{"id":80407,"date":"2026-09-18T19:39:45","date_gmt":"2026-09-18T23:39:45","guid":{"rendered":"https:\/\/blog.t3live.com\/?p=80407"},"modified":"2026-09-18T19:39:45","modified_gmt":"2026-09-18T23:39:45","slug":"bottom-up-roadmap-for-stocks-over-the-next-6-9-months","status":"publish","type":"post","link":"https:\/\/blog.t3live.com\/2026\/09\/18\/bottom-up-roadmap-for-stocks-over-the-next-6-9-months\/","title":{"rendered":"Bottom-Up Roadmap for Stocks Over the Next 6-9 Months"},"content":{"rendered":"

Every trader, in order to be successful, must have some systematic process for identifying, entering, and exiting trades. Each trader\u2019s specific process is going to be unique to their own experiences and beliefs. My own process has been developed over almost 20 years in markets, first as a hobby while I was a telephone salesman in a cubicle for a big tech company, next as a trader on a prop desk, then as a professional equity portfolio manager for a small RIA, and lastly as a refinement when I completed the CFA exam.\u00a0<\/span><\/p>\n

Because I operated in both the trading and investing worlds, my process is a combined approach that incorporates both fundamentals and technicals. Similarly, I combine both a top-down and bottom-up approach to asset, sector, and individual stock selection. In previous posts I\u2019ve explained my <\/span>top-down reasoning why my view continues to be that we are in the contraction phase of the business cycle<\/span><\/a>. This week I\u2019ll present what my bottom-up analysis reveals to us as we try to anticipate price movements in the stock market over the next few quarters into 2027.<\/span><\/p>\n

As opposed to a top-down approach which starts from trends and works down more granularly to individual stocks, a bottom-up approach starts with individual stocks and works up to extrapolate larger themes. A bottom-up approach is a wonderful antidote for the narrative heavy environment in which we currently find ourselves. An analysis of individual stocks often reveals that a popular narrative is not gaining traction in the stocks that should be strong if the narrative were true. As a naturally born contrarian, I\u2019m skeptical of any popularly accepted narrative, and I rely heavily on scrolling through thousands of charts a week to verify that the prevailing narrative is being validated by price.\u00a0<\/span><\/p>\n

Thankfully, we don\u2019t have to go over thousands of stocks to get a workable roadmap for how to deal with this market into 4Q 2026 and early 2027. A smaller sample of stocks is enough so I\u2019ll keep my bottom-up analysis contained to a manageable list of sectors and stocks in this week\u2019s post.\u00a0<\/span><\/p>\n

I\u2019ve taken the leading stocks in the sectors that are most crucial to the US business cycle at the moment: semi-conductors, transports, industrials, utilities, chemicals, and basic materials. The industrial sector contains seven sub industry groups: aerospace, automotive, construction, distribution, electrical equipment, building products, and machinery.\u00a0<\/span><\/p>\n

I\u2019m focusing on just the leading stocks in these sectors because I think they are a full representation of the most influential narrative in the stock market today: the AI buildout. I want to analyze the individual stocks in these sectors to discover any clues they might tell us about the future path of the AI buildout, which will dictate the path of the US business cycle, which will ultimately influence stock prices. We start at the bottom and work our way up to get to our goal: anticipating the movement of stock prices.<\/span><\/p>\n

