Sometimes, the best business decision is to change businesses 💔
Plus a charted review of the macro crosscurrents 🔀
📉 The stock market declined last week, with the S&P 500 falling 0.4% to close at 5,976.97. It’s now down 2.7% from its February 19 closing high of 6,144.15 and up 67.1% from its October 12, 2022, closing low of 3,577.03. For more on how the market moves, read: Investing in the stock market is an unpleasant process 📉
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When you use fundamental analysis to estimate the value of a stock, you have to make a lot of projections.
How quickly will the sales grow? Will profit margins expand or contract? What will the company’s capital structure look like, and where will interest rates go? Where will tax rates be in the future?
If the projections you put into your valuation model are off, then the value you calculate will be off. Analysts call this phenomenon “garbage in, garbage out.”
To demonstrate how difficult this exercise is, let’s try projecting the sales for A1 Widgets Corporation, a hypothetical company that’s the worldwide leader in selling indestructible widgets. Based on A1’s order book, sales for widgets will grow for exactly five years. In the fifth year, everyone in the world who will ever need a widget will have one. From there, there will be no more demand for widgets, and the widget factories will close.
What will A1’s sales look like after the fifth year?
If you said $0, then you’d be wrong.
Because A1’s owners and management had the foresight to quietly gain a foothold in the emerging cloud infrastructure and AI technology businesses. As a result, the company will soon see more sales and growth than ever before. Earnings will eclipse what they made selling widgets. And the stock price will explode.
No, this was not a trick question.
There are countless examples of companies expanding into or outright pivoting to businesses that no one could’ve foreseen.
Buying a stock is about more than investing in a company’s product 🤔
Having a great product to sell isn’t enough to have a business that’ll generate a great return for shareholders for many years to come.
You also must have stellar management with a killer instinct for allocating capital.
Not only does management have to figure out how to sell the company’s core product for growth and profitability, but they also have to be able to read the tea leaves and recognize when the tides of business are turning. Maybe the market for the product is saturated. Maybe the product is becoming obsolete. Maybe customer preferences are shifting with technological developments. Maybe there are other significant opportunities to pursue, and the company has both the finances and expertise to capitalize on them.
Most companies continually make subtle adjustments that often go largely unnoticed. Some completely overhaul their business.
Take Berkshire Hathaway, which was a textile company when Warren Buffett took over it in 1965. Not long after, Berkshire became an insurance company that also sold candy. Today, it’s a diversified conglomerate selling everything from energy to airplane parts to underwear. And it has a massive stock portfolio generating market-beating returns. (I discussed Berkshire’s culture of change in a recent appearance on Yahoo Finance.)
Another famous example of a company that’s undergone a total transformation is Netflix. The company defined change when it introduced DVD rentals by mail while many consumers were still walking the aisles of brick-and-mortar video stores. While it dominated the mail-based rental business, management quickly shifted its efforts and aggressively invested in streaming services and original content. In 2023, Netflix mailed its last DVD. The stock currently trades at an all-time high, with the company valued at over $500 billion.
Last week, I was on Yahoo Finance’s “Stocks in Translation” podcast with Jared Blikre and Sydnee Fried. (Catch it on Yahoo Finance, Apple Podcasts, Spotify, or YouTube!) Jared brought up Apple, which generated $96 billion in sales from services.
Here’s what I said about Apple during our discussion:
If we were having a conversation about valuations 25 years ago when Apple was only making desktop computers, [you would ask] how many computers can they sell before you hit a ceiling? And so if you're only thinking about investing in a company that only makes computers, then yeah, it might not make sense to pay a premium on the stock that you're buying. But if you can be a little bit more imaginative, and if you understand that this is a company that understands change and tweaks its business model as the world changes, and as it reaches a saturation point, then you can begin to imagine a path where a company can continue grow earnings like Apple has and turn into a multi-trillion dollar company.
Apple’s Mac computers account for less than a tenth of the company’s sales. Meanwhile, phones, a category they didn’t get into until 2007, account for about half of sales. Services account for about a quarter of sales.
