Animal Spirits Podcast - Talk Your Book: The Bubble Will Get Bigger

Episode Date: November 17, 2025

On this episode of Animal Spirits: Talk Your Book, ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Michael Batnick⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠���⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Ben Carlson⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ are joined by Michael Arone, Chief Investment Strategist and Managing Director at State Street Investment Management to discuss: government spending, bailouts, SPY, stock market concentration, the AI bubble and much more. Find complete show notes on our blogs... Ben Carlson’s ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠A Wealth of Common Sense⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Michael Batnick’s ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Irrelevant Investor⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Feel free to shoot us an email at ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠[e-mail]⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ with any feedback, questions, recommendations, or ideas for future topics of conversation. Check out the latest in financial blogger fashion at The Compound shop: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://idontshop.com⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Ben Carlson are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. See our disclosures here: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://ritholtzwealth.com/podcast-youtube-disclosures/⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ The Compound Media, Incorporated, an affiliate of ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Ritholtz Wealth Management⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://ritholtzwealth.com/advertising-disclaimers⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Important Risk Information Investing involves risk including the risk of loss of principal. ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns. The views expressed in this material are the views of Mike Arone through the period ended November 3, 2025 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Before investing, consider the funds’ investment objectives, risks, charges, and expenses. To obtain a prospectus, which contains this and other information, call 1.866.787.2257 or visit www.ssga.com. Read it carefully. ALPS Distributors, Inc. (fund distributor); State Street Global Advisors Funds Distributors, LLC (marketing agent). Adtrax Code: 8567100.1.1.AM.RTL / SPD004287 Expiration: 11/30/26 Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits Talk Your Book is brought to you by State Street Investment Management. Go to statestreet.com slash I am to learn more about State Street's products, ETFs, research, and all that good stuff. That's state street.com slash I am to learn more. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion. of Riddholt's wealth management. This podcast is for informational purposes only

and should not be relied upon for any investment decisions. Clients of Riddholt's wealth management may maintain positions in the securities discussed in this podcast. Welcome to Animal Spirits with Michael and Ben. On today's show, we are joined by Michael O'Roney, who is the chief investment strategist

and managing director at State Street Investment Management. Ben, this year has been all about the mic... Well, actually, that's not true. That's not true. That's not true. First quarter, Liberation Day, that was definitely a macro headline trading environment. But man, that feels like a long time ago. AI has just eaten everything since then, right?

Eventually, investors will care about those sort of headlines again. And you know what, I don't miss it. I don't think anybody misses it. That is not a fun environment. Well, no, of course, a bubble is more fun than a bare market, obviously. Maybe not as exciting. There's more, you get more adrenaline from a bear market. But a bubble is, you know.

I think debating this stuff, the reason is, and I stole this from someone, I can't remember who, you always know when you're in a crisis. Everyone knows it. Oh, that's so true. But you never really know for sure when you're in a bubble. There isn't a checklist, because you've been trying to define this lately. There's no checklist you can say, check this, check this, check this, yep, it's a bubble. No one knows in real time because you always think, like, well, yeah, but what about this and what about that?

And so that's why the discussion is so interesting with AI because it's, there are no definitive answers. Not to nitpick, but I feel like the meme stock mania, you knew that eventually that was unsustainable, right? Yeah, that's true. That's fair. But like, you're right, the stock market to know in real time that you're smarter than everybody else and everybody is pushing these prices up and you're the only one who sees the

truth in the future, come on now. You're fooling yourself. Now, I think we all agree that stocks aren't cheap, but so what? Why should they be cheap? We're in a revolution of compute power, margins all the time highs. I mean, all the usual tropes that we talk about. But, yeah, that's what makes us fun and exciting. We talked to him like aaroni today from State Street, and it's funny.

