Animal Spirits Podcast - Talk Your Book: What's Working in the Stock Market?

Episode Date: March 9, 2026

On this episode of Animal Spirits: Talk Your Book, ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Michael Batnick⁠⁠⁠��⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Ben Carlson⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ are joined by Franklin Templeton's Chris Galipeau to discuss: a broadening out of stock market leadership, what's working, what's not working, how AI is impacting markets and much more. To hear more from Chris Galipeau and the Franklin Templeton Institute, click here for the latest insights. 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. Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits Talk Your Book is brought to you by Franklin Templeton. Go to Franklin Templeton.com to learn more about all of their different funds, research, analysis, tools. Franklin Templeton.com to learn more. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben 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 Ridthold's wealth management. This podcast is for informational purposes only and should not be relied on. upon for any investment decisions. Clients of Ridholt's wealth management may maintain positions in the securities discussed in this podcast. Welcome to Animal Spirits with Michael and Ben. Today is February 23rd. We're recording our intro.

Michael is depressed. And we are thinking through the ramifications of AI. We just had a great talk with Chris Gallipo from Franklin Templeton. And we're just, we're trying to think through all the different ramifications here. What's going on in the market? Why is this moving? Why is this changing? Why is this overreacting? And obviously, everything just comes back to AI eventually. It's a Monday. It's snowy. It's gloomy. We all read Satrita's piece over the weekend about what could come to pass. And I am, yeah, I'm not feeling too great after reading that. More on the more on the human level.

Like, you know, obviously the stock market as we get into today is not is not, you know, confidence inspiring. But it's so much bigger than that. Yeah. This has the potential to be a societal shifting. of technology. And you're thinking through the macro ramifications and the market ramifications and the human side of things too, right? That's a whole other thing. Like, hey, guess what? The market could be fine, but there could be a huge human toll for this, right? Market could see plenty of profit increases from this. Margins increase, right? The stock market could be just fine and millions of people are out of the job. You're right, that's the human toll that is giving

you the black cloud. I think we're going to be okay. That's where I've landed on this. We'll keep discussing this. But the stuff with Chris that we talk about, I think that is probably the most surprising to people is just how the stock market is reacting to this. Yeah, if you heard our conversation and we took out the, while the stock market is 2% near an ultimae, you would assume that we're in a deep bare market. That's been that's been like, you know, years on end. I mean, yeah, there's all these areas of the market right now that are working that really

haven't worked in the past. I looked the other day. So again, this is through, you know, almost end of February. Dividend aristocrats are up like 10% this year, right? These are just boring blue chip stocks that- Who cares? Get out here with the dividend-riskrats. Slowly but surely increase their dividends.

But you're seeing all these areas of the market that were just left for dead. And I wonder how many investors have completely given up. And if that has a lot of angst to do with this to the fact that so many investors are so heavily reliant on tech in their portfolios, that that makes this feel worse than it is market. wise because the people who are sitting in these software socks are down 30, 40, 50 percent, they're going, I don't care what you say about the market. I'm getting crushed. Right. I think that's probably a lot to do with it too, if it's intimate. Yeah. We had a good

conversation with Chris today. I don't know if it was uplifting a lot, but it was like, if nothing else, this conversation is a snapshot of the moment in time. So here is our conversation with Chris Gallipo from Franklin Templeton. Chris, welcome. Michael, thanks for having me. You got it. All right, so we are recording this on February 23rd. The financial ETF is down 3%. 3.2%. American Express, not sure what's going on there, but it's getting mauled down like almost 9%.

Software stocks are getting humiliated. Once again, making new lows. The IGV ETF is down. Oh, boy, down 5% new lows there. Don't forget IBM, Michael. IBM? New high to minus 30% in three weeks. Holy mackerel.

