Last month, I asked whether this monthly stock market update should continue. I felt I was repeating myself quite often, and it didn’t always bring out the optimist in me.
However, 82.6% of readers would like to keep this monthly update, while only 1.8% preferred to see it disappear. The rest opted for a quarterly overview. That’s a result I can’t ignore, but I’ll stick to my New Year's resolution of keeping complaints about irrational market movements to a minimum.
Looking at the market with some perspective, January followed the same pattern we’ve seen for nearly two years now: the U.S. stock market keeps getting more expensive.
Since the start of the year, the S&P 500 has risen another 2.72%. The brief panic this week—when Chinese company DeepSeek seemed to threaten the U.S. AI sector—had already faded a day later. It almost feels like this market can’t go down.
Unfortunately, that’s exactly what more and more people believe, which will inevitably lead to a rude awakening at some point.
What stands out, however, is that January was even better for European markets. The Euronext 100 rose by 5.54%, the DAX by 8.07%, and the FTSE by 5.17%. Over a longer period, though, they continue to lag.
A turning point? I’m not convinced yet. The U.S. market remains extremely expensive, and the prevailing narrative—at least according to both traditional and social media—is that it’s the only market worth investing in. That makes it all the more interesting that European markets have outpaced the U.S. in the first weeks of the year. Some investors seem to be repositioning themselves already.
The Buffett Indicator continued to climb, rising from 206% to 207.6%. I’m not sure what more I can add—this is an unprecedented peak.
What was already expensive became even pricier last month. No one denies that the U.S. market is expensive, but this is usually followed by a dismissive “rightfully so” or a nonchalant “so what?” It seems to have simply been accepted as the new normal.
When I see valuation analyses labeling companies as undervalued—even though those calculations already factor in strong growth—I start to have doubts. For some companies, that growth may indeed be sustainable for a long time. But what signals an unrealistic outlook is when, after ten years of strong growth, they’re still assigned an exit multiple of 25.
For reference, Graham used an exit multiple of 8.5 for companies that weren’t growing faster than inflation. Today, investors are using a multiple three times higher—even for businesses that will have already passed their peak growth phase by then. They either assume growth will continue for decades or that, by then, an even greater fool will be willing to buy these stocks.
Expectations are no longer realistic.
This chart from JP Morgan illustrates what realistic expectations look like for a market as expensive as today’s:
For the next five years, realistic expectations suggest annual returns of around 3%—a level we’ve nearly reached in January alone.
Growing Risk
A simple market truth is that the higher the valuation, the greater the risk. Buying the same company or market at 10 times earnings is far less risky than buying at 22 times earnings. At 10x earnings, things can go wrong without disastrous consequences for the investor. At 22x, however, there is no room for error—yet even without errors, the question remains how much return is left to gain.
The biggest risk increase today comes from the ever-growing use of leverage. Debt-fueled investments are being applied aggressively. As long as markets keep rising, leverage amplifies the gains—but when they fall, it will accelerate the decline just as quickly.
I’ll repeat a quote from Charlie Munger:
“Those who are not afraid are not paying attention.”
He said this during the financial crisis, but I find it just as relevant today.
Meanwhile, ETFs—an otherwise good investment product—are being eroded and misused through leverage, options strategies, and other financial constructions to the point where they are becoming a risk themselves. If you invest in ETFs, choose carefully and don’t get swept up in unsustainable strategies. And don’t base your expectations on recent performance—refer back to the chart above.
Another rising risk, strongly felt since Trump’s inauguration, is political risk. The proposals put forward, along with the responses and communications from other world leaders, are outright concerning. The potential economic damage could be significant.
Choosing Positivity
And so, despite my best efforts to take a more positive approach this year, this market update once again paints a rather bleak picture. But I can’t help it—the financial (and political) world keeps getting crazier.
The bright side? So far, we haven’t seen any immediate economic fallout.
Because we’ve deliberately invested in highly undervalued stocks, the first-quarter earnings from companies in our portfolio have surprised investors positively—leading to rising share prices.
With little exposure to the AI hype or the overheated U.S. market, it’s better to focus on our own companies’ performance. And if we do that, 2025 is off to a strong start for us.
Articles and updates this week
Last week, we received the earnings report from Investor AB. It’s a fantastic holding with strong results, but at the moment, I prefer other holdings.
On Monday, I published a full analysis of a stock already in our portfolio. It was briefly cheap enough to add to our position, but unfortunately, it’s now trading above our buy limit again. So for now, we’ll wait and see.
On Tuesday, I shared my take on Monday’s events. My conclusion? Greed still rules.
We also saw some interesting market reactions to trading updates, which—judging by the price movements—were “better than expected.” You’ll find the key figures below in the Brief Summary section.