The Compound and Friends - How to Pick Stocks Like Morgan Stanley With Dan Skelly

Episode Date: September 4, 2026

On episode 258 of The Compound and Friends, ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Downtown Josh Brown⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and Michael Batnick are joined by Dan Skelly, Portfolio Manager at Morgan Stanley Wealth Management, to discuss the resilient U.S. economy, record earnings growth, the AI spending boom, Nvidia and Broadcom, whether today’s data center buildout looks anything like the dot-com bubble, the rotation out of semiconductors, the return of healthcare and financials, risks facing small-cap stocks, why the Mag 7 could lead again in 2027, AI’s impact on corporate productivity and profit margins, the strength of the American consumer, stock-picking in an increasingly efficient market, and much more! This episode is sponsored by Vanguard and Federated Hermes. Learn more about Vanguard bonds at https://vanguard.com/audio. Explore the full ETF lineup at ⁠https://federatedhermes.com/ Take The Compound's 2026 audience survey and help shape the future of the channel: https://www.surveymonkey.com/r/LHC8QHD Sign up for The Compound Newsletter and never miss out: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠thecompoundnews.com/subscribe⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Instagram: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠instagram.com/thecompoundnews⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Twitter: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠twitter.com/thecompoundnews⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ LinkedIn: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠linkedin.com/company/the-compound-media/⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ TikTok: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠tiktok.com/@thecompoundnews⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ 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 Josh Brown 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. 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. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://ritholtzwealth.com/podcast-youtube-disclosures/⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Vanguard Disclosure: All investing is subject to risk. Vanguard Marketing Corporation, Distributor.  Federated Hermes Disclosure: ETFs are subject to risk and may lose value. Federated Securities Corp., Distributor. Before investing, carefully consider the fund's investment objectives, risks, charges, and expenses. Read this and more information in the prospectus or summary prospectus available at FederatedHermes.com.  Learn more about your ad choices. Visit megaphone.fm/adchoices

So this is going to be fun. How long have you been at Morgan? 21 years out of college. Okay. It only feels like 20. Wow. So, what office do you work in? At the moment, 757th Ave, but on my way back to 1585 Broadway.

They move you guys around. They move us around. They keep the real estate moving. Okay. But as you probably well know, 1585 has gone through like a five-year construction. Yeah. So some of us were kind of off grid, as I call it. Yeah.

Or this will be my third time going back to 1585 in 21 years. Wow. And I always say everyone loves a trilogy. So that's my mantra. So Morgan Stanley is so big that whenever I meet a financial advisor from there, I ask them about other financial advisors that I know in New York. And they never know each other. That's wild. But that's the size of the firm, I'm saying.

100%. Right. Because there's so many different offices. And it's just, I mean, I've said this. You don't have to agree or disqual. But I have said, Gorman was incredible as a CEO, as a visionary. Yep. And that's why, is it $20 trillion now?

Do you know? Just under that, yeah. Between wealth and M-Sim? Yeah. Yeah. It's something like $16, $17 trillion. So basically stealing Smith Barney, brilliant move. Yes.

During the height of the crisis. Like really well executed. Joint venture. Then we'll take a third. We'll take another third. Fine. We'll take the whole thing. Yep.

Buying E-Trade. The Morgan Stanley at Work platform is a lead generator. My opinion, I think that's the key. Yeah. That's like, that was incredible. Yeah. So, I mean, it's, and you were there. You watched the whole thing happen.

Watch the whole thing. When I started Josh in 2005, wealth as a percent of overall revenues was 8% of the firm. And pro forma for all the different deals you just alluded to, it's like 60% of the firm's revenues now. I'm Dan Scal. Oh, absolutely. So, right. So I think, what was the guy before, Mac? John Mac.

John Mac. So I think John Mack understood the value of, let's go heavily, more heavily into advice, but Gorman actually executed it. Absolutely. And John was the one who went out and found James, who was at Merrill at the time. Yeah. And had really revamped Merrill's wealth business. And James, prior to that, as you probably also know, was a McKinsey consultant.

So he brought this strategic consulting background as well. And you said it, like sometimes timing's everything. So he had the strategy, the timing, the pricing. And, you know, the multiple and the re-rating has come together since that point. Yeah. I wonder if there are still Smith Barney guys walking around saying I was Smith Barney. I was Legacy Smith Barney. You're looking at one.