The sectors and stocks we\u2019ll analyze seem like a lot of material to digest, but I\u2019ve distilled the information down to a basic form that is easy to absorb in a short amount of time. It\u2019s a useful exercise for anyone risking their capital in the stock market. These are the stocks we\u2019ll be analyzing in each sector; <\/span>semi-conductor<\/i><\/b>:<\/b> ADI, AVGO, MRVL, MU, QCOM, TSM, and TXN; <\/span>transports<\/i><\/b>: UNP, NSC, CSX, JBHT, ODFL, DAL, and UAL; <\/span>industrials:<\/i><\/b> aerospace:<\/span><\/i> GE, RTX, BA, LMT, GD, HWM, TDG, LHX, and NOC; <\/span>auto parts:<\/span><\/i> MGA, BWA, and MOD; <\/span>construction:<\/span><\/i> PWR and FIX; <\/span>distribution:<\/span><\/i> URI, GWW, and FAST; <\/span>electrical equipment:<\/span><\/i> ETN, VRT, and EMR; <\/span>building products:<\/span><\/i> TT and JCI; and <\/span>machinery:<\/span><\/i> CAT, DE, PH, ITW, CMI; <\/span>utilities:<\/i><\/b> SO, NEE, and DUK; <\/span>chemicals:<\/i><\/b> APD, DOW, LYB, SHW, ECL, PPG, and DD; and <\/span>basic materials:<\/i><\/b> BHP, RIO, FCX and NEM.\u00a0<\/span><\/p>\n

I\u2019ll begin on the fundamental side and analyze the valuations and end with a video on the technical side to show what I think the price and volume structures are warning us about.\u00a0\u00a0\u00a0\u00a0\u00a0<\/span><\/p>\n

The only goal I have when analyzing fundamentals is to answer the question \u201cdo I want to <\/span>own<\/i><\/b> this stock?\u201d That means I like to think as a business owner would if he was considering pouring all his family\u2019s capital and his life\u2019s energy into a business. I like to take the 15 year average of pretax income as a rough estimate of what the company would be able to earn on average over a business cycle, in other words, its earnings power. If the market cap of equity is 10 times the average earnings power, I know that stock is probably below fair value. If 10x is below fair value, 20 times the average 15 year earnings power is about the top of the limit. 20x means there\u2019s very little room left for good price appreciation from an ownership perspective. Stocks that trade this high are for rentals only, not ownership, as they are mainly earnings growth stories that can experience temporary, but powerful price movement in either direction.\u00a0<\/span><\/p>\n

The market cap to earnings power ratio over this 15 year time frame is what I refer to as the PE15. I like to see lots of sectors with low PE15s because that means too few positive outcomes are priced in, and any good development will cause money to flow in. If enough sectors of the market have low PE15s, it means the market is attractive as a long term asset. Long term buyers are what create price trends that last. However, if the market is unattractive to long term money, I would not expect a new price trend higher to materialize in the next 6 to 9 months.<\/span><\/p>\n

The PE15\u2019s for each group of stocks by sector and my assessment of the potential for a proper trend higher are listed below, but if you want to jump to the conclusion without any of the detail, here it is: <\/span>with a couple exceptions in mainly chemical commodities, natural resources, and small auto parts suppliers, stocks are far too expensive as an asset class to draw in the permanent type of capital that will create lasting trends.<\/span><\/i> Stocks would have to see significant declines of 50% or more to be attractive as an asset class for ownership. That means almost every stock will have to be a short term rental on the long side if it fits your trading process.\u00a0<\/span><\/p>\n

Now for the details on how I arrived at that valuation assessment based on the PE15:\u00a0<\/span><\/p>\n

Semi-conductors:<\/strong> the PE15 average of the group is well over 100x with TXN the lowest at 44x and MRVL the highest at 977x. The sector is uninvestable at the moment. Because the valuations are so unreasonable, semi stocks are for short term rentals only.<\/span><\/p>\n

Transports:<\/strong> The average is 28x. For cyclical stocks, this is a very expensive price to pay for highly volatile earnings. Removing the two trucking companies, the PE15 comes down to a more reasonable 23x, but that is a lot to pay for companies that will grow basically at the level of GDP in the US. This group is also relegated to short term rentals only. No serious investor looking to allocate his family\u2019s irreplaceable capital would consider these stocks as worth owning at these prices.<\/span><\/p>\n

Industrials; aerospace\/ defense:<\/strong> This is not a homogenous group. BA and HWM are well over 100x, and only LMT, GD, and NOC are 20x. The rest are well over 20x. Since none are under 20x, the group is for rentals only.\u00a0<\/span><\/p>\n