We talked to him the last time in 2020. So it just feels like a world ago to that we... I know he said that on the show, but it's... But his take is, listen, yeah, I think this is a bubble. I think the bubble is going to get bigger. And he listed off all the reasons, the Fed cutting rates, deregulation, tax cuts, all these things. And honestly, when you lay it out that way,

because I think what you think, like, hey, listen, I've identified a bubble, it's going to pop tomorrow. I think a lot of people have that at the back of her mind. Like, listen, of course, the bubble's there. It's going to pop. His point is, yeah, I think this is kind of bubble, and I think it's going to get much bigger. NVIDIA's going to $10 trillion.

I mean, at this point, would that surprise you? Of course not. What do you mean? I just said it. It would not surprise me. All right. So you're, not tugging cheek. And video is going to $10 trillion.

All right. You heard it here first. Do I own it? No, I don't. Wait, you sold from the lows? Yeah, I made like 80%. Well, I don't know if I made 80%. Did I make 80%. I made a lot of percent. I'm surprising. I'm diamond hands in it here. I'm not going to sell into an AI bubble. Oh, I bought a house. Come on. Give me a break. Fair. Okay, so we got into a ton of stuff with AI. We talked about taxes. We talked about government spending. All this stuff with Mikearoni, who is the chief investment strategist at State Street Investment Management. Here's our talk with Mike. Michael, welcome to the show. Hey, it's great to be back.

Good to be here with all of you and Michael, Ben. So I looked, the last time we talked to you was in 2020. And the world was a much different place back then. And it's funny, I looked at just a short bullet point of the things we talked about. And one of them was government spending, do deficits matter? Is the government ever going to be able to slow its spending? And it's kind of funny that we're still having those same conversations today. You wrote a piece on your uncommon sense that just talked about the government.

spending. And I think this whole debasement idea has been a big trend this year. Maybe you could just kind of talk about why deficits can be so important to the stock market. Well, I think that what's happened here this century and for a while now is that the one-two punch of both easy monetary policy and permanent fiscal deficits has been a tailwind for risk assets. And I think that that ultimately could repeat itself again. So we're on the verge of the one big, beautiful Bill Act actually providing both consumer and business stimulus not only now, but in 2026. And it has been an important tailwind. The question is, is when does it matter? We chatted in 2020, it didn't matter then. We have much bigger deficits and much bigger challenges now. And it doesn't

seem to matter. The governments that spend the most, the risk assets do pretty well. In 2022, the only thing that mattered for investors was, were macro stories, primarily inflation and the hiking cycle. And now it really seems like nobody cares. That's not true. But people care way less about the future of interest rates. They care. It's all that AI.

It's very much like the micro is dominating the news flow. Matter of fact, I saw a chart recently that showed the size of the Fed's balance sheet. and that has been trending lower in a meaningful way. And it's like nobody talks about it because open AI and the announcements that they're making on a daily basis are sucking up all of the oxygen from the investors like mine. Like we just can't focus on too many things at once. But that would have been a huge story back in the day. And in fact, I'm like the, I guess the macrotores that I am, I'm surprised.

I thought that that would matter. Why hasn't the runoff on the Fed's balance sheet hit risk assets? Is it just because we happen to be in an AI? explosion? Like, what do you think? Well, I think there's a few things here. I think that ultimately consumers and businesses were effectively able to lock in lower interest rates, long-term interest rates. So when the Fed was raising rates, we never did hit that maturity wall. And so I think that's been a part of it. I certainly think that there's been some powerful fiscal policy that has offset some of the decline in the Fed's balance sheet. And Michael, as you know, I think, and Ben was kind

enough to mention on common sense. And my last article, I wrote about this idea that there's a whole host of reasons the Fed would have to cut rates. Some of it had to do with the fact that the standard overnight financing rate was creeping higher than the effective funds rate. The kind of repo facility that was created out of the pandemic, the last time we chatted, is now drained. We're moving from kind of abundant reserves to ample reserves, meaning that bank reserves are now creeping lower about 10% of GDP. And what happened? Chairman Powell signaled the end to quantitative tightening. And sure enough, the Fed suggested just last week at the last FOMC meeting that quantitative tightening would be end. So I don't know if we should be

kind of congratulating the Fed for shrinking the balance sheet from $9 trillion to $7 trillion. It's still pretty big and it's still pretty stimulant. So I have this theory that the collective we and the market only has room for one worry at a time, right? We worry about one thing and we focus all our attention on it, and when another worry comes on, then we move to that. And for a while there, it was government debt. And the spending that we did in 2020 was astronomical. And I think people just keep saying,

just wait until the toll comes due, right? Just wait. It's going to happen. And some people are of the mind that, well, listen, nothing's going to stop this train at this point. Neither party has any will to, like, take the medicine and take the pain and slow government debt. So we're just going to keep continuing debt. And maybe that means inflation is 3% in the future instead of 2%.