Yeah. Yeah. So the market is, this is exciting. So we'll obviously get into what's happening today and a lot of the anxiety around AI. Are we all going to die? We all got to not have a job. Well, we're all going to die eventually. But all right. So let's rewind. How did how did you feel about the market coming into the new year? And how do you feel today? we came into the year, you know, constructive on equities. And I think it's one thing. And our clients get, you know, I think all investors get myopic on the S&P on the index, right? So we came into the year with a target range for year end, 7,7,400, which, to the best of my knowledge, is on the low side of where the street is, right? I think the median target's 76. So that was the first thing. So constructive, but not crazy, right? The bigger story, honestly, through our lens was what we thought we continue, which was, which is a broadening of the tape, which has continued, right? So we've been on that since coming in the calendar 25. So for us, we've given the same sort of message. I think, you know, when I try and justify or explain why our target is where it is, it's easy, right? So we roll into the year trading 22 and a half times forward. And if you start to walk the targets up 76, 78, you're talking 23, 24 and a half forward. That's a big.

number, right? And so our view was you have better EPS growth away from the index and probably much better valuation as well. So that's, those are kind of the two calls. But we came in, positive. Unched right now. It's funny because a lot of people keep using words to describe this market. Like it's a weird market. It's a confusing market. But you're right. The broadening out has happened. The number from, I think Ned Davis research the other day was that two-thirds of all stocks are outperforming the S&P this year, which is like the highest number in 50 years or something. It's a huge number of stocks are doing well. So the ones that are doing poorly, it's more of a smaller segment over the market.

There's a ton of these stocks that are getting crushed. But on the whole, you're seeing all these other sectors that have been left for debt, essentially, energy and consumer staples and industrials and such. And obviously, these are the sectors that people have kind of given up on. So it's just kind of a reminder about how these cycles can change. And I think people just weren't ready for it. Is that fair? Completely. I'll give you some more stats.

I wrote this this weekend in my market piece. So the equal weight S&P, which I refer to as the average stock, right, is up 6% through last Thursday's close. To your point, that 343 S&P 500 stocks are up on the year. That's 68% of the index. And 41% of the S&P stocks are up more than 10% year to date. It's just not the names that everybody knows, right? And so through my lens, and based on what we've been saying, saying, we've nailed this, right? But to your point, you know, it's been a struggle to convince

investors that it is possible, hold on, it's possible that other stocks can work beyond the seven that have worked for the last five years, right? Microsoft is at a, is it a 52-week-low? Not quite, not quite. But it's down, it's in a 27% drawdown, whatever it is. Do you view the rejection of the bubble? down 29% of it's high. Wow. Do you view the rejection of the bubble? Of course, coming into 2025, it was, uh-oh, strap in because we're going to the moon. And of course, it's going to be led by anything exposed to AI. And now it's the opposite. Nobody wants anything to do with it. Right. I guess that Microsoft, this is good at public proxy for open AI as any. And the numbers that they

came out with over the weekend about how much cash they're going to burn, it's like laughable. It's unbelievable. It's unbelievable. And the market is not believing it. The market is say, want nothing to do with this. It was like, oh, my God, like how much money they're going to spend and then, you know, buy these names. And it's like, whoa, oh, my God, like how much money they're going to spend. This is, this is not great. All right. So, so this resetting of expectations pretty aggressively lower. Meanwhile, earnings are at all-time highs. Like, the PE is getting squeezed bigly. It is. Is this, is this healthy? Does this make you, does this make you a little bit like less worried? I mean, obviously forget about the bubble. Or does this make you more worried?

It's like, wait a minute. This is a healthy reset would have been good, but down 30% for Microsoft is not exactly healthy. That makes me a little bit worried. Yeah, look, I think you're getting the froth squeezed out from a bunch of different places, Michael, whether that's Bitcoin or people super concentrated, you know, in a hand in a dozen stocks or what have you, right? This is not the first time we've seen this, right? This is my 30-50 year, you know, in the business, all as an analyst in the PM. I ran money through the tech bubble. So, no, I don't frankly think this is a business.

bubble like comparatively valuation wise cash flow wise and whatnot but as you point out now you've got these companies hyperscalers burning through cash at an unbelievable rate where if if we talked about this a year ago six months ago you would have been like me this really isn't going to problem there's no way they're going to blow through this FCF and and spend it on capax and yet like here we are the one thing uh i can't remember the exact that i could look at it but if you pulled up oracles chart and you go back to their announcement with Open AI, and the stock gaps up like crazy. I thought to myself, okay, this is getting nuts at this point, right? That was September of 2025.

And then the market took it all back six months later and then some. All right, right. Yeah, well, look, stocks take the staircase up and the elevator down, right? So I guess the big worry for a number of years has been, well, what happens when this concentration turns, right? All the gains are concentrated, all the earnings are concentrated in these huge names and the mag seven or the top ten or whatever it is. And when those turn, look out below.

