a> for the sinking bond market may be the Fed standing pat this week on interest rates<\/p>\n David Berman says the case for investing in Bombardier rests on more than just patriotism<\/a><\/p>\n As private assets become a commodity, Tom Bradley suggests it may mean diminishing returns<\/a><\/p>\n Gary Christie screens for Canadian dividend-growing stocks<\/a> that may do well in a higher-yield environment<\/p>\n