So quick story for you. In college, sophomore year, I interned at a financial advisor's office at Smith Barney. Okay. My junior year I had in like one of these official analyst programs at MSM actually, hired into wealth in 05 full-time. So after the merger, depending on what office legacy branch I would go into, I was either a Smith-Varney guy or a Morgan Stanley guy. Very strategic. Right.

And then there were also Morgan Stanley Dean Witter guys. 100%. Predating the Smith-Borne. Yeah. Okay. All right. So it's been quite an evolution. Yeah.

It's a cool front row seat that you've seen. Thank you, Josh. I appreciate it. To see that all develop. How are we looking guys? Headphones on, everybody. Oh, yeah. Headphones on.

All right. mute your devices. Okay. To have my device. is on my person? Okay. Thank you. All right.

Yeah, let me do not to starve. Do not to stir. Compound of Friends. I think I'm going that right. Today's show is brought you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value in fixed income is not easy. Bond markets are massive, murky, and let's be real, lots of firms throw some flashy funds

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Oh, boy, what a treat. This is going to be a very, I'm feeling like this is going to be a very special episode. Nicole's nodding your head, yes. John's saying thumbs up. All right. Guys, we are coming to you live from Brian Park in New York City. This is America's favorite investing podcast.

It's called The Compound in Friends, first-time listeners. We appreciate you coming by. time listeners. Thank you guys so much. We have a very special guest today. First time, first appearance here on the compound. His name is Dan Skeli. Dan is a portfolio manager of equity. Wait, what is equity maps? Clear that up for me. Priorit portfolios. We have a lot of acronyms at Morgan Stanley. So it's an SMA portfolio. Portfolio manager of the equity maps at Morgan Stanley Wealth management, where he oversees the equity model portfolio team and thematic research product, including alpha currents.

They love that. U.S. Policy Pulse. He is lead portfolio manager for the U.S. model and dividend equity strategies, part of a suite of eight long-only SMAs. He has spent his entire career

at Morgan Stanley starting in 2005 and his associate in the research division. He's a regular on CNBC's squawk box and closing bell overtime. Ladies and gentlemen, please say hello.

Mr. Dan Skeli. Thank you. The crowd almost cannot be contained. All right. Tell me about the squawk appearances. I watched two of yours recently. You do a pretty good job there. Do you like doing television? Do you like getting the firm's views out to the public? I love it. And look, I think it's become in this kind of media technology intersection, it's become table stakes for kind of what we do, right? And so I remember my first appearance on CNBC was a 6 a.m. slot in the summer of 2015.

and it was with Becky, Joe, and Andrew. And, you know, it was, I would say it was touch and go to begin. And, you know, as you know, from having done this world for so long, yes. Over time, you get your feel for it. You get your groove, and it's been really fun to do it over the years. I spent a year doing the 5 a.m. Oh.

And I asked the host, like, who are we talking to? And she said, basically Singapore. Yeah, Asia markets. All right. Let's do it. All right. Thank you so much for coming here. Thanks for having me, Josh. I'm excited.

So, as we mentioned prior to officially starting the show, you sit in a really interesting seat at one of the largest firms on Wall Street, one of the largest asset managers in the world, quite frankly. I wanted to get your take just overall on the current environment. There's a little bit of a push poll right now. I think a lot of the investing public professionals and retail investors have arrived at this point where they almost have learned that they can't. afford to pay attention to the news anymore because it's almost all negative and every time

they get carried away with one of these negative narratives they miss the next 20% in the S&P. How do you help people with that kind of like, you know, all right, I know the news is bad, but the stocks keep going up either way. Like how do you help people with those two opposing ideas? Yeah, absolutely, Josh. And candidly, aside from this podcast, of course, we often advise and counsel a lot of, you know, normal retail investors to turn it off. Like, just stop paying attention every moment of the day. And what's interesting. Except when you're on. Except then keep it on. No doubt. Got it. Or you. I say the same thing. Exactly. So look, I mean, I think a lot of, and the other additional biography piece I would just add to is

