SKEPTIC’S GUIDE TO INVESTING
Straight Talk for All, Nonsense for None
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Your Hosts - Meet Steve Davenport, CFA and Clem Miller, CFA as they discus the latest in news, markets and investments. They each bring over 25 years in the investment industry to their discussions. Steve brings a domestic stock and quantitative emphasis, Clem has a more fundamental and international perspective. They hope to bring experience, honesty and humility to these podcasts. There are a lot of acronyms and financial terms which confuse more than they help. There are many entertainers versus analysts promoting get rich quick ideas. Let’s cut through the nonsense with straight talk!
Disclaimer - These podcasts are not intended as investment advice. Individuals please consult your own investment, tax and legal advisors. They provide these insights for educational purposes only.
SKEPTIC’S GUIDE TO INVESTING
The Frothy Fourth: What's Ahead for Markets
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The financial markets are running hot as we head into Q4 2025, but are we witnessing sustainable growth or dangerous froth? In this thought-provoking episode, Clem Miller and Steve Davenport tackle the pressing question on many investors' minds: what's ahead for the markets?
Steve kicks things off with a bold prediction - the market appears to be discounting an overly optimistic future, particularly in AI-related stocks. When companies merely mentioning artificial intelligence command 30-50x earnings multiples while established healthcare giants trade at 7-9x earnings, something seems amiss. As Steve puts it, "If it looks like froth and feels like froth, it might be froth."
The discussion heats up around Oracle's shocking 35% single-day gain. Is this unprecedented move justified by legitimate future cloud computing growth, or does it represent market exuberance gone wild? The hosts dissect whether such "statistical anomalies" - these "100-year floods" happening with uncomfortable frequency - should prompt investors to take some chips off the table.
The conversation shifts to practical portfolio management strategies during potentially turbulent times. Rather than abandoning growth entirely, Clem advocates controlling risk through forward PEG ratios, portfolio beta, and monitoring short interest. Meanwhile, Steve recommends increasing allocations to undervalued sectors and maintaining hedges like gold as protection against his predicted 10% correction.
What about the Federal Reserve's next moves? Both hosts anticipate 25 basis point cuts in September and December, though they caution that market expectations for more aggressive easing may lead to disappointment. The episode wraps with a teaser for their next provocative topic: government ownership stakes in American companies under the Trump administration.
Whether you're looking to protect gains, find undervalued opportunities, or simply understand what's driving today's market dynamics, this episode delivers the balanced, skeptical perspective you need to navigate the frothy fourth quarter. Subscribe now and join the conversation!
Straight Talk for All - Nonsense for None
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Disclaimer - These podcasts are not intended as investment advice. Individuals please consult your own investment, tax and legal advisors. They provide these insights for educational purposes only.
Hello, welcome everybody to Skeptic's Guide to Investing. I'm Clem Miller, I'm here with Steve Davenport and today we're going to be talking about the fourth quarter. What can we expect for the fourth quarter of 2025 and on the market and so the frothy fourth, yeah, what? The frothy fourth? The frothy fourth, right? And so let me uh, let me start and turn it over to Steve, and Steve, you know, what are your thoughts about the fourth quarter?
Steve Davenport:Clem, I know this has been repeated or heard before, but I'll say that it feels like the market is discounting a future that is too positive and therefore I think that the fourth period will start to see some consolidation, as we see that the forecast for some of these AI growth numbers have to come back to reality. I see companies complaining that they're not getting the benefits they thought. I see companies talking about this race. That really isn't about helping companies and helping individuals. It's more about who has the best server farms and who has the most NVIDIA chips.
Steve Davenport:It feels like this market is frothy, and when I say frothy, I mean that companies who normally would get a market multiple, like a Pfizer and a Merck, are selling for seven to nine times earnings, and companies with any mention of AI are trading at 30 to 50 times earnings. And since we know that those extra normal growth can go on for a while and it has we've seen extraordinary growth in these names super normal growth and the question is do trees grow to the sky? We've seen extraordinary growth in these names supernormal growth and the question is do trees grow to the sky? Can it continue forever or will we have to see some type of a slowdown and contraction in multiples to get back to more normal levels Is now the time to take some profits.
