We're Crazy

<September 4, 2026>

I recently invited a friend to join me for breakfast on a research trip. First Watch Restaurant Group (FWRG) is a small-cap stock that we’ve never owned but recently added to our possible buy list. While the company has a long way to go on improving profit margins, its declining stock price is getting more interesting based on sales and potential normalized earnings.

The restaurant business is extremely challenging. That said, several casual dining chains have been putting up impressive results recently.  Brinker, Texas Roadhouse, Cheesecake Factory, and Darden have all reported strong same-store comps and earnings. Leading casual dining restaurants have been able to offset rising costs with higher menu prices while maintaining traffic.

Restaurant trends support what we continue to see in the operating results of many of the businesses we follow. As costs rise and asset inflation soars, companies are searching for someone to foot the bill—and more likely than not, that someone has benefited from rising asset prices. A dinner for a family of four at a typical casual dining restaurant will likely run well over $100. In fact, as prep for this blog post, we did exactly that at our local Texas Roadhouse and left $130 poorer. 

Many economists and market commentators who oppose the Fed raising rates point to near-term drivers of inflation, such as oil prices and the AI infrastructure boom. They argue higher rates won’t reduce these inflationary pressures.

However, few acknowledge how asset inflation has spilled over into consumer prices this cycle. We believe its inflationary impact has become too important to dismiss. As asset prices have risen, affluent consumers have become a larger share of spending, increasingly influencing demand, product mix, and pricing.

Based on our bottom-up analysis, a growing number of companies are responding by expanding premium offerings and raising prices. Affluent consumers have been able to afford these higher prices as rising net worth has more than offset the loss in the dollar's purchasing power. As long as asset prices continue to inflate, we don’t expect this trend to reverse.     

Which brings me back to breakfast with my friend at First Watch. While eating, he asked how our business was doing. I replied that it’s been a difficult environment for active value managers, especially those focused on absolute returns.

When stocks rise sharply with little perceived downside, absolute return strategies such as ours tend to fall out of favor. Historically, assets leave us when markets are booming and flow to us after we do well. Unfortunately, investor decisions are often reactionary. While we strive to keep clients over a full market cycle, there are times when the forces of human nature are overwhelming. 

After explaining our business trends to my friend, I thought he might console me. He did not. Instead, he proposed a solution and asked if we had considered buying more stocks and getting invested. He thought we were crazy to run a strategy like ours in a raging bull market and that it wasn’t worth the risk to our business. In effect, why fight the wave? Just ride it like everyone else, he said. 

My instinct was to respond quickly and convincingly. I had all the arguments supporting our positioning ready, including bubble-like equity valuations, inflated corporate margins, fiscal deficits, trillions in debt issuance, and numerous other unsustainable variables driving the current cycle. But I did not.

At this point in the cycle, it can be tiring and unproductive trying to convince the this-time-is-different crowd that we’re in another stock market bubble. I saved my energy and said, “You know what, you’re probably right. We probably are crazy.” I laughed and hoped he would feel sorry for me and pick up the tab.

History is filled with asset bubbles and crowd hysteria. As bubbles form and persist, many investors lose their discipline and senses, and for some, yes, they go crazy. “Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”—Extraordinary Popular Delusions and the Madness of Crowds

As the market cycle has aged and stock gains have become more intoxicating, we believe there are growing signs that the herd has gone mad. To illustrate how crazy things have gotten, we’ve been collecting articles with headlines and content that we find, frankly, insane.

The article “FOMO Insurance Drives Options Buying Spree as Stocks Rally On” explains how professional investors are using stock options to protect themselves not from market declines, but from missing rallies and incurring career risk.  

Investors buying the dip will be encouraged by the article, “Leveraged ETFs Snap Back as Casino Crowd Mints $50 Billion.” The article discusses how investors are taking on considerable leverage, aggressively betting that every market decline will bounce. As one Bloomberg Intelligence analyst explains, “People just keep buying no matter what.”