It’s even harder than you think 🫠
Acknowledging that your best product has matured and may be on a path to obsolescence is a tough pill to swallow. That said, once you’ve come to this realization, the hard part is likely just beginning.
Those leading the change will inevitably be met with resistance, not just outside the company, but also inside the company, where many employees won’t be ready to let go of the old way of doing things.
Even assuming you have the full buy-in of the company, who knows if you’re pivoting in the right direction? You very well could be trading one failing business for another that’s doomed to go sideways.
Of course, even the most successful companies have made many bets that have gone bad. The difference between companies that can and can’t move past these failures is great risk management and the confidence of shareholders.
But if you fail enough times, you’ll eventually lose the faith of the shareholders.
No one ever said any of this was easy.
How investors can play this 💸
Every publicly traded company is doing everything it can to make sure earnings will grow, perhaps in a way that leads to market-beating returns in the company’s stock price.
Unfortunately, there isn’t a surefire way to identify winners consistently enough that you can build a portfolio that outperforms the market.
One of the reasons for this is that over time, it’s a minority of stocks with massive returns driving the market’s performance.
So, how can investors play this?
Historically, one of the best moves has been to buy broadly diversified index funds like those tracking the S&P 500. While the diversification may limit your upside, it also makes it almost certain that you’ll have exposure to the big winners, including the companies that successfully pivot their businesses in ways that create massive amounts of shareholder value.
A quick personal note…
The evolution of many companies isn’t too dissimilar from the ups and downs many of us face in our lives.
As I recently shared with Joe Fahmy on his podcast, my entry to writing about markets was anything but planned and orderly. And over the span of my career, I experienced at least six major pay cuts, including one big one that occurred after I got laid off.
Few of us are lucky enough to live a life where everything goes up and to the right in a smooth, straight line.
But most of us are on a non-linear path, whether by choice or because of forces outside our control.
The good news is that just because things don’t go as planned doesn’t mean we’re doomed to spiral. Read enough biographies (and business case studies), and you’ll eventually see that the most impressive people (and companies) were the ones who had to overcome many challenges by making big, unplanned changes.
Just a thought.
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From TKer:
Identifying winning stocks is hard. Holding winning stocks is a nightmare. 🫠
'Past performance is' clearly 'no guarantee of future results' 📊
Most stock-picking pros underperformed in 2024's market rally 🫤
WATCH 📺
I joined Yahoo Finance on Monday to discuss the state of the markets and the reasons behind high valuations.
Catch it on Yahoo Finance, Apple Podcasts, Spotify, or YouTube!
Review of the macro crosscurrents 🔀
There were several notable data points and macroeconomic developments since our last review:
👍 Inflation cools. The Consumer Price Index (CPI) in May was up 2.4% from a year ago. Adjusted for food and energy prices, core CPI was up 2.8%, unchanged from the prior month’s level.
On a month-over-month basis, CPI and core CPI increased just 0.1%. If you annualize the three-month trend in the monthly figures — a reflection of the short-term trend in prices — core CPI climbed 1.7%.
For more on inflation, read: The end of the inflation crisis 🎈and The Fed closes a chapter with a rate cut ✂️
👍 Inflation expectations cooled. From the New York Fed’s May Survey of Consumer Expectations: “Median inflation expectations decreased at all three horizons in May. One-year-ahead inflation expectations declined by 0.4 percentage point to 3.2%, three-year-ahead inflation expectations declined by 0.2 percentage point to 3.0%, and five-year-ahead inflation expectations declined by 0.1 percentage point to 2.6%.”
The introduction of new tariffs risks higher inflation. For more, read: 5 outstanding issues as President Trump threatens the world with tariffs 😬
👍 Consumer sentiment improves. From the University of Michigan’s June Surveys of Consumers: “Consumer sentiment improved for the first time in six months, climbing 16% from last month but remaining about 20% below December 2024, when sentiment had exhibited a post-election bump. These trends were unanimous across the distributions of age, income, wealth, political party, and geographic region. Moreover, all five index components rose, with a particularly steep increase for short and long-run expected business conditions, consistent with a perceived easing of pressures from tariffs.“
Relatively weak consumer sentiment readings appear to contradict resilient consumer spending data. For more on this contradiction, read: What consumers do > what consumers say 🙊 and We're taking that vacation whether we like it or not 🛫
🤑 Wage growth is cool. According to the Atlanta Fed’s wage growth tracker, the median hourly pay in May was up 4.3% from the prior year, unchanged from April’s level.
