This edition of Market Factors begins with a growing list of potential market hurdles from long-time economist and pundit Ed Yardeni. Section two describes a stock selection screen that’s working now and the diversion outlines my dwindling list of favourite podcasts.
Eight big worries
Ed Yardeni is a respected longtime investment professional and I mean loooong time. He, for instance, was the chief economist for E.F. Hutton, a company that was acquired in 1987. Mr. Yardeni’s latest report finds him still bullish but admitting that his growing concerns – he calls it a worry list – has him waffling a bit.
The first of his worries is geopolitics, specifically the potential for a wider conflict in the Middle East. Recent escalation by Iran has pushed crude prices well above US$100 per barrel.
Worry number two is inflation shocks becoming a constant pattern. The U.S. economy remains strong enough that energy costs, AI-related inflation and tariff-caused higher prices have been easily passed on to consumers. This may not remain the case and profits would be threatened as a result.
Worry three is related to number two - a wage price spiral similar to the 1970s. This involves higher prices leading to widespread wage demands (which do need to happen, just not incessantly), which in turn leads to higher prices and more wage demands. Wage price spirals are terrible for equities.
The fourth worry is that the Fed will announce hike after hike for the foreseeable future. This would both slow the economy and demand and also raises the cost of capital for companies. Again, terrible for profits.
Worry number five is that higher interest rates lead to a deteriorating U.S. fiscal outlook. U.S. federal debt just crossed the US$40-trillion mark and the need for Treasury issuance is constant. Significantly higher government borrowing costs could potentially cause a rapidly rising deficit and eventually a crisis of confidence in U.S. debt.
The sixth worry – the one that concerns me most – is a slowing AI capital spending boom. This would immediately reduce profit expectations in the dominant data centre equipment providers like Nvidia that have been leading the market.
Worry number seven concerns the imminent U.S. congressional elections. Mr. Yardeni is concerned that elections will result in even more partisan behaviour and an environment cantankerous enough to threaten debt-related legislation. Democrats will certainly want to reverse some of President Donald Trump’s corporate tax cuts and the president’s plan to send US$5,000 to people who vote for him would be disastrous for public finances in addition to being ridiculous.
The eighth worry is that large-scale technology IPOs will limit market upside. Anthropic is among the likely issuers and could confirm a market cap of two trillion dollars. OpenAI is also reportedly mulling going public. These big new issues will divert funds from existing winners, and the spreading out of investment will limit stock price gains across the board.
Mr. Yardeni listed important reasons to be bullish, including Baby Boomer and ongoing AI-related spending, but there are darker clouds on the horizon for markets. Potentially this is just the usual wall of worry that equities climb, but markets are prone to worsening sentiment changes at the same time.
Equities
Screening for winning stocks
BofA Securities’ Research Investment Committee (RIC) argued persuasively that investors should be using free cash flow multiples to pick U.S. stocks.
The most recent RIC report noted that quality stocks with high free cash flow have been the best performing factor (stock selection criteria) of the past 30 years. At an index level, the S&P 500 free cash flow yield is close to all-time lows and stocks with higher free cash flows are up 43 per cent year to date.
With free cash flow so low it is incongruous to hear that the earnings outlook has rarely been as bullish as it is now, but that is the case. The hyperscaler tech companies are responsible for this anomaly - data centre spending turned their cash flow negative for the first time since at least 2007.
The RIC team is recommending the VictoryShares Free Cash Flow ETF (VFLO-Q) which is up 38 per cent year to date as of Monday morning. Average valuations in the ETF are attractive - the forward PE ratio is about 13, versus 19 for the S&P 500. Sector exposure is heavy in health care and energy.
Andrey Dyachenko/iStockPhoto / Getty Images
Diversions
I was on a podcast
I was a guest on the Globe and Mail’s award-winning podcast The Decimal last week and you should listen to it if you get a chance. The experience got me thinking about the podcast format in general as my consumption has changed a bit over the last year.
NFL football season has begun so I won’t miss an instant of Jeremy Reisman’s Pride of Detroit podcast covering my beloved Lions. I frequently listen to Jeff Rison’s Detroit Lions podcast on Youtube as well.
The Watch remains my favourite pod, with Chris Ryan and Andy Greenwald discussing television mostly but also movies and whatever topics come up during what is almost always an entertaining discussion. What separates a great from good podcast in my opinion is that you will click and listen even if the topic is something I don’t care about. That’s the case with The Watch.
I haven’t been listening to much else, and that’s the change. I dipped back into Yasi Salek’s Bandsplain podcast for the more than 14-hour Madonna marathon because I’m a child of the ‘80s and obligated to do so. I listened to the Pretty in Pink edition of Ms. Salek’s soundtrack series for similar reasons.
The Rewatchables podcast is still good but I only listen if I love the movie being featured. The recent Aliens episode was great.
That’s about it though. Podcasts remain a great format – they have mostly replaced talk shows, after all - but maybe the novelty has fully worn off.
The essentials
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Globe Investor highlights
Why the biggest risk for the sinking bond market may be the Fed standing pat this week on interest rates
David Berman says the case for investing in Bombardier rests on more than just patriotism
As private assets become a commodity, Tom Bradley suggests it may mean diminishing returns
Gary Christie screens for Canadian dividend-growing stocks that may do well in a higher-yield environment
Contra Guys co-founder Ben Stadelmann on what 1999 can teach us about the AI boom - and a Canadian software stock he’s liking right now
Quick hits
Citi foreign exchange strategist Daniel Tobon recommends clients short the U.S. dollar versus the loonie. The trade idea is a hedge against the possibility Iran forces higher oil prices ahead of the U.S. midterm elections, as they have threatened. The CAD benefits from higher crude prices and the greenback weakens because higher oil slows the economy and can put downward pressure on interest rates.
Economists at Goldman Sachs believe developed world long bond yields will remain elevated. Fiscal deficits lead to higher risk premiums at a time when inflation pressure is limiting demand for fixed income (bond prices head lower as inflation pressure hits). Treasury yields might benefit from lower AI borrowing, which is currently crowding out demand for government debt.
Strong earnings forecasts are making stocks cheaper, as Scotiabank strategist Hugo Ste-Marie reported in a recent research publication. The S&P 500 forward PE ratio has declined from an October 2025 peak of 22.9 times to 19.2 times. The TSX forward PE of 15.7 is down from 17.2 in January of this year.
Citi chief U.S. equity strategist Scott Chronert believes “4.8 on the way to 5.0” per cent is the equity market’s line in the sand when it comes to the U.S. 10-year Treasury yield. This is unfortunate because the yield crossed 5 per cent Monday morning. Mr. Chronert also warned of equity market volatility ahead of U.S. Congressional elections in November but more calm afterwards when the results are digested.
Read this week’s earnings and economic calendar here