Does the debt actually worry you at all? Because most of the time, my thinking is what is the actual outcome here besides just higher inflation, right? Like what are the actual worries that people could have from this? Well, I do think that with increased supply of treasuries and now competition from the German government is issuing far more supply. others are issuing far more fiscal kind of spending that has to be financed by sovereign debt. So now you have a global increase of supply. At the same time, you basically have some appetite

that's kind of saturated, if you will, or sated, I guess, would be the word here. And that you might not see as great a pickup of demand. And ultimately, I think the worry is that long-term rates will rise. And ultimately, when we look at this, we know that any investment, real estate, bond, stock, it's the present value of the future cash flows, discount, to discount rate. If long-term treasury yields are the proxy for that discount rate and it's creeping higher, eventually that will matter. We saw a little bit of this in August of 2023 to the end of October, 2023. So what happens?

So just as we're chatting, we're going to get the Treasury quarterly refunding. Back then, Treasury Secretary Yellen for the first time in years suggested that she would kind of increase the amount of longer-dated coupons. And 10 years breached 5% for the first time since 2007, and the market fell out of bed. I think ultimately that is the risk that we face that long-term rates could creep higher. And it's our expectation that long-term rates and inflation are likely a little bit higher, a little bit more volatile, and a little bit stickier than at least it has been in the last 25 years. And that could matter. Does it surprise you that the tenure went back to 4% essentially then? Because I know a lot of people were worried when it hit 5%

and then rates went right back down. So, like, why are rates falling this year? Well, I do think that growth expectations have kind of declined some. Chairman Powell and others have cited the fact that last year, the U.S. economy grew at it, let's call it around 2.5%. I think it was 2.4%. In the first half of this year, when we exclude the kind of impacts from trade, kind of inventory stocking and concerns about tariffs, the U.S. economy grew closer to 1.2%. So it was cooling. So yields are just growth expectations, inflation expectations and term premium. And I would suggest that growth expectations were likely more muted and term premium and inflation were a little bit stickier. Now, again, I do think that there is some concern that as we head to the fourth quarter and we

don't really have this data, that we could have a bit of a kind of a slowdown in the U.S. economy. And I think that's putting downward pressure on long-term yields. But, Ben, you have noticed that each time they breach that 4%, they did when the Fed cut rates in September, they don't stay there very long. They start creeping back up. Today, we're at 4.11. Now, I'm not calling, I'm not chicken little. I'm not saying that rates where they are today are problematic for markets. They're not.

And the bias is for the Fed to cut rates further. I think this will be stimulative. I think the risk, right, like you said, is if we get myopic and we focus on what could cause a problem, higher long-term rates kind of in that 475 to 5% range, that could be problematic. We're not there. I'm not sure we'll get there, but that is a risk. Is there anything inside the system that is cost for concern today? And maybe it's just lack of concern, I guess.

I don't know if that's a lazy answer. But what might be out there that you are like going hmm about aside from the obvious spending on data centers and all that sort of stuff? Well, like I said, I do think headed into this kind of period now where the Fed cut rates again, the standard overnight financing rate was creeping higher than the effective Fed's funds rate, and they were both rising. As they said, the kind of the repo facility that was created out of COVID is essentially drained. So you had a number of indicators to suggest that monetary policy conditions were tightening. And I think the Fed and the Treasury took notice, and they're taking a number of