Industrials; auto parts:<\/strong> This one is more interesting from an ownership perspective. Autos are a huge part of the economy and represent the state of the consumer and job market. MGA is the largest auto parts supplier and it trades at a very respectable 9x while BWA trades at a more expensive 15x. MOD is off the charts at 141x, but its business has gone through a transformation recently so it\u2019s not a fair comparison. This is one sector that at least has a possibility, however small, of a price trend higher.\u00a0<\/span><\/p>\n

Industrials; construction:<\/strong> this is one group that is at the heart of the datacenter buildout, and their PE15s show it. Both are over 100x. There is so much positive expectations priced into these stocks that they are entirely story stocks now, and thus, short term rental material only. I\u2019d expect only temporary price movements in these two names. My guess is that even the greatest news can only bring these to the top of a range but not start a new trend.<\/span><\/p>\n

Industrials; distributors:<\/strong> all three trade at over 40x. That\u2019s too expensive to rely on a trend to develop.\u00a0<\/span><\/p>\n

Industrials; electrical equipment:<\/strong> All 3 are well over 30x. Rentals only.<\/span><\/p>\n

Industrials; building products:<\/strong> Both are over 50x.<\/span><\/p>\n

Industrials; machinery:<\/strong> CAT sits at 54x because of the AI buildout enthusiasm, while DE stands at a still expensive, but only less so, 33x. I wouldn\u2019t feel comfortable betting on a lasting trend taking hold.<\/span><\/p>\n

Utilities:<\/strong> SO and DUK are reasonable at about 26x, but NEE, due to its different operating model, runs at a much higher 41x. Even the boring utilities are unattractive to owners looking for a place to allocate long term capital.\u00a0<\/span><\/p>\n

Chemicals:<\/strong> There are some interesting cases here. While the average for the whole group is 23x, that is skewed heavily by the expensive specialty chemicals like SHW, ECL, and APD. The commodity chemicals like DOW and LYB are under 10x, with LYB the cheapest of any at 5x. This is because China is dumping commodity chemicals on the global market. Also, these companies\u2019\u00a0 petrochemical feedstock inputs are soaring in price. PPG is not expensive at 16x. DD is only at 7x, but it\u2019s gone through so many changes in structure that it\u2019s not a reliable estimate. Overall, the chemical group is too expensive to trend, even if some of the stock inside the group are cheap. Those ones may be considered for ownership as any good news in trade relations with China that makes progress in resolving the over supply could send the stocks trending higher. Additionally, any real construction boom in the US would see these stocks rampage higher. The fact that they are not participating is a reason to be at least somewhat skeptical about the AI buildout narrative.\u00a0<\/span><\/p>\n

Basic Materials:<\/strong> BHP and RIO are on the cheap side at only 14x, so we could see trends develop here. FCX is at 34x so I\u2019m doubtful of any trend development in this name. NEM is at 75x so this one is range bound at best.\u00a0<\/span><\/p>\n

In all, I just can\u2019t get bullish on these AI buildout adjacent stocks as they are far too expensive for a sustained trend higher driven by patient money. We\u2019re already seeing the <\/span>AI companies demand the government regulate them to slow down their progress<\/span><\/a>. If implemented, that will have the beneficial effect of decreasing their expenditures and improving their cash flow metrics as they try to get IPOs out and bought up by passive indexing so insiders can sell. I think the two AI companies want this regulation excuse to stop the spending so they don\u2019t have to do another capital raise until the IPO. If they get what they want, we could see a big slowdown in economic activity that will make the contraction phase obvious.\u00a0<\/span><\/p>\n

In addition to the bizarre request by the AI companies for increased regulation, the stock charts are also hinting that the buildout spend is at risk of ending. The video below covers what I view as subtle warnings from the charts that the spending is at risk of an abrupt end. The stocks covered represent the largest market cap stocks in each sector, so they will have more influence on market averages.\u00a0<\/span><\/p>\n

Individual stock charts by sector video:<\/span><\/p>\n