Good (yet somewhat confusing) news!

Last Friday, the Trump administration announced exclusions for smartphones, computers, semiconductors, and other electronics from President Donald Trump’s “reciprocal” tariff list.

However, in a post on Truth Social on Sunday, President Trump confused everyone, writing “There was no Tariff ‘exception’ announced on Friday.”

Yet Yahoo! Finance reports:

The fact remains that Trump has offered at least a temporary boost to companies with close links to China, and investors are responding by sending stocks of directly impacted companies like Apple and Dell (DELL) higher on Monday morning.

To clarify, these companies are still subject to the 20% fentanyl-related tariff, plus whatever tariffs were in place under the first Trump administration and the Biden administration. But it appears they’re avoiding the brunt of the all-in 145% tariff in place.

This might not last…

Yesterday, Commerce Secretary Howard Lutnick said that many tech products will face separate tariffs in a month or two. And Trump chimed in, saying that tariffs on tech products will still exist but simply be moved to a different “bucket.”

So, we’ll see how this shakes out. But for the moment, Wall Street is happy(ish). As I write Monday, all three major indexes are up – though they were up far bigger earlier in the session. Given how volatile stocks are these days, who knows where they’ll be by the time you read this.

One note before we move on…

Last Thursday’s Digest included a deep dive into what may be Trump’s real motivation in this trade war – quick, vast reshoring as a matter of national security because the U.S. is dangerously dependent on other countries, mostly China.

With that context, here’s Trump from Friday:

We are taking a look at Semiconductors and the WHOLE ELECTRONICS SUPPLY CHAIN in the upcoming National Security Tariff Investigations.

What has been exposed is that we need to make products in the United States, and that we will not be held hostage by other Countries, especially hostile trading Nations like China, which will do everything within its power to disrespect the American People.

We’ll continue updating you on this story. It’s going to be a massive influence on the market and your portfolio.

It’s time to consider diversifying into foreign stocks

For why, let’s go straight to our macro investing expert, Eric Fry:

Many overseas stock markets will begin to outperform our own. And that’s not just a geopolitical factor; it’s also a valuation one.

We have valuation extremes in the U.S., relative to many foreign markets. In other words, the U.S. market has never been more richly priced relative to many foreign markets than it is today.

For smart investors, this valuation chasm can serve as a signal to look toward foreign stocks.

That is not to say great opportunities will not continue to exist in the U.S. stock market. But I believe we will start to see more opportunities popping up in the foreign markets.

Historical data supports Eric’s conclusion. To illustrate, let’s use the cyclically adjusted price-to-earnings ratio (CAPE).

This is a long-term measure of a market’s valuation. It’s your traditional P/E ratio, but it uses rolling 10-year average earnings to smooth out business cycle fluctuations.

The CAPE ratio isn’t a market-timing tool. But it does offer investors a helpful and remarkably accurate expectation of long-term forward returns.

This happens because markets tend to mean revert over time. So, a stock or index that has a high CAPE value today is more likely than not to see its value fall in the coming years.

As I write – even after the historic drawdown we’ve experienced in recent weeks – the U.S. market’s CAPE ratio sits at 33.15. As you can see below, this remains one of the highest readings in more than 150 years.

Of course, a high CAPE reading would be irrelevant if foreign stock valuations were equally expensive. But that’s not what we find.

For that data, we’ll turn to my friend and respected quant investor, Meb Faber of Cambria Investments.

Earlier this month, Meb updated the latest global CAPE ratios. With the U.S. reading at 33.15 as our context, here those are:

• Median CAPE Ratio: 16
• 25% cheapest: 11
• 25% most expensive: 25
• Average of Foreign Developed: 19
• Average of Foreign Emerging: 14

So, the U.S. is twice as expensive as the median reading, and about 230% as expensive as the average foreign emerging market.

Even compared to the average of the 25% most expensive, the U.S. is about 33% pricier.

Beyond CAPE, Meb provides three additional valuation metrics: Cyclically Adjusted Price to Dividends, Cyclically Adjusted Price to Cash Flow, and Cyclically Adjusted Price to Book.

The results?

Averaging all four valuation-metrics, the U.S. is tied with India for having the highest reading out of the nearly 50 foreign markets Meb tracks.

“Jeff, these cyclically adjusted valuation metrics are silly – the U.S. commands a higher valuation because, historically, it performs better and attracts more capital”

That’s what I used to belief, too.

But Meb’s 2016 study on the topic shows that over the long term, it’s not accurate:

Many pundits will list the myriad reasons why the U.S. deserves its lofty valuation, rule of law, GAAP earnings, stable government (ha!), etc., but a quick look at history casts doubt on the explanations…

First, if the U.S. is truly “special” it should always be special, right? Meaning, if the U.S. market is so fantastic that a higher valuation is always warranted, then historically, it should always have a higher valuation.