I'm a member of the firm's Asset Allocation Committee, which is called the Global Investment Committee. And in that effort, right, away from my day job picking stocks, we're really focused on long-term compounding, diversification. And as you well know, better than anyone, the last decade plus, maybe prior to even the last few months, has been all about concentration. And now the market, of course, is broadening. And we're all talking about broadening as per the last several months. But at the end of the day, we've tried to counsel our clients to stay focused on their goals, stay focused on their risk tolerance, which at times, you know, a lot of people who have made wealth, as you also know, in a concentrated fashion via entrepreneurs.

show up, entrepreneurship, or starting, coming up with a innovation, technology, or something really, you know, kind of innovative, they're used to taking risk in a concentrated fashion. It may not be the most preferred way to stay wealthy over time. And so having that diversified bent is always top of mind for us. Okay. Do you think more people are worried about the next correction or more people are worried about missing out on S&P 8,000, Dow 60,000? Like, where do you think the bigger fear is at the moment?

it's interesting timing of that question. If you had asked me that back in May or June, it was definitely FOMO, definitely missing out. I think the rotation and some of the implosion and some of that first half momentum leadership that we've experienced definitely has rebalanced that feeling, that sentiment. And so today, I think it's more balanced.

I don't think it's really one way or another, but earlier in the year it was absolutely fear of missing out. I think if you asked people took a poll, next 10% move, I think it'd be close to 50-50. Yeah, I think you're right. I think you're right. And in May, it would have been like 70, 30. 100%. Absolutely.

And what I would say is, you know, look, we've kind of free, we've coined this phrase that the markets and certainly the economy. Was that you guys? Not us. We can't come with Halo. That was me. That was you or, um, Kramer, I think, dovetailed off you, but. He's welcome to do that. All right.

So what I would say is we've come up with this observation, this realization as of the last year, really, that the economy. continues to be super resilient. Everyone's been talking about it. And it really continues to look through these policy shocks, these inflationary pressures. Is it the economy that's resilient or S&P earnings that are resilient or both? I think it's the economy mostly. And I'll circle back to earnings, no doubt, which is a great comment. But earnings have been really astronomical. And I'll come back to my theory on that in a second. But the economy, I think what isn't as realized today, and it certainly wasn't four years ago, Josh, was this idea of how much the economy, has paradigm shifted away from cyclicals, away from a normalized income distribution,

and add on top of that the AI spending super cycle. And you've got, I think, a very non-to-a-typical economic cycle. And so we've seen this resilience. And on top of that, coming back to your question on earnings, look, earnings at the index level did 28% year-over-year growth in the second quarter. If I look at the median company, it was 14% growth, which I don't think it's talked about enough. So why is the median, the average company experiencing that much growth? It's not just AI.

And I know we're going to talk about AI ad nauseum today, which I look forward to. My presumption, I'm trying to prove this with data. And I know our mutual friend, Adam Parker, is a friend of the show. And we have been talking about this a lot recently, personally. I presuppose that we had a synthetic tariff trade-related earnings or economic cloud or hangover in the first half of last year. emerging out of that right now 12 months later is an equally or proportionate synthetic operating leverage earnings boost for the average company who had more pricing than I think most people would have perceived.

And then didn't have to give it back. Correct. We passed through on the tariff front, which remember tariff was the headline for like six or nine months last year. So Trump really is a genius. Some people would say that. So every company had to take price. Most companies, the average company. Just to muddle through.

Just to muddle through. But they passed on 60 to 70 percent of it. Right. And the prices don't go back down when the tariff emergency is over. Josh. Dan, you think that's tariff-related, this margin expansion? So this is the $493. I think part of it is tariff-related on the pricing perspective, which I do want to come back

to as a new, relatively new suburban homeowner in Long Island. My wife is Long Island. I'm New York City, but I'm an adopted Long Island child now, son. You're going to love it. It's been a wild ride so far. I never left. How about that L-I-E? What I learned from my landscaper after COVID is when he had to take up price 15 to 20 percent because of cost, because of all these things.

