Benedict Evans

The Resilience of Growth and the Valuation Paradigm True wealth management requires looking beyond the surface of index levels to understand the underlying mechanics of profitability. For years, skeptics have pointed to elevated price-to-earnings ratios as a harbinger of doom, yet the market continues to defy these simplified historical anchors. The primary reason lies in the fundamental transformation of corporate efficiency. When we examine the relationship between forward P/E and profit margins, a clear trend emerges: as companies become more profitable, the market naturally assigns them higher valuations. Since 2005, profit margins have trended steadily upward, driven by technological integration and the dominance of capital-light business models. We are entering an era where Nvidia and other Mag 7 leaders demonstrate that 20% consistent growth at a massive scale is not just possible but sustainable. Revenue per worker has reached record highs after stalling for nearly fifteen years, jumping significantly since 2022. This structural shift suggests that stocks may be worth more today than they were in previous decades because they are fundamentally more efficient engines of cash flow. Prudence dictates that we respect these margins rather than waiting for a return to a "normal" that no longer exists. Diversification and the International Resurgence For nearly a decade, the standard advice to diversify internationally felt like a tax on performance. However, recent market behavior has validated the necessity of a global footprint. Last year, the EAFE index outperformed the S&P 500 by approximately 14%, marking the most significant outperformance for international stocks since 1993. This shift occurred despite the overwhelming cultural and financial focus on the artificial intelligence boom in the United States. What drove this change? It wasn't merely a weakening dollar. Local markets outperformed in their own currencies based on fundamental valuation gaps and earnings resilience. European banks, often dismissed as stagnant, have actually outperformed the NASDAQ 100 over the last five years on a relative basis. This serves as a vital reminder for the long-term investor: dispersion is the friend of the disciplined. While the U.S. remains the epicenter of innovation, ignoring the rest of the world risks missing the re-rating of undervalued assets that have finally found their footing. Navigating the Artificial Intelligence Inflection Point Artificial Intelligence is neither a total savior nor a fleeting bubble; it is a complex tool currently experiencing significant growing pains. One of the most pressing issues for strategic planners is the high rate of "hallucinations" in large language models. Research indicates that models like ChatGPT can have incorrect response rates as high as 45% for certain factual queries. For financial professionals, relying on a system that is essentially a coin toss for accuracy is a risk that cannot be ignored. Furthermore, the narrative that AI will immediately lead to mass unemployment lacks nuance. While the New York Times and other outlets highlight tragic stories of individual displacement, broader data from Benedict Evans suggests that tech layoffs have actually trended downward since the initial post-launch spike. Most layoffs were driven by macroeconomic forces and post-pandemic normalization rather than algorithmic replacement. The true long-term impact of AI will likely be the creation of new, unforeseen industries—much like Uber and DoorDash emerged from the mobile revolution. The challenge is managing the difficult transition for those in the middle of the shift while maintaining a focus on the productivity gains that will drive the next decade of growth. The Realities of the Frozen Housing Market Residential real estate remains one of the most distorted sectors of the economy. The "lock-in effect" is real: current homeowners with 3% mortgages are effectively incentivized never to sell, as a move would require doubling their interest expense. This has left the market in a state of suspended animation. While some advocate for government intervention, such as buying down mortgage rates for five-year teaser periods to stimulate activity, the market is currently seeking its own equilibrium. Interestingly, we are seeing a migration toward the Midwest as affordability becomes the primary driver of domestic movement. This isn't just about lower prices; Wall Street Journal data shows that after-tax wage and salary growth in the Midwest is competitive with coastal regions. For many, the ability to build equity in a stable, affordable market outweighs the prestige of high-cost urban centers. As financial advisors, we must emphasize that housing is a consumption good first and an investment second; buying at the top of one's budget in a frozen market is a recipe for long-term stress rather than wealth. Lessons from Global Brands: The Case of Disney Disney serves as a profound example of why a great brand doesn't always translate into a great stock. Despite its cultural dominance and the incredible profitability of its theme parks, the stock has underperformed the S&P 500 on nearly every time frame over the last thirty years. The core issue is scalability. While the physical parks are "gold mines" that can see a million visitors a day, they do not scale with the infinite margins of a software company. Disney's pivot to Disney Plus was an attempt to capture that digital scale, but it has acted as an anchor on earnings. The company's earnings per share have remained largely stagnant for a decade. This illustrates a critical principle of wealth management: iconic status and consumer love are not substitutes for capital efficiency. Investors must distinguish between the "magic" of the consumer experience and the cold reality of the balance sheet. Prudent growth requires investing in companies that can translate brand equity into consistent, scalable bottom-line results. Conclusion The financial future belongs to those who can filter the noise of viral social media negativity—such as the misinformation regarding chain restaurant closures—and focus on the resilient data of consumer spending and corporate efficiency. Whether it is navigating the risks of a 20% correction in AI names or understanding the implications of a proposed "Billionaire Tax" in California, the goal remains the same: thoughtful cultivation of assets. Stay disciplined, stay diversified, and always look under the hood of the narratives you are sold.