For more on why policymakers are watching wage growth, read: Revisiting the key chart to watch amid the Fed's war on inflation 📈
💼 Unemployment claims hold steady. Initial claims for unemployment benefits stood at 248,000 during the week ending June 7, unchanged from the week prior. This remains at a level historically associated with economic growth.
For more context, read: A note about federal layoffs 🏛️ and The labor market is cooling 💼
💳 Card spending data is holding up. From JPMorgan: “As of 06 Jun 2025, our Chase Consumer Card spending data (unadjusted) was 2.7% above the same day last year. Based on the Chase Consumer Card data through 06 Jun 2025, our estimate of the US Census May control measure of retail sales m/m is 0.45%.”
From BofA: “Total BAC card spending per HH was up 0.8% y/y in May. We forecast flat readings for both ex-auto & control group retail sales. Favorable seasonal factors offset a weak reading on m/m spending growth from the BAC card data.“
For more on consumer spending, read: We're gonna get ambiguous signals in the economic data 😵💫 and Americans have money, and they're spending it 🛍️
🏠 Mortgage rates tick lower. According to Freddie Mac, the average 30-year fixed-rate mortgage declined to 6.84%, down from 6.85% last week. From Freddie Mac: “Mortgage rates have moved within a narrow range for the past few months and this week is no different. Rate stability, improving inventory and slower house price growth are an encouraging combination this National Homeownership Month.”
There are 147.8 million housing units in the U.S., of which 86.1 million are owner-occupied and about 34.1 million are mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to movements in home prices or mortgage rates.
For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖
👍 Small business optimism improves. From the NFIB’s May Small Business Optimism Index report: “Although optimism recovered slightly in May, uncertainty is still high among small business owners. While the economy will continue to stumble along until the major sources of uncertainty are resolved, owners reported more positive expectations on business conditions and sales growth.”
For more on the state of sentiment, read: The confusing state of the economy 📊 and Beware how your politics distort how you perceive economic realities 😵💫
🍾 The entrepreneurial spirit remains elevated. From the Census Bureau: “Total U.S. Business Applications were 446,993 in May 2025, down 0.6% from April 2025.“
TKer is a small business that launched a little over three years ago. For more, read: TKer's 3rd birthday comes with an extraordinarily average stock market stat 📈🎂
📦 Inventory levels are stable. Wholesale inventories increased 0.2% in April to $908.7 billion. The inventories/sales ratio held steady at 1.30.
For more on why we’re watching inventories, read: How much inventory did companies build ahead of tariffs? 🤷🏻♂️
👋 Job switchers usually switch careers. From Indeed: “Between 2022 and 2024, about 2.6% of Indeed users switched to new jobs every month, and 64% of those job switchers also changed occupations.”
🏢 Offices remain relatively empty. From Kastle Systems: “Peak day office occupancy was 64.2% on Tuesday last week, a new post-pandemic record high, up nearly four full points from the previous week. Washington, D.C. and Los Angeles experienced record high Tuesday occupancy, up 6.4 points to 64.1% and 5.2 points to 59.1%, respectively. The average low was on Friday at 35.5%, up nearly five full points from the previous week.”
For more on office occupancy, read: This stat about offices reminds us things are far from normal 🏢
📈 Near-term GDP growth estimates are tracking positive. The Atlanta Fed’s GDPNow model sees real GDP growth rising at a 3.8% rate in Q2.
For more on GDP and the economy, read: 9 once-hot economic charts that cooled 📉 and You call this a recession? 🤨
Putting it all together 🤔
🚨 The Trump administration’s pursuit of tariffs threatens to disrupt global trade, with significant implications for the U.S. economy, corporate earnings, and the stock market. Until we get more clarity, here’s where things stand:
Earnings look bullish: The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.
