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Bitcoin, artificial intelligence, market valuations, and earnings expectations suggest
Bitcoin, a reasonable gauge of overall investor sentiment, has sold off sharply, briefly dropping below $90,000 after hitting a record high of over $126,000 in October. In one sign of the current environment, a columnist for The Wall Street Journal openly advocated for a “good, long bear market” to cure “dangerous complacency.” Setting aside the ill-considered desire for a long bear market, a doom-seeking piece chastising investors for imprudence captures the increasingly bifurcated sentiment of investors.
The AI trade has been the dominant theme propelling markets this year, and any softness in the theme has largely been accompanied by rotation into other sectors. This has helped limit damage to the overall market during periods of softness for mega-cap tech, but the market is likely to follow the leaders should they keep declining. Concerns regarding an AI bubble have grown and center around the increasing use of debt to help fund the infrastructure buildout, the circular nature of financing deals, lengthening depreciation schedules, and questions whether the huge amounts of money going into the infrastructure buildout will be justified by reasonable returns.
AI bulls counter that demand for AI infrastructure remains overwhelming; Microsoft, Alphabet, Amazon, and Meta are expected to increase their combined AI spending by 34% over the next year to $440 billion and continue to highlight capacity constraints. Additionally, the companies making the largest investments are extremely profitable and not overly reliant on debt to fund the buildout. Bulls also believe we are only beginning to scratch the surface of AI-related productivity improvements that ultimately will prove the investment case and drive significantly greater utilization. They also point to valuations that appear more reasonable than in historical bubbles, as a current forward P/E of approximately 30x for Nvidia is a far cry from Cisco trading at a multiple closer to three times that in late 1999.
The forward P/E ratio for the S&P 500 is greater than 22x. While multiples remain elevated relative to historical levels, earnings continue to help justify the optimism. Third-quarter earnings have yet to fully conclude, but the results so far have been strong. Earnings growth has been greater than 13%, well ahead of expectations. Furthermore, over a third of companies in the S&P 500 raised their outlooks in the quarter, the highest level since 2021 according to Bloomberg Intelligence. However, those companies missing expectations have been treated more harshly, with subsequent price declines greater than what is typically seen.
Full-year expectations reflect solid 12% earnings growth for the S&P 500. There has also been a trend in upward revisions to the EPS outlook for 2026, as analysts point to the potential benefit from lapping some of the tariff impact, tax benefits, and deregulation. Consensus expectations for next year are for an acceleration in earnings growth to 14%. Strong, accelerating growth is something the market typically responds favorably to and if this plays out it would be supportive for markets.
Given the host of current concerns that have weighed on equities, it is harder to count on typical seasonal strength to lift markets higher through the remainder of the year, though we remain open-minded to the possibility. Despite the recent shift in sentiment, the bull case can still be credibly made, and stocks remain not too far off their recent highs. While near-term calls are exceedingly difficult to make, owning growing, quality companies at reasonable valuations remains a sensible way to pursue long-term investment success.
In this issue, our analysts present a midsized medical device maker that is working hard to defend its market share which could lead to steady if unspectacular growth from here.
Our second selection is a property and casualty insurer that primarily writes “long-tail” business, with success that has made it the fourth fastest grower in the industry.
The commentary is excerpted from the issue of the Investor Advisory Service newsletter published at the end of December 2025. To receive commentary like this in a more timely matter and receive actionable stock ideas each and every month, subscribe today. The Investor Advisory Service stock newsletter was named to the Hulbert Investment Newsletter Honor Roll for the 16th consecutive year for outperforming every up and down market cycle since 2007.
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