He never took it back. And so it's just a small anecdote which speaks to this broader thread. So I think part of this, part of your great question is no doubt pricing, surprising to the upside. Secondly, I think coming through on this, and it's hard to obviously prove dollar for dollar, but we hear it a lot in terms of surveys. seeing it in the transcripts is AI productivity on top of existing workforce. What your margin math at the moment on the chart doesn't yet show is a labor lever being pulled. So let's go higher? Absolutely. Wait, wait. Say more. What's the labor lever? We're in this, if you zoom out, we're in this no hiring, no firing zone. And we've been there

for a long period of time. A couple years it feels like. And what I would argue is if you think about what people were talking about in terms of all the different AI boogeyman in January, Saskop. Apocalypse, software going away. That's been thus far disproven. With some dispersion, we could talk about it. Labor apocalypse, also disproven. What is happening at the Fortune 500 level vis-a-vis our data and our surveys, it's productivity on top of existing labor force, right? And so I think that is coming through in the margin line. To my earlier point, I don't think what's coming through just yet, and I think it's a 12 to 24-month time horizon, is labor actually being pulled in terms of additional margin and earnings. And that's going to be largely AI-driven.

You're saying earnings are going up without additional headcount. That's what it looks like at the moment. So normally, in order to produce the revenue, so I think the revenue increase for Q2, year over year, was also an incredible number, 15%. On 6% nominal GDP. So historically, in a more cyclical analog economy that's more goods heavy, you're not doing 15% revenue growth with no headcount growth. No way.

Well said. You need people on an assembly line literally welding things together and packing them in boxes. You're saying now the next tailwind might be companies continue to grow revenue, which translates into earnings, without the concomitant addition of another 10% labor force. I'm not saying this is great societally, however, we're in the business of earnings and it should be good for the earnings. I think you summarized it perfectly, Josh. And I'm very good at this. I think to your, to your embedded in your statement was this longer term debate around sociological economic effect.

Just have less babies. It'll be fine. I mean, honestly, we can't solve that on this show. We talked about Asia markets coming on. Like, that is a phenomenon going on across Asia, across Europe, and no doubt across the U.S. Yeah. And so, you know, we'll see.

The joke I've been saying is in terms of GOPs and longevity on top of a housing, stuck in locked in housing market, on top of AI and robotics, is we're all going to live longer, but we're going to have nothing to do and nowhere to live. So that's like our future. And a shortage of 18-year-olds, apparently. I was reading about Syracuse University this week. They're not going to hit their admissions targets yet again. And obviously, there are some Syracuse-specific issues like the weather.

But the bigger picture is there just aren't going to be as many young people prospectively. And the nature of work is going to change, too. Back to AI. What is the entry-level legal audit? What does that all look like? Syracuse is very near and dear to my heart. I was fortunate enough to marry a former Syracuse laxer who played for Gary Gate in her day.

And so it's the article, it's definitely batted around our house. They threw that one factor in amongst many. But to your point, Europe, China, the Koreans are not reproducing anymore. So it's a, so I think I've always been glass-half-full about robotics, automation, AI. Likewise. In that, we're sort of going to need it.

Like, we're going to have a nursing shortage here. pretty soon. We're going to have shortages of specific careers, and it'll only get exacerbated by a slower population growth. Well said. And oh, by the way, let's talk about there's been so much myopic focus on AI, and there should be a lot of that is justified. But let's focus for a minute on some of the other massive initiatives impacting the earnings picture, the economic picture, et cetera, reshoring, which I don't think gets enough press and enough ink. But we're going to have, according to a lot of the work Morgan Stanley's industrial team has done, we're going to have a lot more factories. We're already seeing evidence of that. Will all of those factories be filled by the

next 18 to 35-year-olds? No. A lot of it's going to be automated. And so there's an effect and an initiative under reshoring in production that also questions that demographic risk. But I think the robotics is no doubt part of the answer. So it sounds like you're fairly sanguine on where we sit today. Not that you don't think a correction is possible, but you sound as though the earnings growth looks to be sustainable based on these tailwinds that you're talking about. My presumption is we have the midterms coming up right around the corner. It's going to be Labor Day this weekend. That flew by. And the phrasing I'll go back to the outset of this conversation that I've come up with over the last year is policy shocks, inflation pressures, all of these

factors and dynamics that used to matter more to markets are like pop-up ads today. They kind of come and go. And the main narrative keeps coming back to earnings and AI. And so, like, being intellectually honest, knowing that Liberation Day mattered for a minute, for the market, knowing that Iran has mattered in March and April and other points in time, can I intellectually say that the midterms aren't going to matter? No. But to your point, Josh, because the earnings backdrop is so strong, I think whatever drawdowns are corrective experience we get is super moderate.

