BROKERS’ NOTES: Buy gold, sell S&P 500

Simon Brown, founder of Just One Lap

Buy: Gold

I never held gold until the pandemic; recently I’ve been adding more.

When the world is worried, money tends to flow either into US bonds or the yellow metal as safe havens.

Global inflation, which has retreated but is not dead, and a weaponisation of the dollar have fuelled the metal to record highs, with more to come.

US President Donald Trump’s tariff threats may turn out to mostly be bluster, but they create uncertainty, and the extreme valuations in US markets will make it tough going for equities.

Central bank buying of gold has been accelerating since 2018, and we can expect this to continue.

A nice bit of gold in a portfolio looks like a great way to help weather the turbulent years ahead.

Sell: S&P 500

No, I’m not calling for a crash of US equity markets. But the stark reality is that valuations are extremely stretched after an almost 60% return over the past two years.

Less than 10% of this return has been from earnings growth and dividends; the rest has all come from valuation expansion. This leaves the S&P 500 p:e well above the long-term average.

GuruFocus has the S&P 500’s forward earnings multiple at about 23.6, with the median at 18, so almost a third above average valuations.

This high valuation unwinds in either a market collapse or lacklustre returns in the years ahead. A crash is certainly possible (but never predictable), so I am rather expecting low-single-digit returns from the S&P 500 over the next decade, something we saw in the first decade of the century when the S&P 500 achieved a compound annual growth rate of about 1% before dividends.