Next few weeks will be critical

 Previously, I mentioned that there is some euphoria/FOMO (Fear of Missing Out) in the market. Look at meme stocks like PLTR, HOOD, etc. and other AI-related names like APLD, Broadcom, CoreWeave, you will see they have ran up very quickly, almost vertically / exponentially with some of them forming a double-top pattern.  Stocks in general are fully priced, the market is being very optimistic right now. AI-related stocks are being chased aggressively ever since META and MSFT reported good earnings back in April, and of course Nvidia in May. From GPT: Magnificent Seven—Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla—hold a significant share of the S&P 500. As of May 2025, they account for 34.1% of the index. Partly, the S&P index is being held up by Mag7 stocks due to the continuing AI fever.  AI is still in the early stages. Every tech revolution takes at least 10+ years to fully play out. Think of the internet, mobile revolution. There is immense potential for self-driving, robotics, AI-enabled software, etc. and investors have gotten ahead of themselves currently. Investors will be richly rewarded but the path to wealth will be treacherous and volatile. 

Economy is showing cracks

While the market can potentially creep up gradually, I'd be very cautious here and not allocate too much capital at this time. I used meme stocks  as a gauge of bullishness. When some of them form a double-top pattern (Mar and June), it is difficult to imagine them going up any further, thus there is an increasing chance of a strong pullback in the near future. Previously I mentioned the impact of tariffs will slowly be felt over the next 2 months, and we're starting to see some of the impact. I also mentioned we will see worsening economic data before any major trade deal (UK one is not really counted as it not one of the largest trading partners). The latest ADP payroll jobs data showed fewer-than-expected job growth. Producer price index keeps creeping up which would eventually translate to inflation or hurt corporate earnings. Manufacturing sector has been contracting for the past few months. Businesses are still hesitating to hire aggressively or make any long-term investments due to uncertainty around tariffs. Large retailers like Walmart, etc. warned of price increases and other retailers warned of declining profitability. 

Financially stretched

Consumer credit card debt is at an all-time high, and deliquency rate is increasing since 2022. Any slowdown in consumer spending will hurt economic growth. In fact, thrift stores like Dollar General have seen an uptick in customers from higher-income households, seen as a sign of economic uncertainty. Half of Americans live paycheck to paycheck and inflation will hurt their wallets and spending power. 

From GPT: 

more Americans are cooking at home as economic concerns grow. According to Campbell's CEO, home-cooked meals have reached their highest levels since early 2020. 

At the same time, Procter & Gamble (P&G) has noticed that shoppers are cutting back on laundry to conserve detergent.

This shift suggests that households are becoming more cautious with their spending. Things don't look good when the consumers even have to ration their detergent, etc. Lower-income households account for a significant portion of the GDP and cutbacks in spending will hurt the growth.

Why isn't there a crash or strong pullback yet?

Despite the bad economic data, it is quite surprising there is no crash / correction yet. I believe there are a few reasons: 1) Data is still considered not that bad yet or it could be somewhat priced in. 2) In a wait-and-see mode for trade deals, tax cuts which may boost growth or reduce tariffs. 3) Hoping that tariffs will be rolled back or reduced when there are signs of economic trouble.  4) Recession may be unlikely although there is a significant risk of stagflation. 5) market is still hanging onto lagging data from Jan-Apr (cooling inflation, stable employment, etc.)

The man has requested for countries to send in their best offers and by the end of the month, we should have more clarity on the "final outcome". Also there will be 20/30 year treasury auctions which may cause bond yield to spike. That's why the next few weeks will be critical. 

Debt problem 

I believe there is no practical solution to the budget deficit/debt problem, at least not a solution that a politician/president will implement without committing political suicide. The projected deficit is $1.9 trillion for 2025, which has been increasing steadily over the past few years. The only solution is austerity, higher taxes and severe budget cuts which will crash the economy and market. 

With higher-for-longer Fed rate, and will remain so due to the incoming inflation, the cost of servicing the deficit/debt is around 3.2% rate.  It may even go higher as the older debt gets refinanced at current Fed rate. They have to borrow money (by issuing treasury securities), to pay the debt interest. So the debt can only snowball from here.  It does seem that the debt will grow faster than the real GDP which is concerning. In 10 years, the debt-to-GDP ratio may reach 150%, from the current ~120%. If there are any crisis in the meantime which requires them to print money, it may go up even more.  

Lost decade?

With a debt problem and a potential stagflation, will we see a lost decade similar to the one from 2000 to 2008 (dotcom to GFC) where the S&P remained largely flat? From 2008 to 2021, the bull market has been phenomenal, largely because of monetary stimulation (money printing) and zero interest rate. 

What I will invest in

Should there be another dip which I think there will be in the near future, I'd allocate more heavily into AI-related software names and avoid any companies impacted by tariffs. The rationale is  AI can only keep growing in the future due to : 1) the 2 largest economies are locked in an AI race, and they are investing very heavily into AI infra/tech. 2) Tech will always progress and improve. 3) Tech has been the primary driver of economic growth for the past 4 centuries and beyond, and hence tech companies have consistently been able to capture a larger share of the growth.   

We're still early in the revolution, and thus choosing the right companies is crucial. In tech, it is usually the winner that takes all so we want companies that can remain competitive and outlast everyone else. Looking back at the Search Engine 1.0 war around the dotcom era,  there were many search engines (AltaVista, Yahoo, etc.) but ultimately Google won the race. Likewise, you know who won the social network war (FB, Friendster, MySpace, etc.). Google's dominance is now being threatened by new challengers in a Search Engine 2.0 war. 

Inflation may remain sticky, and interest rate will remain high, so choose companies with strong balance sheets that have pricing power. However, with that said, I may still allocate a small amount of capital to emerging tech such as quantum computing, etc.