Clem Miller:Steve, what's your solution? If you think that the AI-related stocks are too highly priced, too highly valued right now, where are you putting your money?
Steve Davenport:Well, I was just saying healthcare at seven to nine times discounting the growth rate of single digits less one or 2%. I don't see that. So I think that what we're seeing is sectors of the economy that are more ordinary commodities energy, healthcare, staples those spaces are just being tossed aside for companies with more growth, more technology and more access to the new. You know, there was the internet. There was high-speed internet. Now we're talking about AI and we're giving all of these companies multiples that are priced to perfection. I don't think perfection is the outcome. So, therefore, I think there's going to be some stumbling, and now would be a good time to take some chips off the table. I'm not saying to get out of them completely. I'm not saying they're not good companies. I'm just saying they're trading at levels that you need to take advantage of. Look at Oracle, up 35% today.
Steve Davenport:Is that a normal return for a day Clem.
Clem Miller:Or is that an?
Steve Davenport:abnormal return.
Clem Miller:Well, it's predicting the future of cloud services, no question.
Steve Davenport:Okay Is all the analysts estimates in the past, prior to today, didn't have any growth in cloud.
Clem Miller:Of course they had growth in cloud. Yeah, apparently they weren't the whole company could go Apparently they weren't in one day.
Steve Davenport:Yeah, and it's not filled with just a little bit of over exuberance.
Clem Miller:Of course it has some over exuberance today it does. I would say today there's some over exuberance in Oracle, but clearly, you know, I mean obviously looking, you know, hindsight's 2020, but you know, the day before today, I mean yesterday or the day before, the market wasn't optimistic enough about Oracle, given the way the price jumped today. So, steve, let's think about this. Let me ask you do you think AI is overblown?
Steve Davenport:I think right now it has become overblown. I don't think AI's potential can really be realized. What we're talking about is constructing the chips so that the servers can start to process the AI calculations we anticipate we need. All of the secondary abilities of AI have to still be addressed in terms of how you develop it and how you implement it. So we're celebrating an accomplishment and we're probably 25% of the way in an accomplishment, and we're probably 25% of the way in. We're not near. You know it's going to be a mid-80s, 26, 27 event, and so we're taking all of this profit forward without having done the work to implement. So I don't see how much your earnings has been enhanced this quarter because of AI.
Clem Miller:Good question. I don't know, I don't know that anybody really knows. Is it 35%? Well, no, I mean that 35% is just one company, right?
Steve Davenport:But my question is how do you keep having this happen on a daily basis, where every analyst is off? And is it? Every analyst is off or the market is just supercharged to react to any of these names?
Clem Miller:Well, I would agree with you that the market right now is somewhat overvalued, and that's why I've got a decent chunk of both gold stay grounded in a portfolio that does have a lot of AI or AI adjacent type stocks in it.
Steve Davenport:I think that's smart, yeah, and I think that's a good idea, right. All I'm asking is if you know, just like when a name gets down and you say, gee, that's a pretty good value, and then it goes down further, is it? Is it still a good value or is it becoming a value trap? My question is on the upside, are these growth growth traps?
Clem Miller:right and so so. So, steve, let me raise another question for you. You know there's some concern about the overall economy and things seem to be a little shaky with employment numbers. You know, while we can still trust the employment numbers, they seem to be a little shaky and so, you know, there's some thought. Are we, you know, are we going to see a weakening? Are we going to see a recession? I know Jamie Dimon made a comment yesterday about that, his concern about that, and you know I would submit to you that you know, in a weakening economic environment, the stocks that do worse are the cyclical stocks, and the market would put a premium on the growth stocks because they provide for more sustainable growth in revenues and earnings than the cyclical stocks that are going to go down and up with whatever's happening with the economy and given that-.
Steve Davenport:It still comes down to GDP growth, right Colin? Why it still comes down to GDP growth, right Colin? It still comes down to GDP growth.
Clem Miller:Yeah, but GDP. But see, here's what I would say is I have, throughout my career, I've heard people make the mistake of thinking that growth stocks are tied to GDP. Growth are tied to GDP growth. Growth stocks are a way of protecting you from GDP movements up and down. Right.