But that’s not what history tells us.

Below is a chart showing the

U.S.’s CAPE versus the world ex U.S. (i.e., foreign stocks). Going back to 1980, both have an average CAPE ratio of about 22. Let me repeat: the historical valuation premium has been ZERO.

Beyond that, the amount of time each spends being more expensive than the other is basically a coin flip.

And if we look at returns on the year, the U.S. market is badly trailing some global markets.

As you can see below, while the S&P is down more than 7% on the year, Japan (via EWJ, the iShares MSCI Japan ETF) is flat, while Europe (via FEZ, the SPDR Euro Stoxx 50 ETF) is up 12% and China (via FXI, the iShares China Large-Cap ETF) is up 13%.

So, what’s the action step in your portfolio?

If you want to go specific stocks, look for foreign companies that either have limited exposure to tariff wars or enough fundamental strength to weather the storm.

You’ll be looking for companies with strong cash flows that trade at reasonable valuations.

On Saturday, fellow Digest writer Luis Hernandez highlighted one of Eric’s latest picks that fits the bill – Canada Goose Holdings Inc. (GOOS). It’s a global performance luxury and lifestyle brand.

As to limited trade war exposure, here’s Eric:

Canada Goose exports its goods to the U.S. duty-free. Under the U.S-Mexico-Canada Agreement (USMCA) President Trump signed during his first term, the U.S. levies no tariffs on apparel and textile exports from Canada to the U.S.

On valuation, it trades at a P/E ratio of 15.2. That’s miles beneath the S&P’s current P/E of 26.7.

If you don’t have the time to research specific foreign stocks, you can buy entire foreign markets via an exchange-traded fund.

For example, to buy “Europe,” look at FEZ, the SPDR Euro STOXX 50 ETF.

Eric currently holds three “whole country ETFs” in his Investment Report portfolio that give subscribers exposure to a basket of the top stocks in those respective countries. For those specifics as a subscriber, click here.

If you’re a good stock picker, there’s less pressure to diversify into foreign markets

As Eric clarified after highlighting foreign markets, “That is not to say great opportunities will not continue to exist in the U.S. stock market.”

So, how do you find those great opportunities?

One answer is by letting data do the heavy lifting for you.

Past performance has predictive power. It doesn’t guarantee future success, but it can signal which stocks have a higher probability of outperformance.

With this in mind, let’s jump to Keith Kaplan, CEO of our corporate partner TradeSmith. They’re one of the most respected quant shops in the investment universe.

Here’s Keith:

Investing operates along the principle of “past performance has predictive power.”

You want to stock your portfolio with strong performers – companies poised for sustained growth. And just as importantly, you want to avoid the losers before they drag down your portfolio.

That’s what TradeSmith’s proprietary AI trading algorithm, dubbed “An-E” (short for Analytical Engine), is designed to do…

In 21 trading days or less.

In last Friday’s Digest, I provided a case study of one An-E prediction and how it played out

Let’s do another.

About a month ago, An-E signaled a trade on AAON Inc. (AAON). It gave the reading a “confidence gauge” of 62%, signaling An-E’s conviction level of its own projection.

To clarify, a 62% confidence level isn’t better than 50%, nor is it worse than 90%. A higher confidence level simply means that the algorithm anticipates a higher likelihood of a stock hitting the price it projected.

So, how’d it play out?

While the confidence reading on AAON’s projection wasn’t exceptionally high, it still hit nearly on target…

By its target date of April 3, 2025, the HVAC equipment maker’s stock reached $79.16. This was just 58 cents off its projection – and a gain of about 7%.

An-E works equally well in bearish conditions

In a recent essay, Keith provided a real-time illustration of An-E’s bear market accuracy, concluding:

An-E doesn’t need calm waters to find winners. And right now, An-E’s bearish forecasts are just as sharp…

This isn’t just about finding what to buy. It’s about knowing what to dodge – and when to get out before things go haywire.

This Wednesday at 8 p.m. ET, Keith is holding The AI Predictive Power Event. You’ll discover exactly how this tech works, and how it can guide you through today’s market volatility – whether “up” or “down.”

I’ll note that just for signing up, you’ll get five of An-E’s most bearish forecasts. These are stocks that the AI platform projects will drop hard in the coming weeks.

Whether you want to trade them or just make sure you don’t own them, those forecasts are yours for free.

Here’s Keith to wrap us up:

Whether you’re playing offense by targeting winners or defense by avoiding losers, An-E gives you the clarity you need when it matters most.

Click here to sign up for The AI Predictive Power Event now and get five of An-E’s most bearish forecasts now.

Have a good evening,

Jeff Remsburg