And obviously, to your point, the equal weight is doing better. Small caps have caught up. International stocks are doing much better. Is it really going to be that easy where we're going to have a baton handoff here to these other sectors and the bull market kind of keeps going? Doesn't that almost seem like it's too simple or too easy, I guess? I think that we've been in a rotational bull tape for 14 months and no one's realized it, right? I can flip you guys the paper we wrote in January 25, calling for example. this and also the setup for when the tape actually broadens historically, what factors or variables

have to be in place. One of them, Ben, is periods of super concentration like we have now. So I think the combination of a lot of money funneled into those names, right, consider this. From Jan 2020 to the middle of 25, right, the mag 7 as a proxy, those names had earnings power or earnings growth of about 650% or 750%. it was 750. And in the time period, that five-year period, those names were up 650%. S&P's up 125 in that window, right? Not a bubble. Well, look, they also had the best earnings growth, Michael. That was all the earnings growth.

Now, I'm saying that earnestly. Like, in a bubble, you take it way past earnings growth. Yeah, the fundamentals match the price, right? That's right. That's exactly right, Ben. And so did some of the parabolic nature were in me? Yeah, a little bit. But the fact of the matter is, that's where all the earnings power was. So if that five-year window, right, 2020 to 2025, mag 7 EPS up 750, 750%, if you take those names out of the S&P, you know what the S&P earnings growth was over the same window?

Not a lot. 32%. So, you know, it makes sense. Stocks follow earnings over time, right? So now, Ben, the paradigm is shifted a little bit. EPS growth is much broader calendar 25, 26, and 27 than it has been in the prior five years and the tape is responding to that. And it started to sniff that out, frankly,

in the fourth quarter of, third quarter of 2024. All investors loved the broadening. Like, it was enough of the MAG7. Let us have a turn, us mean the 493. And the economy's doing fine. Consumers are still spending. Inflation is, you know, relatively benign. So I was all about it.

But I really, I don't love to see the financial sector down 3.3% on, not no news. There's news, but American Express, again, like down 8%. That's a big, big move. Huge. I also don't love to see the consumer staples breaking out against the discretionary, not just the select spider ETFs, which are obviously, you know, that's 40% Tesla and Amazon. If you look at the equal weight versions of them, if you look at the equal weight staples

versus the equal weight defensive, that is having a meaningful breakout today. So on the one hand, on the one hand, I do like expectations being re-eastern. reset. I do like that there's fear in the market, the reintroduction of the Wall of Wari, but the speed at which this is happening is definitely a little bit, more than a little concerning. Oh, great. Yeah, I don't disagree. Full disclosure, I'm along the XL left, so I'm sharing and I feel your pain here. Oh, yeah? Oh, yeah? Chris, I bought Blackstone on Friday. Look, at least we're honest, bud, at least we're honest. The speed at which the market operates now is so much greater than it's ever been.

And I feel like what can happen in two or three weeks used to take a year. And now it's like, boom, boom, bids are hit or offers are swept and the tape changes its colors immediately. It's harder. And so one of the things about, you know, talking to our clients about expecting a broadening tape

and giving the empirical evidence for why that is, right? We can show them the earnings power for this year and next year, right? It's much broader than it has been. And even showing them the empirical data to support that and convincing them or helping them understand that stock prices follow earnings over time, people are still very, very hesitant to get away from what has worked, right, in the past couple years and where they made all their money. So I think, Ben, you asked this earlier, is it okay, this rotation? Think about, ask yourself this, who's left to buy the

Mag 7? Who's left? Right. And so now you've got all these other companies that have good, of good business models, and they've just kind of been thrown in the ditch by the side of the road. Now investors are like, okay, there's some other names out there. And oh, by the way, look, the multiple on the equal-weight S&Ps about 17 times forward. Sign me up. Great. Yeah, exactly. Me too. Michael and I've been talking about the speed of the markets for a while now. And you're right. Everything's happening way faster, the downturns, the repricings, the upturns. How do you think about something like the software sector that is being repriced feels like immediately? It's just, it's happening in the blink of an eye.

People are trying to figure out what the AI impact is going to be. And obviously there's, you know, maybe some babies being thrown out with the bathwater. But like, how do you even try to consider something like this when everything is happening so fast? Do you say like, all right,

I'm not even going to play these games or do you say, no, no, no, now is the time to like really get my hands dirty and get in there? I think it's a little bit of both, right? You got to separate the wheat from the chaff, right? And so this is where, so I was a software analyst for a long time.