Steve Davenport:They're a way of protecting you. I think we're talking about different levels of participation Because if I was to say to you, clint, tell me, you know, in the three big boxes up top core, growth and value where is your portfolio on that continuum? Is it 35% growth, 30% core and 30% value? I would say In the equities, not including your gold and cash.
Clem Miller:Yeah, yeah, yeah. So I would say it's 50% growth and 40% core 10% value.
Steve Davenport:Okay, so there's a bias to one side and all I'm saying, oh yeah.
Clem Miller:No, there's a bias to one side and the bias to the one side what it does is see I, you know, I know you think in terms of growth, value and core. I think less along those lines. With time, I'm thinking.
Steve Davenport:You also have to. You also have to look at this in terms of how soon do you think you're going to use it. What do you think the overall importance is to you? Have you hit the level that you know? You know if you're, if you have the freedom to look at things and say I'm well, I'm well positioned. You could say I'm going to immunize myself against the future and put more assets aside so that I can sleep better at night or I can have more comfort that I've satisfied my retirement goals, my retirement goals, and so all I'm saying is not everybody is in the same position regarding I feel comfortable with this growth because I know that. You know what I mean. I have enough in other assets to manage. You know my needs.
Steve Davenport:Other people say I'm behind and I need to have more in growth because I want to catch up, because I didn't do a good job saving into my retirement. Other people will say I'm 25 years old and I want to be more heavily in growth. All I'm trying to say is if you've looked at yourself and you've gotten a little imbalanced and you typically like to be 40, 40-20 instead of 50-30-20, then think about it. All I'm saying is I feel like if it looks like froth and it feels like froth, it might be froth. If it walks like a duck and quacks like a duck, it feels like an 08 time, it feels like an 01 time. Things are just out of control in one particular area and it just makes me uncomfortable.
Clem Miller:You know, in my portfolio, you know my screening criteria are aimed at basically trying to remove froth. Ok, so first of all I I try to control my overall forward peg. So I would say the median forward peg for one of my stocks is about 1.5 right now times. I don't think that's a very high forward peg, to be honest with you. I got some that are higher. I got some that are lower. Correct Clem.
Steve Davenport:I'm not criticizing your portfolio. You asked me Right. Well, no, no, no. I read the other way, I do your portfolio.
Clem Miller:You asked me Well, no, no, no, the reason I'm bringing up forward peg is when you said that certain folks are going to want to have a greater percentage of growthy stocks. I just want everybody to know who might be listening to this, that when I talk about growth stocks, I'm still talking about stocks that aren't like wildly crazy overvalued, right? I mean, when I think of wildly crazy overvalued, I think of a peg ratio of, you know, above three right or 3.5 or even higher. I mean I remember seeing you know, taking a look at Palantir, which I do not own, right, and Palantir's got a forward peg of like seven, six or seven. That's crazy, right, a forward peg of six or seven.
Steve Davenport:Well, yeah, you had some quantum stocks that you-.
Clem Miller:Yeah, I got rid of that. I got rid of that a long time ago, right, I know?
Steve Davenport:but all I'm saying is Cle's a. There's a desire to be on the edge. We all want to be on the cutting edge right you want to have below at market risk I mean oracle is not on the cutting edge. A risk is that's why I'm shocked. But it's up 35 percent. I mean, can you at least feel a little shock, or do you just feel?
Clem Miller:joy. I'm not shocked, you're not shocked. It's up 35%. Well, I'm shocked at any stock. Well, wait a minute.
Steve Davenport:There is new information. Clown the information. How much of that future information is real? How much is real orders?
Clem Miller:Well, it's as real as any other future information right.
Steve Davenport:Yes, and that's why you should say 35% up based on that information.
Clem Miller:They're talking about hundreds of percent growth in cloud computing. That's like a massive new reality about how this world is going to work in the future in terms of AI. And you know I mean you have healthcare and you know healthcare is also going to benefit eventually, I agree, from AI right, they're going to be using it for drug discovery and for other things. That's going to help healthcare, but at the same time, it's also going to help cloud computing, right, and AI right. It's going to help the AI companies. There's going to be some sharing of benefits, I think, between healthcare and the AI companies right, and the AI companies right.