steps to ultimately try to put some downward pressure on those rates. And again, they were successful a little bit. We got below 4% on 10 years back in September, but we started to creep a little bit higher. So I do think that there were some underlying conditions in capital markets that started to raise some alarms, but they got to it early. Now, Michael, I think the other thing from my perspective is the following. I do think there is a risk that the economy and the labor market, are doing better than feared. And if that's the case, and now you have the Fed cutting aggressively at a time when inflation is notably above the target, I do think that markets could take notice of this. And to Ben's kind of what I'm chatting with Ben, right? I think that ultimately

the way this reflects itself is in higher long-term rates. I do think that could be a risk next year. Maybe not a high probability risk, but what I'm keeping an eye on? So what's the contrarian view on the labor market? Because everyone is so concerned about AI and the impact that it's going to have in the labor market, and any slowness is immediately blamed on that. But let's say it's just a cyclical thing. What is the contrary in view that the labor market is actually doing better than most people think? So here's the thing. I think that ultimately, when we look at this, the labor market, as Chairman Powell describes, as in a curious kind of balance. What is that balance? Both the supply of labor and the demand for it are

slowing at the same time. That's highly unusual. So, Ben, what's the problem? I think the problem this threefold, immigration reform, far fewer immigrants entering the labor force, demographics, we're all getting a bit older, and AI. So the conclusion here is that I think is fascinating, is that you do not need as many new jobs to keep the unemployment rate low because of that curious kind of balance. So to me, that's the contrarian opinion. The labor market is undergoing a structural transformation that's really interesting right now. And at the heart of it, are those three things, immigration, AI, and demographics. You don't need as many new jobs.

In fact, you may be able to get zero and still keep the unemployment rate low. On Friday, October 10th, there was another flare-up in potential TAV. There was some heated rhetoric out of the White House in Beijing on what that was going to look like. And you saw looking at volume for SPY, which just celebrated its what anniversary. So it's 1993, so we're more than 32 years. I was about say it's 30th, but I guess that was two years ago. Wow, time is going too fast. That was two years ago.

Time flies, Michael. Unbelievable. All right. So on that day, there was a volume spike in SPI and everything else. People fired first and asked questions later, as they always do. Are you surprised at both how calm markets are and also how quickly news, like, gets people seemingly all bold. up all bared up in record time? I don't know if I'm surprised. I think we now live in a day and age with 24-7 kind of news and information, 24-7 trading practically. The retail investor

has become a huge component in terms of trading volume and flows and their impact and momentum. So I'm not sure that I'm surprised by all this. In terms of the calmness, I mean, why would do we be calm? Every time there's a market problem, you have the plunge protection. team steps in to protect us all and save the day, right? So whether it's Treasury, whether it's the central bank, why would I, why would I be nervous? Every time there's a problem, they step in and either issue checks or massive fiscal spending or they start rebuilding the balance sheet. It starts expanding and lowering rates. I mean, what's there to be worried about? And I think markets complacency reflects out. It is funny when you hear people talking about like, oh, the game is

right. That's it. It's like, well, yeah, obviously. And now that you know that, now that you know that the powers that be will do everything to prevent bear markets and why would you do anything else but, you know, responsibly own stocks. I think, all right, whatever. Anyway, I guess the good news, Michael, is that, hey, it's rigged in investors' favor. And that, I think, is a reflection of that complacency. My thesis is the stock market is just so much more important now. If you look back at, like, everything I think kind of traces back to the Great Depression. There was really no social safety net. There was no, the Fed didn't know what they were doing. We learned a little bit more

each time, and I think even the great financial crisis in 2008, we never would have had the response in 2020 had 2008 never happened, right? And so every time we have one of these crises, they do learn a little bit more and take a little bit more of the left tail off. It doesn't mean bare markets can't happen because we've had, what, almost three this decade, if you count April. So you can't take the declines off of the table. I think what you can take off the table is the length of the declines. Is that fair enough to say that, like, they just aren't going to last as long if the government is willing to step in every time. I think that that is true.