And what do we know about that space, right? strong reoccurring revenues. We could, right? And because the businesses were like recession, not agnostic, but were resistant. Resistant? Semi-inpervious to recessions. Resistant, yeah. We could model out those cash flows to sign some terminal value and probably award a higher

multiple because we were super confident in Microsoft's, you know, sales of Office 365, so on and so forth. Now, AI rolls along and a lot of that is being, you know, called into question. Look, valuation is not going to help you, right? The reality is you don't know what the terminal value. lose of those cash flows. And if you reverse it, how can you figure out the implied growth rates? That's what's happening here in software. You know, are there good names being thrown out with this? Definitely. But is it, is it a concern? Yeah. Sure. Look, people forget, if you go back to 2000,

Nortel and Lucent and Jadius Uniface, they're not around anymore. Right? Yeah, I don't, I think the overreaction makes sense to me. I keep saying that. Like, I think it's okay people are hitting the cell button first and asking questions later and letting other people sort it out. I totally understand that. It's an overreaction that everybody understands. Nobody's like, this makes no sense. No, it makes total sense. Now, we'll find out.

You know, we'll find out. And I don't know how long it's going to take if it's going to take six months or two years or three years, whether or not this is an overreaction. But I think everybody says, yeah, because nobody knows how bad this gets. And I think that's really it, Michael, right? You just don't know. Or you can say, if you don't own the names, right, if you're not long the names, you'd say, okay, this is just too hard for me to figure out here.

We can do all the analysis we want, make all the assumptions and build a pro forma income statement, but you really don't know. And so if you don't know the answers to that, how can you put some multiple on it and a future price target, right? You're kind of in no main slam. That is like the scary part. It's like, yeah, these might be great businesses today. They might be great business in two years from that.

But what about four years? And obviously the moat, the pricing pressure, the recurring nature of the revenue, the margins, all of that is in question now. And it's bleeding everywhere. So you see, you see like in our industry, altruist, you know, is a company that we work with, but a very relatively small custodian announces an AI tool that is not, you know, we knew he was coming. And it's Schwab falls 10% LPL of Raymond James.

I mean, the market is, the market, it is weird because I'm saying like how the market is very feel for right now. Meanwhile, the S&P is within 2% of an all-time high. But it does, it does feel. Maybe this is how I feel. I feel like the virus of fear is spreading rapidly right now. Agree. And I'm scared.

You can feel it today, right? You can feel it today. And every bounce for the last couple weeks, definitely today is getting sold right into. And all the names we just talked about there, the IGV, good luck with that, right? No bit. And it is spreading, right? And in your own businesses, you just talked about. It hit all the banks.

It hit the legal firms. look at, you know, the accentures of the world, so on and so forth, and probably going to continue to spread, right? Let's talk about an area of the market that is not impervious, but it's different. International stocks. Obviously, Franklin Templeton has its roots in global stocks, and not only no problems there, but it's just such a fascinating turn of events for international stocks that really and truly In December 2024, it was like, are we really going to another year saying the same thing

we've been saying for the last seven years? And now they're working. It's like the only thing working in terms of equities. Yeah. So I can tell you from my seat, when we rolled into 25, we're bullish ROW equities, right, rest of world equities. I mean, I got hate mail for that call, hate mail for it. And despite the fact that we could show the earnings power and, you know,

equal to or better than the U.S. for the first time in 15 years, nobody wanted to touch it. Same can be said, by the way, for small cap, right, in the U.S. But once bitten twice shy, investors didn't want to have anything to do with it. And people assume, and wrongfully assume this, that you need some big currency devaluation to drive those names. Now, you had that tail when in 25, it accounted for almost all the alpha versus the S&P, but the foundational pieces that make any stock work or any index. work or any country work, the foundational piece, i.e. earnings power, forward earnings growth,

is present in EM. It's present in India. It's present in Japan, right? It's present to a lesser extent in Europe. And so we started that call last year and maintained that call coming into this year. But you're right, right? And I don't think you need currency debasement necessarily. Is it a nice tail one? Yeah. But the earnings power is there and the valuation is there. And like for the prior 15 years, right from 09 guys to 2025, S&P is up like 600% because Spoo's earnings are up 250%. And in that same window, right, EM earnings are up like 30%. And European earnings, yeah.