Clem Miller:You know, I think that it's still very smart to hold significant shareholdings in AI and AI adjacent stocks. I think that you can control your risk by not going too high on forward peg. I think you can also control your risk by not going too high on short interest right, because short interest is an indicator of risk and I think that a portfolio can look misleading in terms of returns on an up day or on a down day by having a beta, a portfolio beta that's too high. So I certainly would not want portfolio beta to be significantly higher than one, right?
Steve Davenport:um, it depends on what you're comfortable with, clem. I mean, I I can see why people who are younger could have one. Well, but it's it's. It's really in my mind. I'm just trying to call out for that, that old idea of balance, and it's an old idea and I know it's not. You know it's not cutting edge to think about balance when you want to put everything into the future. If we want to put everything into the future, look at Tesla's pay package A trillion dollars if it hits goals of a million robots, a million auto taxis and 10 million vehicles.
Clem Miller:Yeah, well, you know, if you run tesla through my criteria, it fails no, and all I'm saying, clint, is that there are.
Steve Davenport:There are other names besides the names that you own right, like palantir, like the, the quantum computing, like some of the names like we're talking about, tesla that, in my mind, are trading at ridiculous levels.
Clem Miller:Well, I look, I think we're in agreement there. I think we're in agreement there.
Steve Davenport:I'm just saying that you don't want to sell any of your names because you do a better job of understanding risk.
Clem Miller:I think, with my criteria, I feel very comfortable and can sleep, like I say, sleep well at night by being able to control beta risk, peg risk and short interest risk. I think that allows me to sleep well, even with stocks that are showing significant returns. Now, granted, when you have an oracle that's up 35% in a day, obviously you think to yourself, well, should I trim it? And I probably will, you know, I probably will. You know, we're broad, we're doing this podcast at nine 30, so I can't trim it at nine 35. Right, but maybe, maybe I trim it later today, right, so we'll see, we'll see. I mean, I think it's, I think it's, it's, it's. It would be smart to trim it later in the day, because how much further can Oracle, as that individual stock, still run? I think is a legitimate question, correct? But the other ones that are being pulled up by Oracle, that may be up 2%, 3%. I'm not going to trim those.
Steve Davenport:No, all I'm saying is it's an abnormal response in the market, I can tell you, with a statistical anomaly. It's one of those 100-year floods and I don't know how many 100-year floods we can have in a 20-year period, but it feels like when we see one we should say, hey, that looks like an unusual number and statistically I know it is.
Clem Miller:so therefore, do I take that input and I own the name and do something about right, but you don't need to do something when you you when, when one reads about you know this being an anomalous valuation for the overall market, you're still talking about the overall market and you're not talking about individual stocks within that market. And if you're a stock picker and have a discipline that you stick with in that market, then you know, you know it's certainly you know. I mean, what kind of conclusion should you reach? If you look at the overall valuation for the S&P 500 and you see that it's abnormally high against history, what conclusion should you reach? That you buy bonds, right, I mean-.
Steve Davenport:I think you can make a few conclusions. One we're probably in a market that's dominated more by technology than it was in the past, so the past comparison might not be as valid. I will give you that the markets change and therefore our estimates of what's normal should change. I give you all of that. I just believe that you've mentioned three or four names that you said you would never own, and they're general. Hey, pick your head up. I know you've got to go to work today, but look around and see if maybe some of the names that you have that are riskier have gone up an abnormal amount and you never go bankrupt taking a profit.
Clem Miller:So, steve, on the S&P 500, we've seen it rise a lot this year, hit numerous all-time highs, right. So what do you expect? I mean, by the end of the year, what do you expect? Do you expect the S&P to be down about the same or up significantly?
