We are pleased to share the latest edition of Lighthouse Canton Investment Guide.
Markets have taken everything in stride – from tariff deadlines, to wars, to downward earnings revisions. At this stage, our aggregate model score is positive, with trend strength and earnings strength more than offsetting a decelerating economy and expensive valuations. Unless we see a material negative catalyst, especially from labor data, or a markedly weak earnings guidance, the allocation to equities, especially growth sectors, warrants an overweight positioning. We do expect a pause for breath in the uptrend, allowing momentum indicators to neutralize – aside from that, until reversed, goldilocks continues.
Our economic nowcaster suggests an economy that is decelerating but not collapsing - losing momentum across key pillars of consumption, housing, and business activity. Labor market remains the bright spot with not just positive readings, but also positive momentum – a key factor holding up the broad economy. The aggregate earnings score remains strong and stable, with broad-based support from core growth and profitability metrics. However, with fewer earnings surprises and persistent leverage risks, the upside from here may be more selective. The aggregate valuation score is "Average (Stable)", primarily due to EV/EBITDA offering an offset to stretched readings elsewhere. However, the dominant signal from the model is one of broad overvaluation – with downward earnings revisions, and an all time high index, extent of overvaluation is higher than at the start of the year.
Asset Allocation: Our proprietary nowcaster is overweight in equities with strength across earnings and particularly price signals offsetting macro deceleration and expensive valuations. Unsurprisingly, the model is overweight growth sectors at the cost of defensives. With credit spreads on both HY and IG corporate bonds back to record lows, other than European financials, corporate bonds do not appear attractive. Gold is stuck in a range for the last three months – it needs resolution out of the 3200-3400 range. Bitcoin's breakout into new high ground is solidly bullish. Relatively non-correlated strategies – insurance, life settlement and to a large extent private credit, remain a preferred positioning.
Report Sections
- 4 Pillars Investment Framework - Economic Cycle, Earnings Cycle, Market Signals, and Valuations
- Economic Cycle Nowcaster - Decelerating momentum; labor is the key
- Earnings Cycle Analysis - Consensus expects decelerating earnings momentum
- Valuation Assessment - Expensive – both equities and bonds
- Market Signals Review - Strong trend but momentum suggests pause
- Sentiment Analysis - Bullish but not egregious
- Sector Recommendations - Growth sectors overweight, defensives underweight
- Technical Analysis - Strong trend but oscillators stretched
