Christopher P. Bloomstran, President of Semper Augustus Investments Group, presented a sobering, data-driven analysis of the U.S. stock market, arguing that a confluence of factors has created a secular peak that rivals the great market tops of 1929, 1966, and 2000. His conclusion is that passive, cap-weighted index investors face a decade or more of low single-digit returns, making active stock selection more critical than ever.
Peak Margins, Peak Multiples
Chris’s argument rests on two pillars: unprecedented corporate profitability and extreme valuations.
The Margin Story: For decades, as Warren Buffett noted in 1999, S&P 500 net profit margins were remarkably stable, oscillating in a range between 4% and 6.5%. However, a unique combination of factors in the 21st century—the rise of capital-light technology businesses, a secular decline in interest rates, and a significant cut in the corporate tax rate—drove margins to an all-time high of 13.3% in 2021. Chris’s core thesis is that this level is unsustainable and likely represents a secular peak.
The Valuation Story: This peak profitability is being capitalized at a peak multiple. The S&P 500 currently trades at 27 times earnings. This is skewed by the “Magnificent Seven” (substituting Broadcom (Nasdaq: AVGO) for Tesla), which trade at a collective 36-37 times earnings. Even excluding this cohort, the remaining 493 stocks in the index trade at 21-22 times earnings—still significantly above the long-term historical average of 16.5x.
The AI Capex Bubble and the Macro Debt Problem
Chris identifies the current AI investment boom as the primary driver of the market’s excess and a direct threat to the high margins of technology companies. He draws a parallel to the fiber-optic bubble of the late 1990s. Today, hyperscalers are spending an estimated $350-400 billion per year on AI-related capital expenditures, while generating less than $40 billion in corresponding revenue. The math is starkly unfavorable. As this massive capex begins to depreciate over the next several years, it will introduce hundreds of billions of dollars in new costs to the income statements of these formerly “capital-light” businesses, putting immense downward pressure on their celebrated profit margins.
This market-specific risk is compounded by a broader macroeconomic problem: debt. With total U.S. credit market debt now at 350% of GDP, Chris argues that the nation has crossed the threshold where leverage becomes a drag on economic growth. He points to the fact that real GDP per capita growth has been halved from its long-term 2% trend to just 1% over the past quarter-century. A slower-growing economy, he contends, should command a lower long-term valuation multiple, not a higher one.
The Stock Picker’s Response
Chris’s bearish top-down view is not a call to retreat to cash, but rather a directive to actively seek value in the areas of the market that the current mania has neglected. The market’s obsession with a single theme (AI) creates mispricing and opportunity elsewhere.
Focus Idea: Deckers Outdoor (NYSE: DECK): This high-quality, fast-growing consumer brand company saw its stock get punished due to market fears over a potential new tariff policy on goods imported from Vietnam, where 85% of its manufacturing is based. This overreaction allowed investors to buy a business with a pristine net-cash balance sheet and a powerful growth engine—the Hoka running shoe brand is growing at over 20% annually—for just 13x earnings. While the market chases AI narratives at 37x earnings, a tangible growth story became available at a deep discount because of a political headline.
Contrarian Cyclicals: Echoing Bob Robotti, Chris also sees value in out-of-favor cyclicals. He used the recent sharp sell-off in Olin (NYSE: OLN) to increase his position, buying the stock at a deep discount to its mid-cycle cash flow potential. He also maintains a position in gold miners like Kinross Gold (NYSE: KGC) as a pragmatic hedge against fiscal and monetary indiscipline, though he has been prudently trimming the position after its significant run-up.
Let’s go deeper.
