Is the Stock Market in a Bubble?
Many investors have been amazed to see the market roar back from its late March, Iran War lows. The Dow was at 49,500 prior to the war starting, and bottomed out at 45,166 on March 27. That represented an 8.75% drop. To end the month of May, the Dow hit an all-time high of 51,022. That’s a 13% reversal for the Dow, while the tech-heavy Nasdaq index powered up +28%.
While semiconductor and technology stocks have been on quite a run, it’s worth stepping back to evaluating this move in a broader context. When we do that, the bubble picture isn’t so clear. The stock market is a forward-looking discounting mechanism. That simply means investors care a lot more about what a business is going to earn in the future than what it is earning today In theory, a stock price is just the present value of a company’s future business expectations. So, if those expectations improve significantly, the current stock price should increase as well.
That’s exactly what we’ve seen during the recent quarterly earnings season. Kevin Muir, who writes The MacroTourist Substack, points out that this quarter’s S&P 500 earnings were the 8th-best quarterly earnings in the past 22 years. But they jump off the page for a different reason, this quarter was the only quarter among the Top 10 that didn’t follow a significant downturn at first. As Muir puts it, “The current earnings period is unique because it is the only non-post-recessionary acceleration of this magnitude.”
It appears that one of the main reasons large U.S. companies have seen their earnings jump higher is they are starting to see the impact of AI flow through to their bottom-lines. Getting the same or more work out of the same number or fewer employees is a recipe for higher corporate profits. That’s what companies delivered this quarter. And what is significant is that the expectation for ongoing impact from AI is predicted to be substantially higher for the next few quarters as well.
In other words, this isn’t a one-time fluke. It appears to be the start of a new higher earnings trend, and stocks have broadly repriced higher as a result.
Working backward from there, the tech companies facilitating this increase in corporate profitability have seen their stock prices rise faster, and the semiconductor companies at the heart of the AI story have gone up the most. This makes sense, as questions about whether corporate America would actually be able to monetize the promise of AI are being answered “yes” in real time.
The odds that the AI story is “smoke and mirrors” that will not be able to fulfill the hype, are declining. Investors seem to be changing their assessments as they realize that AI companies are still short of the computing needed power to satisfy the appetite of corporate America for more AI.
I can tell you first-hand that we have incorporated an AI program called “Quinn” and it has been remarkable to see how it has benefited our boutique company. The ability for it to reach across Outlook, Box, other programs, and the internet to summarize client meetings, help with preparation for meetings, create reminders so tasks do not fall through the cracks, and ensure we are up to date on compliance, is nothing short of remarkable.
THE REINHOLD FINANCIAL APPROACH TO BUBBLES (OR AGING BULL MARKETS)
The point of this article isn’t to try to convince you one way or the other regarding whether AI/semiconductor /tech stocks are in a bubble. Rather, it’s to assess what an investor should do even if this turns out to be one.
One lesson from history is that trying to predict when a bubble (or simply an aging bull market) will end, doesn’t work. So, what can investors do instead? This is our approach to dealing with a bubble (or extended bull market):
1.Stay invested
We use a strategy that has defensive properties that we believe will help (not eliminate) the impact of future bear markets. For example, the Core Strategy will typically move from equities (S&P 500, International Index, and Real Estate stocks) into the more defensive positions (Bonds, Cash, and Gold). The bottom-line is you are staying invested, but in different assets. In rapidly rising markets, we will rebalance your portfolio more frequently, which redeploys money from rapidly rising holdings into less bubbly assets.
2. Have reasonable expectations
If the bull market continues and it’s just a theme change we have to eventually deal with, the normal processes within the Sector Rotation and World ETFs will gradually pivot our portfolios from the old themes to the new ones. If it’s a more dramatic ending that results in a full-blown bear market, remember that our process is intentionally designed to kick in slowly, ideally triggering only occasionally, during particularly damaging conditions.
There’s always a trade-off with defensive efforts: Either the protocols trigger quickly, causing us to endure numerous false alarms that cost money and frustrate everyone along the way, or they trigger slowly and infrequently, which requires us to absorb some degree of pain at the end of a bull market cycle. This happens as our fully invested portfolios work their way down from the prior highs, to the levels where the defensive protocols kick in and start getting us out of stocks.
As you know, the overall goal is to “win by not losing.” While we have navigated this effectively over the years, past performance is no guarantee of future returns. In using a strategy that uses past returns (1 mo, 3 mo, 6, mo and 12 mos) to establish trends, by design it will not “sell at the top” or “buy at the bottom.” The goal is not to get hurt badly when bubbles burst or during bear markets, so that we can be ready for the next ride up.