I think that ultimately you will have this kind of downside volatility. I mean, this is investing. You are taking risk and stocks can be volatile. So you should expect corrections along the way and even that occasional bare market. So I do think that that exists, but I do think that they are probably a bit sharper and shorter lived relative to history. And Ben, to your point, in this market rally, since the lows back in kind of early, April. Essentially, what's happened is the S&P 500 has kind of increased by about half of the

U.S. economy's GDP. So it underscores your point that the market has become a major kind of influence on the U.S. economy, on sentiment, both from consumers and businesses, and it's not going away. Michael, I'd like to get your take on credit markets. Spreads are tight, as they should be, given the backdrop that we just described. If they weren't, there would be a very bizarre disconnect, and buyers would come in to tighter them. But there's some chatter, and you probably have a better sense of the data than I do, that one of the reasons why high-yield market spreads appear tighter or healthier than they have historically is because a lot of the lower-quality companies are moving to different sources of financing. Is there any truth to that, that those companies are now

accessing money via the private credit, or is that just something that people are saying without really any verifiable data? Or am I saying that they're saying it? Is anybody even saying this? No, I think I've heard this notion that private credit markets have distorted credit markets. They have increased fourfold in the last decade in terms of the assets kind of in private credit. I think they're upwards of 1.5. Some estimates is close to 2 trillion. And that's a four-fold increase over the last decade. And so certainly, again, I think as Ben was highlighting, kind of post the 2008 environment, kind of regulation came in, traditional lenders of credit exited many of the different

businesses or increased kind of the credit conditions or kind of what you needed to lend to. They left those businesses, but with low and zero rates, in some instances, negative rates on sovereign debt, that money flowed somewhere. flowed to private credit markets. Overall, I think those markets have provided an interesting stimulus to markets to private equity, to the AI phenomenon that has been healthy. I do worry that as more entrants come in, as you move down in credit quality, you do have to wonder about some of the lending that's going on. But some of the big players, the Aries, the KKRs, the Apollos, the Blackstones, I'm not so worried about their books at this point. And I'm not sure there's been

a major distortion to listed credit markets. I think the last time there was some real credit problems, of course, 2008, 2009, which created a good opportunity for investors, perhaps the last fat pitch that we got in terms of high yield credit investing there. But the other thing you might recall is kind of the shale boom and subsequent unwind. And a lot of the triple C credits in below and high yield were in the energy space. Well, these energy companies are in far better shape today. And I think that's more to do with it. I think when I I look at it, earnings are growing. Profit margins are high. Interest coverage ratios are fine and default rates are low. I think that has to do with the kind of compression and credit. One final

thing here is, would you rather lend to the United States government or to some of these companies given some of the rates here or some other sovereign from that perspective? I think that's also shifting. And we talked about that in terms of the term premium that investors will require to invest in long-dated U.S. government debt. So Michael and I were talking earlier today about the whole AI phenomenon, and it's impossible to ignore it at this point. I think the downside is pretty easy to lay out, right? These companies spend too much money, the expectations get taken too far, and then eventually there's a comeuppance because there's not a quick baton handoff to, you know, investment into ROI, right? I think people can, we can look at history and see that

happen many times of innovations like this. What is like the best case scenario here, where these companies are making all this investment, and it doesn't lead to a bubble bursting that people are kind of waiting for. The best case scenario is this general purpose technology gets widely adopted by consumers and businesses that many different businesses and consumers come across and find different ways to utilize the technology and that elusive return on investment begins to manifest itself, begins to reveal itself. That is the best outcome. Now, it might be the rosiest outcome. And to your point, I think that the way that I viewed this is that for really the last year, we've been encouraging investors to think beyond the MAG7, but within tech, we like the

earnings growth. We like the A-I phenomenon. But here's the thing, in the last seven decades, even in technology, the companies that spend the most aren't always, they don't always perform the best going forward. And in fact, to your point, in these historical cycles, what happens is that all that excess capacity ends up really having the bubble burst eventually, almost through higher interest rates eventually down the line. But what happens next is all businesses or consumers come in and stop up that excess capacity and find a better way to use it, a more interesting way to use it,

