I like to think about stocks in two related ways–concept and valuation.

Valuation is the price we pay for a stock today.

It’s a function of three things:

–the worth of the company as it stands now,

–the prospects for future earnings growth which will make the worth figure higher or lower tomorrow, and

–how these variables compare against the situation with every other publicly traded stock.

Concept is a bit more complicated. It’s three elevator speeches,

–one about how the company stacks up in terms of possible market share gains vs other publicly traded companies;

–one about prospects for the industry the company is in;

–a third about the shape of the overall economy–the US vs the rest of the world–which tells us whether to favor importers, exporters or whether this is a crucial distinction to make here and now.

To my mind, the most important of the three over the past few years has been the third.

Three reasons, all consequences of Washington politics.

–the first is the attempt to lower interest rates, as a way of decreasing the cost of government borrowing–put another way, to allow the government to borrow more than it could otherwise. This move has had the effect of weakening the dollar as foreign holders of Treasuries do this to lower their perceived risk.

–the second is tariffs, which not only raise the price of foreign finished goods but also the cost of imported raw materials used domestically.

–the last is the strong use of force by ICE that has the effect of retarding the growth of the domestic workforce or even shrinking it. …think of the Korean workers that ICE led off in chains last year, as they tried to open a battery factory in Georgia.

My basic idea has been to avoid the US consumer economy where possible, to focus instead on companies that have costs in $US and foreign revenues, avoiding $US revenues/foreign costs wherever possible. IT, especially software, is a prime example.

This has worked exceptionally well, until around a month or two ago.

A reasonable question to ask, but in any event the one I’m asking myself, is why the change?

The possibilities, as I see them. Either this is an issue of valuation, and the market will soon rotate back to the previous winners, or the market is now signaling a longer-lasting shift toward the domestic economy.

My guess is that it’s the former. My reason for thinking this is that low-end domestic retail has been especially weak over the past couple of months.

A rough approximation for the origin of revenues and profits for the S&P 500 is that half of each come from domestic sources and half from foreign.

concept

One of the major goals of the Trump administration has been to weaken the dollar, a strategy most often employed by developing economies to boost foreign sales while weakening foreign competition in the domestic market. A second is to shrink the domestic workforce, a move seemingly at odds with the first.

Still, the obvious portfolio shape that results from all this emphasizes (overweights) companies that have their revenues in foreign currency and their costs in dollars. Tech companies, software in particular, are the most obvious beneficiary. Any company that uses foreign currency inputs and sells to domestic customers is the equally obvious loser. Tariffs work as a multiplier on both the plus and minus sides. In theory, they fend off foreign competition, but they also raise the cost of foreign inputs for local companies.

valuation

Until recently, this has been a very successful portfolio structure. There has been rotation within the tech sector away from end product creators to component suppliers–some of the latter for the first time in years! This rotation itself is evidence that the primary market thrust has been getting long in the tooth. It isn’t that the companies involved have changed, however. It’s that the prices of the stocks of the primary beneficiaries have risen to the point where the secondary stocks are seen by the market as having greater value.

Recently, though, it seems to me that there have also been signs that market interest is starting to widen into the stocks of companies that depend on domestic demand. In a typical domestic business cycle, the targets would be less-than-stellar consumer stocks that have strong brand names and distribution networks but weak managements. As far as I can see, these continue to be pummeled. What appear to be perking up are strong consumer names whose businesses have been hurt by the Trump anti-growth economic/social agenda.

At this stage, I have no idea whether this market shift (which I bought into in my own portfolio a couple of months ago) is being driven chiefly by valuation, or whether this is anticipation that voters will call for a significant change in policy in the November elections.

I was reading the summary of an analysis of the US economy vs. US stock market this morning. It said, in effect, that hedge fund use of financial leverage to buy stocks (looked at another way, being short fixed income and long the stock market) was increasing the wealth of the most affluent Americans. This wealth effect, in turn, was causing this group to increase their spending on goods and services–and is a key aspect of this year’s rise in the S&P 500.