Demand is positive: Demand for goods and services remains positive, supported by healthy consumer and business balance sheets. Job creation, while cooling, also remains positive, and the Federal Reserve — having resolved the inflation crisis — has shifted its focus toward supporting the labor market.
But growth is cooling: While the economy remains healthy, growth has normalized from much hotter levels earlier in the cycle. The economy is less “coiled” these days as major tailwinds like excess job openings and core capex orders have faded. It has become harder to argue that growth is destiny.
Actions speak louder than words: We are in an odd period, given that the hard economic data has decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continues to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.
Stocks are not the economy: Analysts expect the U.S. stock market could outperform the U.S. economy, thanks largely due to positive operating leverage. Since the pandemic, companies have adjusted their cost structures aggressively. This has come with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.
Mind the ever-present risks: Of course, this does not mean we should get complacent. There will always be risks to worry about — such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, cyber attacks, etc. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.
Investing is never a smooth ride: There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect to experience as they build wealth in the markets. Always keep your stock market seat belts fastened.
Think long-term: For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t be able to overcome over time. The long game remains undefeated, and it’s a streak long-term investors can expect to continue.
For more on how the macro story is evolving, check out the previous review of the macro crosscurrents »
Key insights about the stock market 📈
Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.
10 truths about the stock market 📈
The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.
The makeup of the S&P 500 is constantly changing 🔀
Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.
The key driver of stock prices: Earnings💰
For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings has a very tight statistical relationship.
Stomach-churning stock market sell-offs are normal🎢
Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.
How the stock market performed around recessions 📉📈
Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.
In the stock market, time pays ⏳
Since 1928, the S&P 500 generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.
What a strong dollar means for stocks 👑
While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.
Economy ≠ Stock Market 🤷♂️
The stock market sorta reflects the economy. But also, not really. The S&P 500 is more about the manufacture and sale of goods. U.S. GDP is more about providing services.
Stanley Druckenmiller's No. 1 piece of advice for novice investors 🧐
…you don't want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there's overcapacity and they're losing money. What about when they're losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it's going to be in 18 to 24 months as opposed to now. If you buy it now, you're buying into every single fad every single moment. Whereas if you envision the future, you're trying to imagine how that might be reflected differently in security prices.
Peter Lynch made a remarkably prescient market observation in 1994 🎯
Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That's all there is to it.
Warren Buffett's 'fourth law of motion' 📉
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
Most pros can’t beat the market 🥊
According to S&P Dow Jones Indices (SPDJI), 65% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2024. As you stretch the time horizon, the numbers get even more dismal. Over a three-year period, 85% underperformed. Over a 10-year period, 90% underperformed. And over a 20-year period, 92% underperformed. This 2023 performance follows 14 consecutive years in which the majority of fund managers in this category have lagged the index.
Proof that 'past performance is no guarantee of future results' 📊
Even if you are a fund manager who generated industry-leading returns in one year, history says it’s an almost insurmountable task to stay on top consistently in subsequent years. According to S&P Dow Jones Indices, just 4.21% of all U.S. equity funds in the top half of performance during the first year were able to remain in the top during the four subsequent years. Only 2.42% of U.S. large-cap funds remained in the top half
SPDJI’s report also considered fund performance relative to their benchmarks over the past three years. Of 738 U.S. large-cap equity funds tracked by SPDJI, 50.68% beat the S&P 500 in 2022. Just 5.08% beat the S&P in the two years ending 2023. And only 2.14% beat the index in the three years ending in 2024.
The odds are stacked against stock pickers 🎲
Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. Most professional stock pickers aren’t able to do this consistently. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 24% of the stocks in the S&P 500 outperformed the average stock’s return from 2000 to 2022. Over this period, the average return on an S&P 500 stock was 390%, while the median stock rose by just 93%.
"Read enough biographies (and business case studies), and you’ll eventually see that the most impressive people (and companies) were the ones who had to overcome many challenges by making big, unplanned changes." To be fair, no one writes biographies of the ones who failed, either. It's easy to weave a tale once you look back from a successful perch. Working hard is necessary, but by no means sufficient. The Stoics had it right.