Summary
It’s rare for markets to correct as significantly as they did in April 2025 and March 2026, then rebound as strongly as they have recently, only to then fall into a deep bear market. Never say never, but this dynamic, coupled with the resilient economy and recent inflection higher in realized and anticipated corporate earnings, suggests that this bull could run quite a bit further before it tires. That said, it’s still useful to ask the tough “what if” questions should that turn out not to be the case.
The bottom line is our strategy allows us to stay invested through what can be surprisingly long “late” bull market periods — harvesting the big gains that often come in toward the end — while still reducing our downside risk when bear markets eventually hit. Long-term, we think this approach will lead to better results than trying to anticipate bear markets and reduce stock exposure preemptively. Mentally and emotionally, it’s much easier to follow the same strategies long-term — through bull markets, bear markets, and especially those confusing periods when it’s unclear which animal is in charge.
TACTICAL ASSET ROTATION STRATEGY (TARS) RESULTS
The Core ETF Strategy is comprised of SPY (S&P 500), EFA (International), VNQ (Real Estate), IAU (Gold), IEF (7-10 mo. Treasuries), and BIL (Cash) and are evaluated on a relative strength basis and re-ranked 1 through 6. Clients are in the top 3. Typically, the CORE makes up 30% of a client portfolio. The Core TARS portfolio is designed to share in some of the bull market’s gains, while minimizing (or even preventing) losses during bear markets. “Win by not losing.”
TARS Core had another gain in May, with an overall 1.65% return. The weak performer for May was gold. We have been in gold for 27 months now, but the most recent 3 months have been negative. Despite the current trend, the position is still up +9.08% this year. We will be watching to see if this trend continues and we get a “sell” indicator in the coming months, or if there is a reversal for another leg up.
In our new allocation within the Core Strategy, if US Equities (SPY) is part of the mix, then we further evaluate the US stock market for which segment is performing best. We have been in IWN, which is the Russell 2000 Value Index as value stocks came into favor this year. We are now rotating out of IWN into IWO, which is the Russell 2000 Growth Index. This makes sense with the resurgence of technology, AI, and Semiconductor stocks as noted previously.
Year-to-date the Core ETF strategy is up 9.20% as compared to the S&P 500 up 10.49% and the 60/40 blend index up 9.64%.
THE CORE STRATEGY
Here was the performance of the three Core asset classes for May1
US Stocks (SPY) + 5.26%
Small Cap Value (IWN)** + 2.95%
International (EFA) + 2.42%
Gold (IAU) - 1.57%
*Conservative, Moderate Conservative & Moderate allocations hold 50% SPY and 50% IWN.
**Moderate Aggressive & Aggressive allocations hold 0% SPY and 100% IWN.
There is one change for June. Sell IWN (Russell 2000 Value) and Buy IWO (Russell 2000 Growth).
SECTOR ETFS
The TARS Sectors that are chosen based upon the same momentum strategy as the Core ETFs. I evaluate 85 Sectors and we make changes if they fall out of the top quartile.
Last month we rotated out of Biotechnology into Commodities. While commodities have performed great through the end of April, they pulled back in May. Commodities still remains in the top quarter despite the negative month, and at the start of June the sector is moving up, so hopefully we will see a recovery.
Here is the performance of the Sector ETFs for May1
Commodities (PDCD)* - 4.12%
Aerospace & Defense (PPA)** + 2.19%
*Moderate & Moderate Aggressive allocations hold IBT
** Aggressive allocations hold PAA
There are no changes for June.
WORLD ETFS
I evaluate 64 country and world ETFs. Aggressive portfolios hold a 5% allocation to 2 country ETFs and Moderate Aggressive have a 2.5% allocation each.
Both Spain and Latin America dropped out of our top quartile. We have been in Spain (EWP) for 15 months with a 50.27% return over that period. We only held Latin America (ILF) for 6 months, but over that period we had a 15.14% return. We are replacing Latin America with Emerging Market ex-China (EMXC). The “ex” means that this fund excludes Chinese stocks from its holdings.
We are selling Spain and replacing with a northern European country, Austria (EWO). Spain (EWP) was largely Spanish banks, electric utilities and Infrastructure, while Austria (EWO) also holds banks, but adds energy, materials, and industrial companies to the mix. It also pairs well with EMXC, which doesn’t overlap at all in its holdings.
Here is the performance of the World ETFs for May1
Spain (EWP) + 2.19%
Latin America (ILF) - 4.12%
There are two changes for June. Sell ILF (Latin America) and Buy EMXC (Emerging Markets ex-China). Sell EWP (Spain) and buy EWO (Austria).
