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Morro the Same

July 1, 2024

By Mark Oelschlager, CFA

In 1539, 30 years after San Juan was founded, the Spanish began building defenses of its harbor on the northern shore of Puerto Rico.  Construction continued for another 250 years.  Now that’s a long time-horizon!  The mammoth fort known as Castillo San Felipe del Morro (or “El Morro”) is still standing and has six levels, covers 70 acres, stands 140 feet tall, and boasts walls that are 20 feet thick.  It was used to defend the island from the 1500s through 1961, when it became a national park.


The fortress that is the US economy continues to withstand attacks from everywhere.  Historically-rapid interest rate hikes, ballooning national debt, a burgeoning commercial real estate crisis, a rising cost of living, and deteriorating relations with major trade partner China have all been thwarted, at least so far.


The S&P 500 rose in the second quarter, taking the index to another record high.  But that belies how the average stock is doing.  The major indexes are being driven by a small group of very large companies (with large weights in those indexes) whose market values are reaching unprecedented heights.


It wasn’t that long ago that a $1 trillion market capitalization for a single company was out of reach, with Apple becoming the first to surpass that mark in 2018.  Today, Apple, Microsoft, and Nvidia are worth more than $3 trillion each!  Some of this is justified, as they are poised to benefit from technological trends, including artificial intelligence (AI), and they operate very profitable businesses.  But a lot of good news is being priced in, and the companies will have to demonstrate outsized growth in the coming quarters in order to keep their stocks up.


Apple has a tremendous franchise with a nice moat, but it hasn’t grown revenue over the past couple years and its P/E is north of 30.  Microsoft has a fast-growing cloud business and is quite profitable, but its free cash flow yield is 2%, meaning that if you bought the entire company, you would, at present, reap $2 annually (without accounting for growth) for every $100 you invested.


Nvidia has a free cash flow yield of about 1.3%.  The purveyor of graphics and AI chips has been growing sales and free cash flow at an incredible pace, which must continue for many quarters in order for the stock price to stay afloat.  One of the most remarkable facets of Nvidia is its profit margin.  Over the last four quarters the company had sales of roughly $80 billion.  After it paid its employees, paid for its materials and all its other costs, and allocated a healthy sum to capital expenditures, it had about $40 billion left over.  That’s a 50% free cash flow margin.  For perspective, 20% is considered highly enviable.  A big reason Nvidia is able to generate margins like this is that it is the clear leader in its field, which allows it to charge an exorbitant amount for its semiconductors.  But other companies are working hard to chip away at its castle.  So the question with Nvidia is twofold: how sustainable is the demand for AI chips and how long can it keep the competition at bay?


If you like statistics, the rest of this commentary is for you.


As mentioned earlier, the average stock has been faring far worse than the major indices.  While the S&P 500 returned 4% in the quarter, the equal-weight S&P 500 returned -3%.  For 2024 so far, the former is +15% while the latter is +5%.  Smaller stocks are being left in the dust as well.  Since the end of 2022, the S&P 500 has returned 46%, with the small-cap Russell 2000 at 19%.  This is reminiscent of the late 1990s, when, for the two years starting Jan 1, 1998, the S&P 500 posted a return of 56%, while small stocks returned 18%.  Like now, the S&P 500 in the late 1990s was being powered to a significant degree by a few large stocks.  What happened after that?  For 2000 and 2001, the S&P 500 fell 20% while the Russell 2000 was flat.  In 2002 the S&P 500 fell another 22%, with the Russell 2000 performing similarly.  We don’t know if it will play out the same way this time, but the similarities between the two eras are interesting.


Currently the S&P 500’s P/E ratio is about 30% higher than that of the S&P 500 equal weight index – the largest such premium for data going back to 2010.


As of a week ago, while the S&P 500 was sitting on a gain of about 15% year-to-date, 56% of stocks in the Russell 3000 (essentially the largest 3000 stocks) were down for 2024.  According to market strategist Francois Trahan, through the end of May, almost 2/3 of S&P 500 stocks were underperforming the index – something seen only last year and in the late 1990s.


Here is another statistic illustrating the lack of breadth in the market.  Warning: it might make your head hurt.  According to Jason Goepfert, over the last 30 years, the Nasdaq composite closed at a 3-year high seven days in a row 10 different times.  In each instance, and for all days within those instances (in other words, all 70 days) there were more new highs among individual stocks than new lows.  In mid-June, the Nasdaq once again closed at a 3-year high seven days in a row – the 11th such instance in the last 30 years.  But this time, on only one of those days did the number of new highs exceed that of new lows.