This could be so, I guess. The big issue that I see with this analysis, though, assuming I’ve read it correctly, is that the S&P 500 ex the Consumer discretionary sector is +12.6% year to date. Consumer discretionary itself, in contrast, comes in so far in 2026 at -4.1%–and the overall S&P 500 at +10.9%. Consumer staples, is also an index laggard, but at +6.1% ytd, has substantially outperformed discretionary spending.

My picture of what’s going on is a bit different. Last year could be seen as very much about capital flight from the US. This year, however, the S&P 500 and EAFE indices are more or less even year to date.

If there’s a theme to the S&P 500 so far in 2026, I think it’s orienting equity portfolios toward companies that generate revenues outside the US and away from revenues generated domestically. In 2025 this was key, given the currency decline Washington induced back then. Now, although I think it’s still important to have the same orientation of costs in dollars/revenues in other currencies, the broader conceptual issue, I think, is whether the Trump agenda, which has the effect of systematically shrinking the domestic economy, will continue to be at the forefront of US economic policy.

If so, I think this would trigger a substantial further portfolio shift away from the US and toward the EU, Canada, Japan, and maybe even China, as source of future economic growth.

The stock market doesn’t usually do this.

Generally speaking, it’s always adjusting to two forces:

—concept: it tends to either go up, responding to actual and anticipated future earnings growth, or down, responding to the opposite, and

—valuation: it also tends to have a strong sense for the price being paid for growth, rotating away from currently “hot” areas where it perceives that all the possible good things that could conceivably happen in the near future have already been priced in–and toward left-behind stocks that have the potential to do better. That improvement generally comes either from a favorable change in business conditions or an upgrading of management.

The formula for stock market success since the inauguration has been very clear, given the development of domestic AI-related businesses plus the anti-growth administration strategy of shrinking the workforce and weakening the currency: look for companies with $US costs and foreign revenues, and avoid ones that use imported inputs to sell products to domestic customers.

Experience tells me to root around in left-behind domestic demand-oriented companies, with two ideas other than simple market rotation into underperformers:

–that arguably most of the bad news from tariffs and shrinking the domestic workforce have been priced into the underperformers of the current Trump presidency, and

–the cost of duplicating even somewhat tarnished domestic brand names far exceeds the price of taking over now-downtrodden domestic brands themselves.

None of this has happened so far, at least nothing that I’ve detected. I have no solid idea why. Maybe it’s simply that the top third in income in the US is the only group still buying stuff other than necessities–so more bad news is in store for potential takeover targets. Maybe, too, it’s close enough to domestic elections that it makes more sense to wait for November results before acting.

The Trump administration is, if the news reports I’ve been reading are correct, suggesting that it intends to “help” publicly-traded US companies by eliminating quarterly reporting in favor of semi-annual, as well as by doing away with much of the detailed disclosure these companies are now required to make to shareholders.

If we look at stocks traded in London, where a regime like the one the administration is suggesting is already in place, the market PE for a smaller group, but a close enough assortment of industries represented, is around 15. If we look at Hong Kong, where, again the reporting requirements seem to be like what the administration is aiming for, the market PE is just above 10x.

Arguably, then, the market response to a new regime where there’s much less information and investors are much more in the dark in holding domestic equities, should be a substantial, if perhaps gradual, contraction of the market PE from the current 20x.

I’m not sure I’d bank on gradual, however. There’s also the possibility that stocks decline sharply from the first day the new rules would be put into effect.

Those worst hurt by this would presumably be organizations, including many states and the federal government itself, with defined benefit pension plans. Individual savers with IRAs and 401ks also stand to fall substantially short of their financial goals as PE multiples contract. And, of course, company stock options would be word considerably less, so company cash flows would shrink as cash salaries rose.

The only winners, if that’s the right word, I can see from the dumbing down of current disclosure rules are firms whose financials don’t look so enticing in the sunlight.