OTHER FUNDS
VYM continues to be a consistent performer and is doing exceptional well this year, up +11.37% YTD. It is not surprising that the Aegis Small Cap Value fund (AVALX) is doing well, seeing as the Core Strategy had us move out of Large Cap Growth and into Small Cap Value. YTD it is up +15.50%.
Here is the performance of these funds for May1
Vanguard High Dividend Yield Stock Fund (VYM)* + 1.27%
Aegis Small Cap Value (AVALX)** + 0.10%
*Conservative, Moderate Conservative, Moderate & Moderate Aggressive allocations hold VYM.
** Moderate Aggressive & Aggressive allocations hold AVALX.
FIXED INCOME ETFS
PAAA (PGIM’s AAA Ultra Short Bond Fund) makes 20% of Conservative allocations, 10% of Moderate Conservative and Moderate allocation, and 5% of Moderate Aggressive allocations. It has a current yield of 5.12%. FLOT floating rate has a 10% weighting in Conservative allocation. PIMCO’s PFN ETF has been swapped out for a less volatile PIMCO Mutual Fund – PIMIX. For Moderate Conservative and Moderate allocations, FLOT has been swapped out for the Guggenheim Macro Opportunities Fund (GIOIX).
For those in non-retirement accounts where we are seeking to limit taxable income, I have substituted the Short-term Nat’l Muni (SUB), North Square Tax-Advantaged Professional Income (QTPI), and PGIM Ultra Short Muni (PUSH).
Here is the performance of the fixed income funds in May1
PGIM AAA Ultra Short Bond (PAAA) + 0.41%
PGIM Short Term Muni (PUSH) + 0.28%
Short-term Nat’l Muni (SUB) + 0.14%
Invesco Floating Rate (FLOT) + 0.35%
Guggenheim Macro Opportunities (GIOIX) + 0.63%
PIMCO Income (PIMIX) + 0.92%
North Square Tax-Advantage Income (QTPI) + 0.16%
ALTERNATIVE HOLDINGS
The JP Morgan Equity Premium fund (JEPI), writes covered calls on S&P 500 holdings for additional premium returns yields 8.29%. Real Asset Allocation (RAA) is a diversified asset allocation fund that utilizes the same relative strength strategy as our Core Strategy with the inclusion of not just stocks, bonds, and gold, but commodities, metal miners, managed futures, Bitcoin, TIPS, Emerging Market Bonds, and more. RAA is currently 10-20% of every risk strategy. It has been a solid holding up 10.59% YTD, with less downside risk than the S&P 500 that is up 10.49%.
This year I also added a Commodities Fund (SDCI) to the Aggressive Growth allocations as a hedge against volatility and inflation. It is up 25.12% this year.
Here is the performance of the alternative funds in May1
Real Asset Allocation (RAA)* + 3.11%
JP Morgan Equity Premium (JEPI)** - 1.92%
SummerHaven Dynamic Commodity (SDCI)*** - 1.89%
*All portfolio allocations hold RAA
**All portfolio allocations except for Aggressive hold JEPI
***Aggressive Growth allocations hold SDCI
REFERENCES
1. Morningstar May 31, 2026 Monthly Returns.
DISCLOSURES
The analysis and commentary in this Market Commentary is general in nature and does not take your personal circumstances into consideration. It is not intended to be a substitute for specific, individualized financial advice and investors should obtain legal, accounting and tax advice from a qualified tax professional, accountant or attorney.
The information provided in this Market Commentary, including any strategies, methodologies, and opinions, is expressed as of the date hereof and is subject to change. EverSource Wealth Advisors, LLC assumes no obligation to update or otherwise revise these materials.
This Market Commentary relies upon historical data, and much of the information presented is not intended to be performance reporting or representation, whether hypothetical or actual. Reports on the performance of various strategies are gross, not net, and do not take into account our fee or various third-party charges such as trading charges. Individual Exchange Traded Fund (ETF) performance in the commentary are monthly returns of all ETFs utilized across client accounts in various asset allocation percentages based upon risk tolerance. They are gross returns and not net of advisory fees. Each client’s returns will vary based upon the percentage of each ETF held, in addition to other variables, such as: allocations to money market funds, additional individual stocks or mutual funds held, and date of entry into each holding.
Actual results will vary from the analysis. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, expressed or implied is made regarding future performance or the accuracy of the information herein.
This material is provided for informational purposes, is intended for your use only, does not constitute an invitation, solicitation, or offer to subscribe for or purchase any of the products or services mentioned. It is likewise not a recommendation that you purchase, sell, or hold any security or other investment or pursue any investment style or strategy.