The Value Investor Weekly: Markets, Bubbles, and Fed Cuts

Key Takeaways

1. Central banks shifting tone: Fed widely expected to cut rates for the first time since 2024, while ECB and BoJ hold steady, signaling caution despite mixed growth and inflation data.

2. Inflation still sticky: US CPI accelerated to 2.9% in August, with shelter, cars, and energy driving costs. Inflation remains a drag on consumer confidence.

3. Markets at record highs: S&P 500 and Dow hit new peaks, fueled by rate cut optimism, but UK profit warnings and slowing fundamentals highlight cracks.

4. AI sector froth: Nvidia–CoreWeave and Microsoft–Nebius deals showcase related-party “circular” revenue engineering. High P/S ratios force companies into creative growth tricks, echoing bubble patterns.

5. Value investor lens: Fundamentals are growing slower than stock prices. Current valuations demand skepticism, patience, and focus on real competitive advantages.

Let’s start with the big one: the Fed. Everyone and their dog has been betting on a rate cut, and as of today markets have priced in a 96% chance of a 25-basis-point trim. This would be the first cut since late 2024. Why? Well, job growth in August looked more like a weekend lemonade stand than the world’s largest economy, and jobless claims have been rising. The bond market has already sniffed this out, with the 10-year yield drifting down to about 4.05%. Translation: Wall Street is prepping for cheaper money, even if Main Street isn’t feeling so cheery.

Over in Europe, the ECB kept rates steady at 2%. Christine Lagarde basically said, “We’re done worrying about runaway inflation, but don’t get too excited.” Inflation in the Eurozone nudged up to 2.1% in August, which is hardly terrifying, but enough to make them cautious. They even revised 2025 growth forecasts up a bit. It’s like your friend who brags about running a faster mile time but then admits they won’t be running at all next year.

Japan is doing what Japan always does: holding steady. The Bank of Japan looks likely to keep its rate at 0.5%. Meanwhile, China’s central bank is stuck in a policy pickle. On one hand, their stock market is sizzling. On the other hand, the economy needs juice. It’s a bit like trying to lose weight while also training for a hotdog-eating contest. Their caution means investors are still living in uncertainty.

Now let’s talk inflation. The US August CPI came in at 2.9% year-over-year, up from 2.7% in July. Core inflation stayed at 3.1%. That 0.4% monthly pop was the highest since January. Shelter, used cars, and energy costs were the main culprits. In other words, the things you need to live, get around, and keep the lights on. Not exactly confidence-inspiring for consumers, and another sign that inflation still has some sticky spots.

Corporate earnings were a mixed bag. The S&P 500 pushed to fresh all-time highs, with tech leading the charge, while energy lagged. Goldman Sachs posted healthy profits, proving again that investment banks somehow always find a way to make money, even when the rest of us are digging under the couch cushions for spare change. But in the UK, profit warnings jumped sharply, especially in construction, which is flashing red lights that policy changes and global jitters are starting to bite.

Let’s not avoid the elephant in the room: AI mania. Nvidia and CoreWeave’s $6.3 billion deal looks less like a business agreement and more like two cousins trading baseball cards. Nvidia sells them hardware, then agrees to buy back the excess capacity if CoreWeave can’t find enough customers. That’s like opening a restaurant, selling half your meals to your own investor, and then bragging you’re fully booked. Why do this? Because when your stock trades at a sky-high price-to-sales (P/S) ratio, Wall Street demands growth that matches the story. Companies don’t just need to sell more; they need to sell a lot more to justify those valuations.

At a P/S of 30 or 40, investors are basically paying today for revenue that might not show up for a decade. So instead of waiting around for natural demand, companies strike these creative “related party” deals to keep the top line moving. It’s a feedback loop: the higher the multiple, the more pressure to engineer sales, which in turn reinforces the bubble. Add in Microsoft’s $17.4 billion Nebius partnership and the fact that many enterprise AI projects still deliver little to no return, and you’ve got the recipe for a classic late-cycle party. The music is loud, the drinks are flowing, and nobody wants to ask who’s picking up the tab.

So where does that leave us as value investors? Warren Buffett always said it’s better to be approximately right than precisely wrong. Right now, the approximate truth is that fundamentals are still growing, but at a slower clip, while the stock market is sprinting like it’s on an energy drink bender. When companies are trading at 60 to 80 times earnings and making deals with their own business partners just to keep growth stories alive, that’s not exactly Ben Graham’s idea of a margin of safety. Patience, discipline, and a skeptical eye are the best tools in times like this.

Happy investing!
Josh

The information is provided for educational purposes only and does not constitute financial advice or recommendation and should not be considered as such. Do your own research.