Other data points are cause for concern.  The S&P 500 market capitalization as a percentage of GDP is 169%, just shy of the all-time high of 170% in late 2021.  The 2000 peak was about 120%.  Cypress Capital tells us that this year the average household equity allocation reached 50%, matching the December 2021 level and approaching the peaks of the 2000 tech bubble and the 1960s.  Also, net exposure to leveraged ETFs is close to an all-time high.


In such an environment, maybe it isn’t surprising that the meme stocks have staged a resurgence.  Three years ago, a handful of companies with questionable business futures saw their stock prices skyrocket, as a band of amateur buy-happy traders overwhelmed fundamentals, at least for a time.  The leader of this movement was Keith Gill, a.k.a. Roaring Kitty, who amassed a large online following.  Mr. Gill resurfaced in May, driving a 179% two-day rally in GameStop shares.  AMC Entertainment rallied as well.


While all this is going on, Federal Reserve Chair Jerome Powell contends that monetary policy is restrictive.  The famous Groucho Marx line comes to mind: “Are you going to believe me or your own eyes?”  According to the Bloomberg Financial Conditions index, current financial conditions are easier than 97% of episodes over the past 34 years.


Over the last 12 years, the S&P 500 has notched 371 all-time highs, the most in any 12-year period ever.  Accommodative monetary policy, fiscal stimulus, and ascending corporate profit margins have provided a strong tailwind for equities.  As markets move inexorably higher, it is easy to be lulled into a false sense of security, but it is important to remember that conditions will not always be this favorable.  Things do change.  Stocks will go through periods in which they offer not just disappointing returns but steep losses.  We don’t know when that time is coming, but we can say with a high degree of confidence that returns over the next 12 years will not be as strong as they were over the last 12.  This is not to scare people, or to suggest that they should sell their shares, but to remind investors about the inherently risky nature of stocks.  And we think such a reminder is more valuable when issued while the US economic fortress appears impenetrable (market, valuations, and confidence at high levels) than when the opposite is the case.

Mark Oelschlager, CFA  

Oelschlager Investments 

Total Return as of 6/30/24

Towpath Focus Fund

Russell 3000® Index

S&P 500® Index


Fund returns are net of fees.

Gross Expense Ratio: 1.03%Net Expense Ratio: 1.12% (Contractual until 3/31/2025)

Q2 2024





Since 12/31/19 Inception








Since 12/31/19 Inception*




Total Return as of 6/30/24

Towpath Technology Fund

Morningstar Tech Category 


Fund returns are net of fees.

Gross Expense Ratio: 2.44%, Net Expense Ratio: 1.12% (Contractual until 3/31/2025)

Q2 2024




Since 12/31/20 Inception






Since 12/31/20 Inception*




The performance data quoted represents past performance. Past performance does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please call Shareholder Services at 1-877-593-8637 to obtain performance data current to the most recent month-end.

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The statements and opinions expressed are those of the author and do not represent the opinions of Towpath Funds or Ultimus Fund Distributors, LLC. All information is historical and not indicative of future results and is subject to change. Readers should not assume that an investment in the securities mentioned was profitable or would be profitable in the future. This information is not a recommendation to buy or sell. 


This manager commentary represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice. 


The Russell 3000 Index is a market-capitalization weighted index measuring the performance of the 3,000 largest U.S. companies based on total market capitalization. The S&P 500 Index is a commonly recognized market capitalization weighted index of 500 widely held equity securities, designed to measure broad U.S. equity performance. The Morningstar US Technology index measures the performance of companies engaged in design, development, and support of computer operating systems and applications, manufacturing of computer equipment, data storage products, networking products, semiconductors, and components. Unlike mutual funds, an index does not incur expenses. If expenses were deducted, the actual returns of an index would be lower. You cannot invest directly in an index.


Click here to view ​Towpath Focus Fund Top 10 Holdings as of the most recent quarter-end.  Click here to view Towpath Technology Fund Top 10 Holdings as of the most recent quarter-end. Current and future portfolio holdings subject to change. 

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Towpath Funds are distributed by Ultimus Funds Distributors, LLC (Member FINRA). Ultimus Fund Distributors, LLC and Towpath Funds are separate and unaffiliated. ​

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