Are European earnings up a little more than that? You want to know why those markets were cheap? That's why there was no earnings power, right? So things can stay cheap forever until there's a catalyst to unlock it. Now in the last two years, you've got the catalyst to unlock it. But, you know, Ben, it's probably not different than I think it's similar to the rotation in the U.S., right, where you've got very few people with any significant or substantial ROW equity exposure in portfolios. Now there's a scramble on. They fought it all last year.

Oh, it's all currency. It's all currency. And we were saying that it is, that's helping. But you've got earnings power here, folks, and you've got to recognize that. But yeah, it's work well. So you're a believer in the shareholder reforms too, just the fact that, you know, the stock market is almost like ingrained in us now. And it's not, that's not so much the same thing overseas and many places. Do you think that tide is turning to where they're going to finally make it so, return money to shareholders or treat shareholders better? Is that going to be, is that going to stick this time? I think it has been sticking, right? That's been, that's been underway in Japan for five plus years, right? And, you know, I guess I personally have a bigger question mark on

European EPS growth and that sort of thing. But yeah, it has. But to me, the setup was interesting because you've got the, you've got the valuation discount. Like, I really don't care about that until there's a catalyst to cause it to re-rate. And then when we saw that start to crop up going into 25, I'm like, okay, maybe this is it. But boy, investors don't want to believe that. And it probably has, not probably, it has likes. Maybe this is my recent Zby is talking, but I was saying to Ben last week, it does feel like people are extrapolating the current environment out into a long time. And maybe they're right. Like maybe these software names just don't catch a bit because I don't care where you tell me next quarter. I don't care about it the next quarter or the next quarter

because it doesn't matter. There's nothing you could say that's going to make us forget that AI is coming. It's here and it's going to change your business model. And this is an open question. Like how much time, what if, what is, is it six quarters of new all time highs for these, for the earnings? If, like, if, if Adobe is six quarters from now saying like, hey, it's, it's our eighth quarter in a row of all time highs. Like, what? It's, like, what? It's, is it's our eighth quarter in a row of all time high. It's like, when are you guys going to respect the fact that we're using it too? And we actually have a sustainable business model. But nobody knows how long it's going to take. I agree with you. I agree. And I think that that's the challenge. And so people get in to

shoot first, ask questions later sort of thing, right? And that's clearly where we are here in the last couple weeks, big time today. But I think to the extent, right, that we could get some of that, let's say we get some of that, Michael, right? You get, you know, I'm just going to, I probably shouldn't throw out names, but you guys know the names and they start reporting our, reporting our names. they start to talk about AI in their own business and how it's accretive and all that sort of thing, maybe we'll start to see some sort of sea change. But that would be, I think Dan I've worked with forever

as a PM, Dan was on the sell side, obviously. I think he talked about that this week. And he's right. That could be a little bit of an elixir. So we've got Salesforce and Snowflake this week. And of course, in video, which is, I mean, it's not besides. the point. We know they're going to report ridiculous numbers. There's no question that there's a

shortage of compute. But man, it's hard to, it's hard to feel good about the market when software, gigantic software names are falling 4% every day. No, it's, right. It's, look, it, you guys know this. It's an emotional game, right? And it always is. And when it gets to, when we get in periods like this, it's stressful. But I would also fall back on what we hit on earlier that the S&P is like, down 50 basis points on the year, and there are an awful lot of stocks that are up. It's just not the names we're used to. So I don't know if that's comforting or not. I could credibly make an argument either way.

But I think the thing that feels different, at least for me, for this recent sell-off, which, again, yeah, the S&P, it's nothing. We're down 2% whatever. A, we could be down 11% by next week and who knows a month, two later. Fair. But more than that, like every time there's a sell-off, It usually isn't accompanied by fears of, hey, wait a minute. Am I taking too much equity risk because I should be hoarding cash because I might not have a job in 18 months or?