Well, how about this? I think one of the reasons why all of these things that we've dealt with over the years, that would have at a minimum derailed the economy, if not thrown it right into a recession. I think part of the reason is there's so much money in the system. And I think it's underappreciated how much that is distorting, not in a bad way, what otherwise could have happened in a different generation. Now, the assets could shrink in a bare market and fear can return, obviously.

But think about all the secondaries that we're seeing. Anytime something goes bad, it's bought up immediately. And that is- Google's issuance ahead of the big SpaceX deal. I see that's really impacting the economy and the market in an underappreciated way. No, I think that's absolutely right. And that's like the residual benefit of a 15-year bull market, which started out as Fang, then went to Mag 7, then went to AI CapEx.

And now, I agree with you, the most healthy thing I would argue in terms of the duration of this cycle is the rotation we just saw. It's as if you really needed the semis in June and some of the other first-order AI-CAP-X winners to roll over. Here, healthcare, take it. To get the healthcare sector, to get- Mathematically get the MAG 7 working. Right.

And we saw that in, you know, selective spouse. Finance, financial stocks working all year and all year last year for the most part. Healthcare this year, small caps coming out of nowhere. Industrial had a run. I know they've pulled back, but they had a big run. And kudos to Mike Wilson, our other friend and partner, you know, of many years, who used to be my direct boss 10 years ago, who had a small caps call earlier this year, late last year.

So, yeah, I think that's been one of the surprises as well. Okay. Are we going to see the dramatic earnings growth gains that have now spread from the S&P into the midcaps and the small caps? Is that sustainable? So I feel like that space is a lot trickier. Yeah. Because on the one hand, you would argue like the sectors that are disproportionately overweighted to small and mid, industrial's financials, have a lot of, as I've mentioned so far, a lot of idiosyncratic positives like capital market cycle, rates. building, building, production, no doubt, Josh. FOMO. FOMO, for sure. That risk-taking liquidity, you mentioned.

All the MNA leads to more MNA. And it should. And look at how the biotech sector is acting of late as an example. So all of that can be true on the one hand. And then on the other hand, I think it can be true that rates backing up, particularly for that lower quality cohort of small caps, should be an issue, right?

And we've talked about this phenomena as of the last 15 years. We went through this massive monetization cycle in private. and something like 80% of the companies in the U.S. today that generate 100 million plus revenue are private. So basically your small cap allocation as a retail investor could have just been in the private market and not in the Russell. It's an off now. Totally. And so that you've had like almost this negative selection bias in the public in the Russell 2000, which is like, whatever the status, 40% of that index isn't profitable.

And so like I think on the one hand, you have positive drivers, but on the other hand, beware rates. one, and beware AI. Look, let's face it, I think AI, we've talked about it earlier in terms of the big caps and when does that show up in earnings. But I think AI could be really tricky for small caps in the sense that, number one, in some of these industries, AI is going to disintermediate certain industries completely, and they may be more small cap in nature. Number two, I would argue that the AI adoption wave we're going to experience, which is going to be a decade experience, may not also be felt in terms of the right tail from the small caps, because in many of the cases, those less profitable small caps don't have the capital to invest in AI.

So they might have a left tail risk, disintermediation. They may have a right tail risk in terms of not participating in the AI adoption. So small caps will do what small caps do, which is periodic moments of inspiration, followed by disappointment. And then when you're so disappointed, all of a sudden they start to rally again. Very different return profile than large caps. I think that's well. So I think it's like catching a Friday morning flight to Tampa.

You're going to have a lot of periods of calm and you're going to have a couple seconds of turbulence. I like that. I like the pop-up ad metaphor even better, though. That's a good one. Thank you. Where, yeah, we see it. It's peripheral.

Can't wait to close that window and not think about it. So I'm that way with the midterms. I have no opinion of what's going to happen because I'm paying as little attention as possible. I think that's wise. So maybe the house turns over. the Senate doesn't and nobody really does anything differently. The one big thing that might change is,

all these astro-turfed data center protests might very quickly go away because there's no longer a political opportunity to say how much you hate Microsoft. Like all of a sudden we were talking about it, talking about it, then the election comes and goes and nobody's talking with it anymore. I can picture that. I think that's spot on. I was at a client dinner earlier this week out on the island with Brian Noak, who's our leader, thought leadership, thought leading.

industry-leading internet analysis, you well know. And we were talking about really the midterms, but also 28. And this idea that the midterms, like you just said, are going to come and go, and then people are going to focus on 28. And what you might feel, right, is just a very fast pull forward in terms of the data sales. We may have a presidential election in 28. Yeah.

