Market Overview: Volatility Returns as Credit Concerns Surface
Welcome back, investors! We’re seeing some interesting developments in the markets this week that deserve our attention. After a period of relative calm, volatility has returned to Wall Street with some concerning signals emerging from the credit markets.
The collapse of First Brands Group and Tricolor Holdings, combined with fraud-linked writedowns at Zions Bancorp and Western Alliance, has revived fears about hidden credit losses. This has stoked concerns that lending stress might be more pervasive than initially thought. Despite these worries, the broader market showed resilience with the Dow up over 130 points in morning trading and the S&P 500 ending the week 1.7% higher.
However, the regional banking sector continues to struggle, with the S&P Regional Banks Select Industry Index falling nearly 2% in its fourth consecutive week of losses. We’re also seeing a shift in investor sentiment, with more than $3 billion flowing out of high-yield bond funds and risk-on momentum trades like crypto losing steam.
One particularly concerning development comes from the auto sector, where delinquencies have increased by a staggering 51.5% over the past 15 years. With 1.6% of total auto loans now 60 days or more past due, this trend is outpacing delinquencies in credit cards and first mortgage loans. The average new car price has risen more than 25% since 2019, now topping $50,000, while interest rates on new car loans exceed 9%.
Stock Spotlight: Applying Value Investing Principles
Oracle’s AI Cloud Dilemma: Growth vs. Profitability
Oracle has been making headlines with its ambitious AI infrastructure investments, securing multibillion-dollar deals with clients including OpenAI, Meta Platforms, and Elon Musk’s xAI. However, investors are growing concerned about the company’s ability to supply the necessary data centers to meet growing demand, citing supply constraints in areas like land, buildings, energy, and GPUs.
Applying Benjamin Graham’s principles, we need to ask: Is Oracle trading at a price that provides a sufficient margin of safety? The company’s stock fell as much as 8.2% on Friday, reflecting investor concerns about profitability. While Oracle projects overall annual revenue to reach $225 billion by fiscal 2030, the disclosure that an infrastructure project generating $60 billion in revenue would have only a 35% gross margin raises questions about the quality of this growth.
From a Philip Fisher perspective, we’d examine Oracle’s functional excellence in production and financial skills. The company certainly has the scale and technical capability, but the margin pressure suggests competitive intensity. The key question becomes: Is Oracle’s current valuation justified by its ability to maintain superior profitability in the face of intense competition?
American Express: Premium Positioning in a Two-Tier Economy
American Express delivered record third-quarter results, with net income increasing 16% to $2.9 billion and earnings per share rising 19% to $4.14. The company’s success highlights a “two-tier” effect in the economy, with premium producers passing through price increases directly to their affluent consumers while lower-income consumers become more price-sensitive.
From a Peter Lynch perspective, American Express fits well into the “stalwart” category – large, entrenched companies with moderate growth that can be used for recession defense and modest gains. The company’s ability to attract younger affluent consumers (millennials and Gen Z now account for 36% of total card member spending) demonstrates successful adaptation to changing consumer preferences.
However, investors should remain cautious about the sustainability of this premium positioning, particularly if economic conditions deteriorate and even affluent consumers begin pulling back on discretionary spending.
AI Infrastructure Stocks: Bubble Concerns Surface
The AI infrastructure sector is showing signs of potential overheating. Nebius Group, a Russian technology conglomerate rebranded from Yandex, saw its second-quarter revenue jump 625% year over year to $105.1 million, driving its stock price up 390% since the start of 2025. However, the company trades at a tremendous premium over the S&P 500 average and has yet to turn a profit.
This reminds us of Peter Lynch’s warning about stocks selling at “absurd and illogical dimensions.” When a company’s valuation becomes disconnected from its current earnings and cash flow, the risk of significant price correction increases substantially.
Portfolio Strategy: Staying Disciplined in Uncertain Times
Given the current market environment, here are some actionable strategies based on our investment principles:
1. Maintain Your Margin of Safety
With credit concerns resurfacing and auto delinquencies rising, it’s more important than ever to focus on companies with strong balance sheets and sustainable business models. Avoid companies with excessive debt or those trading at valuations that require perfect execution of aggressive growth assumptions.
2. Diversify Across Quality Categories
Following Peter Lynch’s framework, ensure your portfolio includes a mix of stalwarts for defense and carefully selected fast growers for appreciation. Given the current economic uncertainties, consider increasing your allocation to companies with proven business models and consistent earnings.
3. Be Wary of Speculative Excess
The dramatic moves in AI infrastructure stocks and the concerns about “neo-cloud” profitability should serve as warning signs. Remember Benjamin Graham’s distinction between investment and speculation: an investment operation promises safety of principal and adequate return upon thorough analysis.
4. Focus on Cash Flow and Earnings Quality
In an environment where growth stories are being rewarded over profitability, maintain discipline by focusing on companies that generate strong, sustainable cash flows. As Philip Fisher emphasized, the true investor is essentially a business owner and should focus on underlying operating results.
5. Consider Defensive Rebalancing
If your stock allocation has increased significantly due to market gains, consider rebalancing back to your target allocation. Graham’s 50-50 rule between stocks and bonds provides a reliable all-purpose program that automatically forces you to sell high and buy low.
Remember, successful investing requires emotional self-control and the discipline to stick with sound principles even when market sentiment shifts. The current volatility creates both risks and opportunities – the key is to maintain your analytical framework and avoid being swayed by short-term market movements.