S&P To 7000? | Warren Pies On Why Stocks Aren’t Overvalued

Episode Summary

Executive Summary: Warren Pies argues the post-election market “regime shift” is real in leadership, but not a reason to chase small caps or speculative junk. He’s bullish on the S&P 500 and quality stocks, sees the 10-year as roughly fair value near 4.4%, thinks bonds have priced in most Fed cuts, and believes rates are still too high to sustain a durable rotation into low-quality, rate-sensitive assets.

Main Topics: Regime shift after the election (Priority: 5/5): Pies frames the election as a political regime change that may or may not translate into a market regime change. He says investors are hoping for broadening into small and mid caps, but he is skeptical that post-election leadership will persist. Why he prefers quality over low-quality cyclicals (Priority: 5/5): He argues that late-cycle conditions reward high-quality businesses with strong balance sheets and sustainable margins, while low-quality names need a stronger cyclical impulse and lower borrowing costs to outperform. Bond yields, Fed cuts, and the 10-year fair value (Priority: 5/5): Pies thinks the market has largely priced in expected Fed cuts and that the 10-year Treasury is already near fair value. He sees little room for a simple rates-driven rally in small caps unless the Fed eases more than consensus expects. Reassessing S&P 500 valuation (Priority: 4/5): He explains why his firm revisited its bearish valuation stance and concluded the S&P 500 may be fairly valued after adjusting for sector composition, margins, and unusually high quality/ROIC in the index. Model-based investing and the full-cycle trend ETF (Priority: 4/5): Pies describes a systematic ETF strategy built around quality, trend, and dip-buying in a quality universe. He emphasizes the model’s process, turnover, and historical robustness through bear markets. Oil, gold, Bitcoin, and macro overlays (Priority: 3/5): He is bearish on oil despite his model still signaling a buy, remains bullish on gold, and is skeptical-but-constructive on Bitcoin as a store of value, especially if policy and flows continue to favor it. Deficits, crowding out, and policy constraints (Priority: 3/5): Pies says deficits matter because they crowd out real resources and raise rates over time, but he does not think a debt crisis or bond vigilante episode is imminent in the near-term outlook.

Key Arguments: Small caps and mid caps are not attractive just because they are laggards; they still need a meaningful drop in long-term yields and a stronger cyclical backdrop to justify outperformance. The bond market has already priced in most of the Fed’s expected easing, so small caps may not get the rate relief investors are betting on. Monetary policy transmits more through borrowing costs farther out on the curve than through the overnight Fed funds rate alone. Current economic data are mixed, but housing and autos remain weak enough to support the view that rates are still restrictive. The S&P 500 is not simply overvalued on a headline P/E basis once you adjust for today’s sector mix, margins, and much higher-quality constituent base. High-quality companies deserve higher multiples because their margins and ROIC are structurally better and more sustainable than commodity or low-quality businesses. The market’s current leadership is more concentrated in tech and other high-quality sectors, which supports the index even if broad participation is uneven. The model-driven ETF strategy works by combining quality screens, regression-based trend ranking, and systematic dip buying within a high-quality universe. Oil is still vulnerable because OPEC supply, seasonality, and prompt-market dynamics can cap upside even if the model remains bullish. Bitcoin and gold are both viewed as monetary/store-of-value assets, but Bitcoin’s upside is increasingly tied to political and flow narratives. Deficit problems are real over long horizons, but they are slow-burn issues rather than immediate crisis catalysts.

Data Points: Bull market start: October 2022 - Pies says the current bull market began in October 2022, making it year three of the cycle. S&P 500 trailing P/E: ~27x - Used as the conventional headline valuation benchmark he says is too simplistic on its own. Russell 2000 trailing P/E excluding unprofitable companies: ~18x - Cited as an optical valuation argument for small caps. Mid caps trailing P/E: ~21x - Presented as cheaper than the S&P 500 on a headline basis. S&P 500 trailing P/E adjusted comparison: ~21-22x - Pies said a sector-adjusted approach pushes the market toward this range. 10-year Treasury fair value: ~4.3%-4.5% - His framework triangulates the 10-year near this range given the Fed terminal rate and nominal GDP. Fed terminal rate assumption: 3.0% - He uses the Fed’s own projection as a reference point in valuing the 10-year. Analyst S&P earnings growth through 2026: ~26% - He says this level of growth could justify a move toward S&P 500 7000 in 2026. Analyst S&P top-line growth through 2026: ~12.5% - Used to infer an implied macro growth environment. Implied nominal GDP growth for S&P target case: ~5% annualized - He says the 2026 earnings and revenue assumptions do not require an unrealistic macro scenario. Implied nominal GDP growth for mid-cap analysis: ~4% - He says mid-cap assumptions are also not overly demanding on macro growth. Single-family housing starts: 80,000 - Cited as a recessionary/contractive reading and a leading indicator for job losses. Peak money market yield cited: 5.5% - Used to illustrate why wealthy cash holders were advantaged in the high-rate environment. Existing home sales: Lowest since before the GFC trough - Used as evidence that rates are restrictive and housing remains weak. New auto sales: Below 2018 levels - Used as evidence of weak consumer durables demand. S&P 500 ROIC: 22%-23% - He says the index’s return on invested capital is unusually strong and supports higher quality multiples. S&P 500 margin target into 2026: ~14.4% - He says analyst assumptions imply further margin expansion. Model portfolio size: 20 stocks - His ETF/strategy is concentrated and equal-weighted. Model turnover: ~3-3.5x per year - Used to explain why the ETF structure is tax-efficient versus direct trading. 2022 model performance: ~ -9% - He cites this as a strong relative result versus the broader market in a difficult year. 2022 S&P 500 performance: ~ -20% - Referenced as the benchmark drawdown in a bearish year. Gold target reached: $2,500/oz - He said gold hit his prior target coming into the year. Gold next target: $3,000/oz - He remains bullish on gold despite some USD strength and Bitcoin competition.

Pivotal Quotes: "“The downside versus upside going into year three of a bull market, it's a mature expansion. The playbook tells you, you want to stick with quality.”" — Warren Pies: Explaining why he prefers quality stocks over small caps and low-quality names in the current cycle. "“I think that the bond market, by and large, has priced in the Fed cuts that are projected in the last SEP.”" — Warren Pies: His core argument for why lower rates may not provide the expected catalyst for small-cap outperformance. "“This is not a bubble. We're not in a bubble.”" — Warren Pies: His response to repeated claims that the market’s valuation surge equals a mania or bubble.

Implications: Investors should not assume Fed cuts will automatically rescue small caps or junk stocks. Pies’ framework favors quality, selective risk-taking, and a cautious view on rate-sensitive laggards unless growth and policy improve materially.