Steve Davenport:I think it's going to correct by into the end of the year. So I think the forward statements coming out for the third quarter ending September 30, I think are going to be slightly negative and I think they're going to be more realistic and I think people are going to adjust some of their targets and I think that's going to cause a ripple effect. I also believe next week the Fed will disappoint. I think instead of saying 50 basis points, which a lot of people are talking about now, they'll say we're going to cut 25 and then we're going to wait and see. And that wait and see comment will be viewed by the market as not as receptive as they thought it was going to be, and I think it's going to surprise markets and it's going to cause people to rein in their risk tolerance. And so I mean I see, on days like yesterday where there's one rumor about something in this space and the names come down, three or 4%, like it's nothing, and I just find that to be concerning because that tells me there's more fast money than there is slower, more cautious money.
Steve Davenport:And I think that, you know, when we look at the options activity which is something I haven't really focused on. But options activity is setting records. It's setting records in space with one-day, two-day options and I sit there and I go. This is just people basing it on speculation. This isn't real. Hey, I know tomorrow it's going to be higher than today, so I'm all in, I'm going to buy a call option.
Clem Miller:So, steve, when you say correction, you mean like the literal definition of correction. I mean, do you see, over 10%.
Steve Davenport:Yeah, I think it's going to be over 10%. So I would say that I think we're going to end the year somewhere around 5,800 on the S&P. So I don't have a crystal ball to say that this is a serious. You know, we've got something in the market like real estate in 2008 or in like technology in 2000. I'm just saying that I think we have a market that has done too much. I mean, we were down 18% in April and it all came back in 30 days, right? So is that normal Clinton?
Clem Miller:Well, I would say that the April development was policy induced. It was the announcement of the tariffs and then the pullback shortly thereafter in the tariffs, and so I think what that you know, the lesson I take from that is that at any point, the Trump administration could do something that could trigger a correction, a market correction, a correction, a market correction.
Steve Davenport:My point is, glenn, that if you look at it historically, 18% moves in 10 days and then a bouncing up of 24 or 5 that you needed to get back even in 30 days are both abnormal, correct. So therefore I say, if the market is in, a position that has already shown you right something, do you ignore it and say I think everything's great, there's no order? You say, hey, it's telling you they're telling you something.
Clem Miller:Look what happened earlier this year in terms of the correction and the recovery very quickly was all related, can all be traced to one policy development right, the tariffs and the pullback. I think that it was. I think nobody had on their game card, so to speak, the expectation that the proposed tariffs would be so freaking high. Okay, nobody expected that proposed tariffs would be so freaking high. Okay, nobody expected that.
Steve Davenport:And and and that had a very significant impact, uh, on market expectations. But, Clint, let's just take a step by. When we look at the amount of stuff we import and when we look at its overall impact, even if we took the 100% worst cases, it didn't justify what happened to some of those names. They couldn't be impacted as quickly as they were pricing in right.
Clem Miller:Well, like you say, the market is pricing in the future, right, right?
Steve Davenport:And is it a good mechanism or is it a bad mechanism is my question. And I'd say right now it's an over, it's, it's overreacting on both the down and upside. And to the information that if you really discounted it more properly, you would probably say that should have been a 5% and 7% move, not an 18% move. And that's my point is that the moves are magnified. So if you're comfortable with magnified moves because they go on the positive side, then go ahead, roll the dice.
Clem Miller:Guess what? That's why I've got a lot of gold, because gold… I know I'm not criticizing you Clem.
Steve Davenport:It doesn't always have to be about Clem. I use you as an example sometimes, but my comment is more general, to everyone and not just to you, Clem. So it's really about in my mind you know, hey, if 35% of the one one did it, I was thinking of taking some of off. You know what I mean. This is a gift. You can either take it or you can ignore it. But just realize that if something were to happen and there were to be another pullback of 20 percent right, this price.
Clem Miller:I mean I think, look, I think, if, uh, I think with the oracle, I think, taking that entirely off the table, you know I wouldn't object to that, right. I mean that's a lot of uh, that's a lot of uh of money in one day that you can uh, you know that you can pull off the table and put into more gold.
Steve Davenport:Right, I'm not even saying you have to go all out. I'm saying there are good names like a Merck and a Pfizer selling at seven to nine, that I don't think are franchises that I would say belong on the scrap heap, should? Should some things belong on the scrap heap? Should some things be on the scrap heap? Yes, are those two names the examples? I don't think so. Pfizer could possibly have an oral version of this, you know obesity drug.
