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.

I’ve just updated my Keeping Score page for August. …another drubbing for the American consumer. Not directly visible in the numbers but, as I see it, another month in the methodical destruction of the American military–and no sign of protest by the luminaries of either political party in Congress.

Back in the dim past, when I was working as a portfolio manager, I was at an early January strategy meeting one year that had been called to discuss strategy for the upcoming months. I said I thought this would be an especially difficult time to make money. Everyone else started laughing–apparently because that was what I said at the start of every year.

I’m finding this year to be very unusual–and difficult. Washington seems to be populated at present by an unusually large number of serial bunglers, so the road forward appears to be chock full of economic potholes. Hard, for me anyway, to figure which ones are safe to ignore. Also, and maybe because of government dysfunction, the typical rotation from one economic sector to another, based on valuation, doesn’t seem to me to be occurring.

To illustrate:

YTD sector performance, through yesterday:

Energy +37.7%

IT +23.7%

Materials +16.9%

Industrials +16.8%

S&P 500 +12.9%

Healthcare +10.6%

Staples +7.7%

Real estate +7.6%

Financials +5.5%

Utilities +1.3%

Communication services -.2%

Consumer discretionary -1.4%

The biggest winners have continued to be beneficiaries of the war in the Middle East–energy and defense industrials–and stuff that goes into AI data centers.

Consumer discretionary, usually a strong sector when the US is not in recession, as well as a place where a market busy elsewhere for a time will inevitably rotate to, is not only in the minus column but dead last in the rankings.

And as far as the winners go, Energy and Materials are tiny sectors at ~3% of the index each. IT, about a third of the index, is in the plus column vs. the S&P, but all the other four 10%+ sectors are underperforming.

There has been one significant rotation in the market this year–away from the owners of data centers (basically in the
Communication services sector) and toward in increased focus on the makers of the semiconductors (in IT) whose output will reside in them. But that’s an intra-sector move. So far there’s no sign I can see in the stock market of anticipation of any consumer-friendly, GDP growth enhancing, policy changes in Washington.

The one near-term implication of all this is to look outside the US for new growth ideas.