And it's hard to reintroduce risk appetite when that black cloud is hanging over every investor. That's a good point. That's probably the one thing that I started to think about this on while you were buying Blackstone on Friday. I was looking at that basket. And I'm thinking, okay, what is this? what is the message here, right? And moreover, what is the message with the, with the action in the big banks, right? What would happen if AI becomes so prominent, so powerful that we do start to see people losing jobs, a lot of jobs, right? Then you got the unemployment rate up. Then

you've got the negative vortex of consumers pulling in their horns and that sort of thing. You can talk yourself, work yourself right into a recession or scenario if that happened. Oh, I'm doing it. I'm doing it, Chris. So I've been saying for the past couple of months, I'm like, look at, don't tell me about the consumer. Look at Capital One. Look at Ally. Don't tell me about struts in the car market. Look at these stocks. I just don't believe you. Well, guess what? Capital One is down 8% today. Rototilled. Again, on no news, and it's breaking hard. It hasn't been this low since June of 2025. And it's hard to, I'm not hand-waving this away. Listen, there is information in stock price movement, period. And if people don't believe that, at some point in their career, they will come to realize

that that's probably the most important source of information, right? We can talk about all the, what the company say on earnings calls and all that sort of thing, but there's always different and probably better information out there, and you're right. I mean, it is a little bit scary to watch these things come unglued. I mean, American Express, not a small company. Is there any, like, what's more blue chip? And American Express in particular, that's like exposed to the luxury segment of the market. That's white collar unemployment. That's right. That's a perfect example of the fears over the weekend, all the doom scroll and the doom, the bear porn articles, people are reading, myself included, not fun, not having a good time.

How do you try to handicap that? Because I can see so many different macropaths here if AI takes hold versus like, you know, could it lead to deflation and could that also lead to lower rates and could that also lead to a big fiscal response to the government? I feel like if you try to go down the different forks, it just, it's enough to make your head hurt. and I don't see how you try to handicap those situations of AI taking over the world versus, no, maybe AI just takes us on a similar trend that we've always been on. And it's not going to really be a huge disruption. It's just going to make people's lives easier and better. And I don't know how you handicap the situation.

Let's look at what Walmart said on their call Friday, right? So Walmart comes out, reports good earnings. They've already told us, they've already told us that they expect to grow revenues for the next five years at the same rate. they grew them for the past five years with zero headcount, adding zero headcount. And so using AI, whether it's in procurement or a supply chain, or it's on the floor, they believe will be incrementally accretive to revenue margins and ultimately net income and earnings, right?

In their call, they said, we noticed that shoppers that were using their AI tool while they're in the store, spent 35% more than the shoppers that were in the store that didn't use it. So if you and Michael are in the store, Michael's on it and you're not, he's going around buying all kinds of things because it's telling him he might like, you know, product ABC. That's accretive, right?

That's good news. And that's the good part of AI. And by the way, what have we heard from big-name companies in the last two to three quarters, JP Morgan, Home Depot, City Bank, a bunch of the logistic companies have talked about it? the benefits of AI, right? Now, whether it starts taking everybody's jobs, I mean, I'm not really in that camp. I think it probably takes some, but I think the Walmart example Friday, that's probably how I'm thinking about it mostly, Ben, to be honest.

Chris, if you could fast forward to the end of the year other than like stock prices, is there anything that you would want to see in order to tell us today what happened for the rest of the year? Would it be unemployment rate? Would it be Fed funds rate? What would you look to? You know what I'm hoping for here, to be honest? And this is, you know, it's always tough to go through these things.

We're in a midterm year, right? We know that midterm years are rough years. Average returns well below long-term returns. What most people don't know is that 12-month forward returns. 100%. Right. And I think you guys even put something out about this in last couple weeks. We've done the same analysis.

We'll publish it soon. It is an absolute home run to be using weakness in a midterm year to take risk, right? Now I'm not saying you've got to go out in my software stocks necessarily, but S&P behaves well. So what I hope for, and I'm hoping for, and we're getting it, right? I think we get this, we get this moderate vault shop, maybe we get, give me VIX over 30, give me the RSI on the S&P under 30, and it's go time. You want to take it to 40, you want to take it to 50? It's margin time. Let's do it. That's right. Let's do it. Chris, the VIX is at 21. I know. It's like on the floor. Like, that worries me too. I know.

It's like, this is like a very, very orderly panic. It's not a panic. It's just a bleed. It's weird. But the paper cuts are now becoming like hatchet cuts and things like AXP and some of the other names that we've talked about, right? Certainly in software. And look, you guys know, it doesn't take much for Vicks to go from 21 to 32.

It could be two days. Could be three days, right? Could be this week. Yeah. But I think we get that. Then the risk reward starts to improve, right? Because people forget this. that a stock prices come down.