Not to be outdone by retail investors, the article “Situational Awareness’ Portfolio Sinks 67% on AI Rout” illustrates the risks professional managers can take using leverage to crowd into wildly popular stocks. The fund reached $45 billion in assets near its peak and is managed by a 24-year-old.

Speaking of young investors, the article “Some 65% of Young Men Who Trade Stocks Daily Feel Like Failures” reports that 25% of men aged 18-29 say they trade stocks daily. The article also states that 80% of Gen Z investors have invested or considered investing in stocks, options, crypto, or prediction markets because they feel financially behind.

For those trying to catch up, zero-day options are often the vehicle of choice. Bloomberg’s article “Degenerate Gambling in Zero-Day Options Thrills Retail Traders” illustrates how investors can fund or defund their retirement in hours. Why wait years!

Closer to home for Palm Valley Capital, Cboe’s article “The Rise of 0DTE Trading in Russell 2000® Index & ETF Options” shows how the notional value of traded options tracking the small-cap market has increased over 6x since 2020.

And if stock options aren’t your thing, good old-fashioned margin debt is another way investors are goosing returns. The Wall Street Journal’s article “The Trillion-Dollar Borrowing Binge Lifting the Stock Market to Risky Heights” highlights how investors are increasingly using leverage to amplify returns.

Instead of acting out of desperation, many older investors are considering early retirement thanks to booming stock prices. The article “The Stock Market May be Doing so Well That it’s Causing More Baby Boomers and Gen Xers to Drop Out of the Labor Force” points to declining labor participation among those 55 and older. As stock prices have soared, more workers have had the wherewithal to leave the labor force. It’s just one more example of asset inflation spilling over into the broader economy.   

While stock prices have been on a tear, not every sector of the market has participated equally. In fact, we’ve been finding interesting opportunities in food and beverage stocks. The group has been beaten down by affordability concerns and growing GLP-1 usage. Who in their right mind would buy declining food and beverage stocks when semiconductor stocks are up more than 100% in the past year? You have to be crazy!

And finally, what’s a blog post about going crazy in today’s market without mentioning stock valuations? The Financial Times article “The Next Crash: Why This Time Might not be Different” compares today’s valuations to past bubble periods, including 1929 and the dot-com bubble. Needless to say, valuations are just as crazy now, if not crazier, than at past bubble peaks.   

When measuring valuations, it’s also important to understand where we are in the earnings cycle. The article “Investors Must Be Wary of the Earnings Bubble” reminds us that it’s not just valuations that are inflated, but the earnings used to calculate them as well. A normalization of both would be a double-whammy for equity prices.

Sure, we might be crazy. But looking around, what if we’re not? What if it’s the herd that has gone mad?

Eric Cinnamond

eric@palmvalleycapital.com

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Definitions:

ProShares UltraPro QQQ (symbol: TQQQ): a leveraged exchange-traded fund (ETF). It aims to deliver 3× the DAILY return of the Nasdaq-100 Index, before fees and expenses.

S&P 500: (short for the Standard & Poor’s 500 Index) is a stock market index that tracks 500 of the largest publicly traded companies in the United States. It is widely considered one of the best indicators of the overall U.S. stock market and economy.

Russell 2000: a U.S. stock market index that tracks roughly 2,000 smaller publicly traded American companies. It’s commonly used as a benchmark for U.S. small-cap stocks.

The Philadelphia Semiconductor Sector Index (SOX): is a stock-market index that tracks major companies involved in semiconductor design, manufacturing, and equipment.

The S&P Select Industry Food & Beverage Index: is a stock-market index designed to track U.S. companies in the food and beverage industry. It generally covers businesses involved in areas such as packaged foods, agricultural products, beverages, breweries/distilleries, and related food products.

Leveraged ETFs: exchange-traded funds that use borrowed money and financial derivatives to amplify the daily returns of an underlying index or asset.

0DTE (Zero Days to Expiration) Options: Options contracts that expire on the same day they are traded.

Margin debt: money that investors borrow from their brokerage firms to buy securities, using the securities in their accounts as collateral.

CPI (Consumer Price Index): is a measure of the average change over time in the prices paid by consumers for a representative basket of goods and services.