Our cautious outlook for the third quarter was met with continued record highs for the stock indices. The tariffs have not been as onerous as investors had feared, mostly because, so far, companies have not passed on their higher costs to consumers. The Federal Reserve has begun lowering interest rates due to a weakening labor market and in the past, that has been a tailwind for stock prices. Corporate profits remain healthy as well.
Nevertheless, stocks are at levels above fair value historically. The current price to earnings level of the market is about 22, compared to about 18 for the last ten years. Therefore, given what we know now, or don’t know, we expect market volatility to continue, with a 5-10% “correction” (sell-off) likely at any time from recent DJIA levels of 46,750 and S & P 500 6,716. Therefore, we suggest most portfolios hold at least 10% in cash (money-markets).
Despite the lofty stock price levels, we have found some interesting opportunities.
There is increased merger activity in the banking industry. A small bank in the Washington, D.C. area – Eagle Bank (EGBN, $20.75) may be a target. It trades a bit more than 50% of book (break-up) value and yields 3.15%. The solar stocks have been rallying, despite Trump’s aversion to renewable energy. Canadian Solar (CSIQ, $15) produces and installs solar panels, utility scale solar systems, and battery storage. Forty-six percent of its business is in the U.S., with the rest scattered around the world. It trades for less than half of its stated book value. Income seeking investors may like Neos S & P 500 High Income ETF (SPYI, $52). It yields 11.7% and pays its dividend monthly. The fund buys blue chip stocks, sells covered call options on them – a conservative strategy – and passes on the extra income to shareholders.
Prices and yields as of October 3, 2025. The above information is believed to be reliable but is not guaranteed to be accurate. Investors should check every investment for suitability for his or her needs. Stock investing is risky, and you could lose money. The author and/or his clients maintain positions in all the above-mentioned securities. First Georgetown Securities, Inc. will provide available information supporting the above recommendations on request.