You know what else is coming down? The risk in owning. Risk. Right. So that's the thing that I always take comfort in. You want to give me all this bad news, all the what could happen? Hey, guess what, asshole? Excuse my language.

Yeah. The market is pricing in bad news. What do you think Microsoft being down 30% means? That's risk. We know. Markets bottom on bad news, guys. Got to remember that. To leave people with like some positive sentiment.

Because I feel like so much of the AI stuff is just very, it's easy to get to the negative doom loop. I agree. And I'm a very optimistic person. Michael needs a support group, Ben. I really do. I was feeling very upset last thing. My thought process is though, like margins continue to climb higher slowly but surely through everything that's happened this decade, right? Everything corporations have gotten thrown at it. Supply chain problems, high inflation, tariffs, all this stuff. Margins just keep moving higher. What could cause margins to fall when AI is potentially one of the most productive efficiency generating machines that we've ever created. Isn't that, at the end of the day, isn't this good for profits?

Agree. Agree. Isn't that what Walmart told us on Friday? It is. I guess the market is just sorting through whose profits. I think that's right, Michael. But I think that's right. Look, in my entire career, you know what I've been told?

Operating margins of a peak here. Marges can't get any better. They've gone up for 35 years. Right, exactly. Maybe I'm just telling this to myself to feel better. Today, the macro backdrop is pretty okay. Yeah, agree. Agree.

Unless, like, not the worst comes to pass, but I think unless, unless unemployment really is on its way to 6%, hard to get too bearish. Right. Michael, don't get too bearish. Don't get too bearish, Michael. Come on, don't do it. Hang in there, Michael. The thing is the unemployment rate is still at 4.3%.

The prime age labor force participation rate is essentially at the highs of all time, going back to, like, matching like the late 1990s run, right? Maybe you could say, well, this is the peak. It's going to get worse from here. And that's possible, but we haven't seen a huge impact yet. And I really do think that corporations are going to think very hard about the political and ramifications of mass layoffs because of this technology. I think you can't take out the human element of these decisions. And I think that's something that we have to consider as well.

Right now, we're in the eye of the storm, right? And we need to remember, investors need to remember, that the storm always passes. The landscape may look a little different on the other side, but the storm always passes. right? And this one will pass too. The landscape might look different, but it's not the end of the world, right? And let's remember the S&P is barely off. It's all time high. The biggest risk to equity markets and to earnings and profitability are recessions, right? Median earnings degradation for the S&P during recessions like 15, 18%, right? Median max drawdowns, 2830. Those are almost always caused by one or two things. The Fed, breaking it, right, overt tightening, staying tight too long, causing a liquidity crisis and or a credit crisis. That's what we're used to, or we get a black swan like COVID. We're certainly not in the first part of that, overtightening, breaking something, right? I don't know about black swans, but.

Topline revenue growth has been the highest since 2022. Amidst all the fear, companies are killing it. Right. Earnings growth in Q4 is like plus 13% year on year. Probably going to be similar this year. Interesting environment. Right. Never a dull moment in this.

business, right? But to Ben's point, if you can improve, what might be good for Main Street, sorry, Wall Street in this case, i.e., right, lower higher EBIT margins, potentially, because they can be just as productive without adding headcount and or reducing fixed cost is accretive to margins and accrue of their earnings, right? It might be, you know, we don't want to see the unemployment rates spiral out of control. That's for darn sure. But that hasn't happen yet. Chris, for people that want to learn more about your thoughts and follow your writings, how do they get a, how do they get that? Yeah, so you can track me down on LinkedIn and there's a newsletter that I write every weekend gets published Sunday afternoon or Monday morning. So you can find

me on LinkedIn, Chris Gallipo, and just subscribe to the newsletter. You'll get the comments in your email every Monday morning. Very straightforward. You know, I'm a no BS guy. I'm not pulling any punches there. I'm going to let you know exactly what we think. All right, Chris, this was a... I don't know if fun is the right word, but this was a good talk, a sobering talk. You're going to be okay, Michael. We're going to be okay.

All right, man. Appreciate your time. Thanks, guys. Okay, thanks to Chris. Remember, check out Chris's newsletter on LinkedIn. Check out frankatempton.com to learn more and email us, Animal Spirits at the CompoundNews.com.

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