a cheaper way to use it. And I think that'll happen again. So I'm not sure I'd be loading up on the hyperscalers, but boy, I'm long on technology and bullish on the potential for technology. I just not sure that all of the spending will pay off over the long term, but it's going to lay the foundation for the next line of businesses. The most recent example of this, of course, is the TMT bubble bursting. Remember, guys, we used to get the Netflix used to send you CDs in the mail, but all this excess broadband capacity led to streaming. And now it's, you know, whatever, trillion dollar company, whatever it is. So to me, these guys are laying the foundation for the next wave. And I want to be thinking about the next wave. Now I'm not a

stock picker, I wish I was, but I think that that's ultimately kind of where we're headed. And that's what I think, that's the scenario that I think most likely happens. So you mentioned the hyperscalers and investors, unless you are really doing something wacky with your portfolio, you're there, you're invested. I guess I'll plug SPY again. It is now the S&P 500 has, what is it, 40% of the market cap is in the pot is in the max, whatever it is. Well, it's 35 or 40, who cares?

It's a lot. It is a large percentage of your asset allocation, even if the S&P 500 or the U.S. stock market is, whatever it is, 30% of your portfolio, whatever it is, you're all the way there. What are you hearing from investors about, like, hey, I don't want to like bail because, you know, it's a core holding. But how should I think about diversifying outside of just the MAG 7? Right. So to your point, about 38%. What's a couple percent among friends? That means 62% of the SFP 500 is in something other than the MAG 7.

And so I do think there's opportunities here. And so there's a number of things. So concentration in diversified portfolios, given the large weight, is a common investor concern. So, Michael, there's a number of ways to address it, right? So one of them I just mentioned. So we don't love cap-weighted technology. We love equally weighted technology of the tech leaders.

And that's been a winning strategy. It's beaten the AI thematic. It's beaten cap-weighted tech. It's beaten the S&P. It's beaten granny shots. It's beating them all. And to me, I think that that's ultimately kind of a good way to think about it. Lean into earnings growth, leaning to the AI phenomenon, stay within technology, just have a

different makeup. So that's one way. You could call it factor investing. You got all of smart beta, I don't know, equally weighted. It just has a little bit of a different size preference. And that's been a winning strategy in the last year, despite some kind of concerns, kind of on the broader cap-weighted kind of tech exposure. Second thing, you can move down a cap.

So small cap companies are going to have a triple benefit. They're going to get, they're getting interest rate cuts. So their refinancing rates are lower and their net interest costs should be falling, should flatter their profitability. One big, beautiful bill act, they're going to get some stimulus from that. You used to be able to, your biggest net interest expense was 30% of earnings before interest in tax. Now it's 30% of interest before earnings.

Interest before, earnings before interest tax, depreciation and amortization. I got to slow down. And small cap companies have twice as much depreciation and amortization as large cap companies. I said it the wrong way. I got to slow down here, Michael. So small cap companies have far greater depreciation and amortization that they're going to be able to immediately expense. That's number two. And it should flatter their profitability. And third, with the ending of quantitative tightening, that should also help at a time when they're cheaper. Now, the biggest challenge to small cap as their earnings growth has been lousy. But now beginning next year, earnings growth off a lower base is supposed to outpace large cap. So for those reasons, we think moving down in cap makes sense, equally weighted tech. And of course, you can use sectors. And international, what's interesting, in October, international non-U.S. equities and ETF flows took in 29% of the equity flow. That's greater than their 20% percentage.

of the flow, of the assets. So they're punching above their weight is the point. So you can go international, can you move down a cap, different exposure? Those are ways to address some of the concentration challenges. So Michael and I were talking about this concentration piece today, too. It's funny, it's not the kind of thing that just gets resolved overnight, right? Unless there's a, you know, I guess a massive crash or something in these big names only. But this is just something that investors are going to have to deal with.

And obviously, it's been helpful on the way up. If some of these stocks get dinged, it might hurt on the way down. To your point, there's still some diversification in the S&P, at least. But this is just, I guess, potentially the new normal investors are going to have to get used to, right? And the S&P 500 is not the only one. If you look at any other country, just because we're such a big piece of the globe, most other country stock markets are concentrated just like this, correct? So we're not like an outlier here.

