What to do when the stock market drops

Today’s issue in preview:

• What to do when the stock market drops

• Operation Epic Fury confirms this high-tech megatrend is poised to run higher

• The AI Lawnmower claims another victim: Office landlords reach new one-year lows.

What to do when the stock market drops

Credit: welcomia

So far, the benchmark S&P 500 does not like how the war is going.

Oil tanker access through the critical Strait of Hormuz is now restricted. Brent crude, the global oil benchmark, recently hit $85 per barrel. It’s the highest price since 2024. In response, the S&P 500 is down 2.3% mid-morning. Fifty S&P constituents are down 5% or more.

As you can see in the chart below, the “Iran selloff” has taken out recent S&P 500 lows in the 6,800 area. This is major damage to the short-term trend.

A rally can quickly fix short-term damage such as this. However, I’m treading lightly here.

I’d like to see the S&P climb back above the “line in the sand” that the 6,800 level represents before saying the broad market’s trend is healthy.

But keep in mind, that point of view is relevant to short-term trading… not so much long-term investing.

If you’re a relatively inactive long-term investor, none of this should be a concern or a point of focus. The key point is that the stock market has returned an average of 10% per year for decades. It has generated these returns despite wars, pandemics, bear markets, and financial panics.

Another valuable data point: Since 1928, the benchmark stock index has traded through two dozen bear markets. After each and every one of them, stocks went on to reach all-time highs. The track record here is perfect.

Despite something bad happening every decade, incredible wealth was created by innovative businesses like Coca-Cola, Ford Motor, Apple, Google, Hershey, Intel, Disney, General Electric, McDonald’s, Procter & Gamble, Wrigley, Tootsie Roll, Pfizer, Microsoft, Walmart, Starbucks, and thousands of others. It pays to ignore short-term crises and bet on free markets and innovation.

So, short-term: let’s see the S&P climb above 6,800 again.

Long term: Strait of Hormuz, who cares?

Operation Epic Fury confirms this high-tech megatrend is poised to run higher

Credit: NiseriN

As the media works 24/7 to cover “Operation Epic Fury,” reports of drones playing a major role in the attack are flying fast and furious. These reports are helping to make the Drone Theme one of the few areas of the stock market showing strength.

Regular Money & Megatrend readers should not be in the least surprised.

In late 2024, I urged colleagues to invest in drone stocks for one simple reason: After years of progress and innovation, military and surveillance drone makers can now produce large amounts of effective drones at low cost. Many drone applications now have very high “cost-to-damage inflicted” ratios. This is why drones have played a significant role in the Russia/Ukraine war.

The now pervasive use of drones in warfare means we are in what military experts call a “Revolution in Military Affairs.”

A Revolution in Military Affairs is a fundamental change in how wars are fought, typically driven by technological innovation. For example, the introduction of mechanized warfare in the form of tanks, battleships, and airplanes drastically changed the battlefield. Airplanes, in particular, introduced a whole new dimension to war.

I’m deeply anti-war and anti-surveillance, so a big part of me wants to see drones manufactured only for peaceful activities like delivering pizza and Amazon packages. However, I don’t make the rules. Governments around the world are buying drones by the thousands. Drones are playing a big role in Iran. Drone maker revenue is soaring. We have an investment megatrend on our hands.

These bullish fundamentals are driving a strong uptrend in drone manufacturer stocks. The Money & Megatrends Drone Theme basket is up 97% since January 1, 2025. Drone giant Elbit Systems (ESLT) is up 67% and recently reached a new all-time high.

Given the drone industry’s potential to revolutionize war, surveillance, and communication, I believe this uptrend will run for years. We remain bullish!

The AI Lawnmower claims another victim: Office landlords reach new one-year lows.

Credit: karandaev

This week, the AI Lawnmower is cutting its way through the world of corporate office space. The market values of giant office landlords Boston Properties (BXP), Vornado Realty (VNO), and SL Green (SLG) just reached new one-year lows.

Over the past six months, we have scored big wins with our oil, critical resource, silver, gold, copper, robotics, pipeline, and Latin America recommendations.

Each position above has its own favorable fundamental drivers, but they are united in that, at the end of the day, the investor in them is investing in things you can stub your toe on. Things a person using AI cannot code or prompt into existence. As wonderful as AI is, it cannot create 100 miles of 30-inch steel pipe.

On the other hand, companies in the category I’ve called KIDS have suffered historic declines in market values. KIDS is my acronym for Knowledge work, Information collection & analysis, Data collection & analysis and Software.

Generally, these businesses sell digital products and services. We’re talking consulting firms. Credit rating agencies. Financial data providers. Software firms. You can’t stub your toe on what they sell.

These companies sell products and services that AI programs could produce for a very low cost soon. If someone using AI can code a product or service into existence, then any business related to it is in danger.

AI will put some of these KIDS work companies out of business. But keep in mind, it doesn’t have to put them out of business to make them stock market losers. AI only needs to lower the cost of producing what they produce over the long run. This will enable hordes of AI-centric competitors to throw a heavy wet blanket over their growth rates, profit margins, and P/E multiples.

Companies in the KIDS category are major tenants of office buildings across America. Since AI threatens their business models, investors are dumping shares of their landlords.

Boston Properties, Vornado Realty, and SL Green are giants of the corporate office industry. Together, they rent enough office space to enough vulnerable businesses that investors are dumping their shares with enough enthusiasm to send the market values to new one-year lows.

Technological disruption isn’t producing just a “K-Shaped economy.” It’s also creating a “K-Shaped stock market” full of big winners and big losers. Stay paranoid.

Market Notes

• The AI Lawnmower continues to cut down software stocks. SAP (SAP), Duolingo (DUOL), Upstart (UPST), and Root (ROOT) reached new one-year lows today.

• The AI Lawnmower is cutting down private equity firms exposed to the software industry. Blackstone (BX), Apollo Asset Management (APO), and Ares Management (ARES) reached new one-year lows today.

• Danish pharmaceutical giant Novo Nordisk (NVO) reached a new one-year low today.

• Retail giant Target (TGT) reached a new one-year high today after reporting strong quarterly results.

• Fertilizer giant CF Industries (CF) reached a new one-year high today after reporting strong quarterly results.

Regards,

Brian Hunt
Editor, Money & Megatrends

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