Clem Miller:Yeah, Let me ask you about another name UnitedHealthcare. Where do you stand on that one, Steve?
Steve Davenport:UnitedHealthcare. Where do you stand on that one, steve? I can't get behind it. I mean, I just I find that their lawsuit and their government, I don't think it's over for them. I think that when we look at this in the future, I think we will say this really brought the idea of companies operating efficiently and effectively for their patients and for their shareholders. This is a bias towards the shareholders and I think that there's still some reckoning to come in that stock, so I'm out of it.
Steve Davenport:But, how do you feel about it? Well, I think it's terrible and I think it's a great example of why just investing in cheap stocks is not the way to go. Yeah, I mean, I think when something gets beaten up, you've got to ask is the rationale, is it fundamental? How much could it affect earnings? I think you have to ask some tough questions and if the answers are, I don't know, I think it could be worse then I think you gotta you gotta hesitate and to jump back in.
Steve Davenport:If everything were cleared up and they paid fines and they they rectified and they put things in place so it wouldn't happen again, I'd be in a different position. But I don't think we're halfway there yet. So I guess I mean, we came into this wanting to talk about the fourth quarter and I've given you my estimates of what might happen in the fourth quarter. I'm calling for a 10% or so correction and I think it's wise for people to take some of the hotter areas and I would say that Bitcoin is one of them. I mean, Bitcoin here to me is still on's rein in risk and keep, keep some funds aside for a time when things could get more economical and be better values.
Clem Miller:Well, I'm kind of. I think there's a 50% chance that the market will be about the same and a 50% chance that we'll be down. You know, maybe 10%, right, 5% to 10%, maybe a little more, so that's where I am.
Steve Davenport:You're giving me a hard time for it.
Clem Miller:Right, you basically agree with me, but you argue about every point. No, but I'm arguing about what to do about it and that's why having some cash, having some gold, being careful about stocks that have high short interest, high beta, high forward peg I think if you control those things and still stay in stocks that have shown some decent returns recently, I think you're going to be in good shape and um, and when you follow those rules, you know you're not going to be in the cyclical stocks that are going to be hit the worst by an economic recession, right? So I feel pretty comfortable that that in my portfolio I'm, um, I'm insulated to a good degree against the cyclical downturn that you would see from an economic recession. I feel pretty good about that.
Steve Davenport:Okay and that's what I think we want to try to say to investors is that every time you start to feel your gut is telling you something, you don't need to listen and act, but you should just open up your eyes and say do I feel like there's the short-term loan I got for the construction? Should I take some off today and use that to pay off some of that loan versus paying interest rate of 6%? I think I probably should. I agree with you and therefore you know, is my action going to be the action for everyone? Absolutely not. What Clem and I try to do is to debate these things to show you that there are points and counterpoints and we're not always going to be on the right side, but we know that by being skeptical and looking at it, we can eventually create more and more situations where we succeed and we have less regret and we have a better ability to sleep with the holdings that we have. You got anything else fun?
Clem Miller:no, I think that's about it. I think, uh, I think we've, you know, communicated our views about the fourth quarter, and I, what do you?
Steve Davenport:think about rate cuts. What's your judge? I think we have 25 in September and 25 in December, and then we have another 50 and in 26.
Clem Miller:I'm not going to speculate about 2026. I think that depends on whether we're actually in a recession or not. I think, I think, give me your 25 numbers. I think 25 and 25, 25, september 25, a little later this year. So that's what I think, I think. I think that I think, if I think, if Trump manages to take firm control over the fed, manages to take firm control over the Fed, we might see something a little different and a little more dangerous actually.
Steve Davenport:I think that's the 26th event, though, right.
Clem Miller:Most likely. Yeah, I guess so yeah.
Steve Davenport:All right, skeptics, thanks for listening. Please share the podcast with others and let them know um, we appreciate you listening and, uh, we look forward to our next opportunity to talk. Um, our next podcast is going to be about us government buying states and companies. Is the trump administration in a position to evaluate where America should be putting its money? Thank, you everyone and we enjoyed your listening.