Absolutely. I think that's a big point, Ben, is that any market cap weighted index, you're going to have the largest companies driving the bulk of the kind of the weight and kind of, you know, impacting the volatility and the returns. That's true anywhere. And in some instances and in some countries, you know, this concentration of risk can even be worse depending on the depth of that market and those types of things. So I do think it is an important distinction.

And then again, we're talking about globally diversified portfolios. So as much as I would love everyone to just own the S&P 500, they certainly, and SPY, they certainly own diversified portfolios, which include midcap and smart. cap, sectors, perhaps, or industries. They own styles. They own international, emerging markets. And so there's a number of ways to diversify beyond just the S&P 500. And I think that that's an important distinction. One last thing on this is that we have someone on our team. They do a funny bit when we talk to audiences around this idea. I said, okay, Ben, Michael, do you have an iPhone? Inevitably, nine out of ten, yes. Hey, do you have an Amazon? Did you get an Amazon package today

this week. Inevitably, absolutely, right? You know, have you been watching a Netflix streaming show? Yes. Did you do a Google search? This is why these companies are so big. They're so successful. It's not anything to do with market manipulation or the games rig or indexing. It's because we are massive consumers of their products and their their fundamentals are incredible. Michael, I think you'll like this. So, Michael, this morning, as I was preparing for one of my shows, I said to my guys, hey, break me out Apple's revenue by their segment. So they report iPhone is the biggest. I was 49% of their quarterly revenue.

Then is, I think services is next. Yeah, services is next by a wide margin. And then it's wearables. Then it's the Mac. And then it's the iPad. So I wanted to compare the segment revenue for the last 12 months versus other companies to contextualize, yeah, Apple's $4 trillion. Yeah, it's 7% of the SP500.

But investors aren't dumb. There's a reason why this company is so big. So here we go. So the iPad, which I don't know what I would have guessed, its revenue is probably $10 billion. I would not have guessed $28 billion. The iPad did as much revenue as AMD. The Mac did $8 billion more revenue than Schwab.

The wearable segment did about as much revenue as Starbucks. services did as much revenue as Target, and the iPhone did more revenue than Bank of America. And get this, the iPhone alone did more revenue in the last 12 months than meta. Is that nuts? Just the iPhone. It's crazy. So, Michael, in this last decade, the top 10 contributors to the stock market performance, and they're among the names that we've been chatting about.

They have 30% free cash flow margins and return on invested capital of 33%. These numbers are remarkable, remarkable especially for their size. And this is just- And it's still going. It's still going. And so again, I think Ben was trying to tease out and appropriately so. When markets are high and there's a lot of complacency, we need to ask ourselves what can go wrong. And I think that's important. But we also need to take a minute to realize that there's the kind of compound growth of free cash flow and the return of invested capital that these

companies are able to generate is why they command a premium in the marketplace and why this may continue for a while longer. One last thing on this on this topic. Our friend Alex Morris tweeted this. I might butcher it, but whatever, Microsoft Cloud, which is at a $100 billion run rate, I think they've grown their revenue 20% a quarter, every quarter for the last decade, which seems like a made-up stat, but I'm pretty sure I didn't make that up. The numbers are phenomenal. They really are. So this is the top now, then.

Why? Because we're pointing out how good these companies are? We rang the bell. But I mean, I guess the thing is everyone tries to make historical parallels. And it'd be hard to avoid the comparisons to the railroad bubble and the dot-com bubble and all these things, like the CAP-X, the sheer size of it, and it's an innovation, and people are getting excited. But I guess that is the one difference, and the hard thing to wrap your head around this is that we've just never seen companies this big and this efficient before. These are the biggest best companies that we've ever seen. So I guess the hope would be if anyone can avoid having the valley, even before we get like, you know, we got everything we wanted out of the dot-com bubble, but we had to go through the bubble burst and you get there.

I guess the hope this time would be these companies are so good at what they do and they produce so much operating cash flow that maybe we don't have to have the bursting of the bubble to get to the side of this. So, Ben, you are going to have a bursting of the bubble at some point. My argument is that the bubble is still inflating. And again, I'm not really calling it a bubble, but you definitely have some ingredients in terms of big AI spending. Some of this is now a little bit circular, a little bit opaque with all the intra-company kind of investments and the like. They announced, Open AINS, another one today with Amazon. It's every day.

Every day. So you have a lot of circular investments. It's a little hard to keep track of a little opaque. Certainly the credit markets are contributing to that as well, the private credit markets. We touched on that earlier. Now you're going to have a lower regulatory environment. That's what's coming next year in 2026. Where the Trump administration is going to pivot to economically anyway is they're going to

really tackle their kind of lighter touch regular. And now you have an easier fit. And so now you have lower kind of interest rates and more accommodative monetary policy. You have all the classic ingredients of a bubble inflating. Full steam ahead. Full steam ahead. Let me let me just one thing. So here's the thing. I think we all look for when what's the pinprick, right? At least historically, the pinprick is the fact that in 88, 89, the fed was raising rates into the 90 recession. There wasn't really a bubble then. But, That hurt. 99 to 2000. The Fed funds rate went from 475 to 650, right up until the TMT bubble burst. In 2004 to 2006, the Fed was raising rates. Now, I'm not saying it was the sole contributor,

but it was definitely a contributor to the pinprick that burst the bubble. Michael, to your point. In Japan, the Central Bank started raising rates, that burst that bubble. Right. So that was 88, 89, right? And the Fed was alongside that. So Michael Ben, what's the money? what's happening now. Central banks are easing rates. That's why this bubble has longer to go,

in my humble opinion. So the pin prick is when the Fed starts raising rates. So last question, Michael, because Ben and I were just talking about this morning. And I know it's easy to throw around the B word, like, you know, but I would ask you this. What would you have to see on the other side of the deflating to be like, yes, that was a bubble? Because for my purview, my opinion, I don't think a 50% decline tells you anything, especially if it's like, hey, guess what? We just took out, we just gave back three years worth of gains. Big deal. I mean, Amazon and Google fell 50% in 2022. To me, for us to know that this was an actual bubble that burst, I need, I'm sorry, give me a 60 to 70% drawdown that doesn't make a new all-time high

in two years. Yeah. I mean, look, after the TMT bubble burst, we had the lost decade, right? And so I do think that there is, you know, there are sometimes some challenges. But we all know, right, when we look at kind of long-term history, any given day, any given week, any given month, the kind of proposition to win or lose money in the markets is roughly 50-50. You start going out year, five years, 10 years, 15 years. Once you get to 15 and longer, the probability of making money, earning return in markets over rolling 15-year periods is north of 90 percent. Given what we talked about today in terms of kind of trade becoming stabilized, one big beautiful bill, easier monetary policy, kind of consumer stimulus from tax refunds, AI spending, deregulation, celebrating the 250th anniversary of the signing of the Declaration of Independence next year, and hosting the World Cup, I'm betting on a potentially better or a continuation of this bull market given some of those dynamics. Of course, there are risks. There are always risks.

This is investing in the stock market. But I think that these tailwinds will likely trump, pun intended, some of the risks out there. Midterm election years are more volatile than normal, but they typically finish positive. Something to keep in mind. All right, Michael, remind everyone where they can find your work. So you can find my work at State Street Investment's website under Uncommon Sense. You can also find it on LinkedIn under the unconventional. investment stratus. Free to subscribe, but you can get it all there as well.

Perfect. Thanks so much, Michael. Thank you. Thank you. Okay. Thank you to State Street. Remember, check out StateStreet.com slash I am to learn more. Check out Uncommon Sense from the research tab and insights and email us Animal Spirits at the compound news.com. Important risk information. Investing involves risk including the risk of loss of principle. ETFs trade like stocks are subject to investment risk, fluctuate in market value, and may trade at prices above or below the ETF's net asset value. Prokourage commissions and ETF expenses will reduce returns. The views expressed in this material are the views of Mike Aroni through the period

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