Every four years or so, they seem to come back. Okay. Go on. What I was just saying is Brian's view, and it makes, it's intuitive to me, is past the midterms, right? And keep in mind that AI CapEx and momentum implosion in June, which has struggled technically to come back to the 50 day if you're like memory stocks or I think it's very interesting when you get past the midterms that you have maybe almost a pull forward ahead of 28 in terms of the data center, trying to get as much done ahead of that. So that would be a negative catalyst? Eventually.

In terms of like great in the moment. The hangover? Well, so the last. the last capex cycle that became a pull forward was Y2K. And the hangover from that started to be felt in the second quarter of 2000. So, wait, wait, wait, people are not going to buy this many Intel chips every quarter. Oh, that's not good. So that's the thing that I most worry about.

The amount of the earnings growth that's expected to come from the hypers, the 50 largest semis and memory companies, and then the Dell computers of the world. It's a large, it's not all of the earnings growth. It's a large amount of it. And if it goes into reverse, I don't know that the market's going to treat that well from 21 times earnings. And also, broadcom today. What are they, 90% growth, whatever it was, and the stock felt 5%. It wasn't 91%.

And same with the NVIDIA recently, which, you know, blew out the guidance and even said guidance amid capacity constrained backdrop. And the stock worked well on the day and then really hasn't followed through. What does this tell you about where the stock market is today? Now, the environment could change, but people are simultaneously worried that the earnings are too high, the earnings estimates are too high, and even when companies destroy earnings to the tune that we've never seen before, the stocks still aren't working. Is that bullish? It doesn't really sound it. I think it's, my opinion, it's good for the duration again. Like, it comes back to this idea of, I think we're in a longer cycle. And, like, secular, here's the good news. The way of the capital

capitalism works, the secular bulls last a very long time. They last 20, 25 years on average. And the good news is also that the secular bears tend to be half that duration. So we had a nasty bear market, as you well know, coming out of the 2000 internet bus. And really since 2009, 010, it depends if you adjust it for inflation, S&P price and gold terms or not, which I know, which is one popular way to look at it. But we think we bottomed in 10 or 11 in real terms. And so, you know, whatever, we're 15 years into that cycle. I think the factors that are going to matter, right? To Josh's point, a minute ago, 60% of 2Q earnings, 28% headline, came from AI infrastructure. So I think we're money good on that particular contribution. That was then. I think it were money good,

27, 28. Talk to Brian, who I saw two nights ago, his numbers for AI CAPX and 27 are 1.5 trillion. The street is at like 1.2. So the street is still low. And that's been, there's been a catch-up. we all know for the last 18 months or so. On our team, we call it the quarterly tradition. Like every quarter, you can bank on the numbers going higher. Why? Because it's a generational competitive risk among the U.S. players zooming out among China as well. We can talk about it.

Secondly, on a more technical basis, the scaling laws continue to work. Meaning, every time we train new levels or new models of AI, new AI models on higher levels of compute, the outputs and the results continue to get better. So what is the technical incentive for drawing? down the KAPX at this moment. So I agree that. One other thing to add to that that I've been talking about that I think is maybe underappreciated.

It's not as sexy as new data centers. And it's not as sexy as new GPU sales to new customers. But when you build these data centers, you are embedding guaranteed purchases of servers and chips as far as the I can see. We could argue about the depreciation schedule and is a GPU produced in 2026, a five-year asset, a three-year asset, I don't know the answer. I'll be the last person that will know that answer. But the point is, it's not a 20-year asset. Correct. It's not the same as Toyota building a plant that's going to make Rav-4s for the next 20 years. Like, you're going to need new chips all the time.

And there's a story there for Nvidia, story there for Dell, which just had a blowout earnings report this week. Like, that's a big part of the story that I think people underappreciate. Like, now that you built these data centers, even if that slows down the pace of new construction, we still have to feed all of this existing infrastructure with tons of technology. So I think that's the most important point that anyone's made so far on the pot. And the reason I say that is... I told you I'm good at this. Is that a tennis clap?

Yes. The reason I say that is because of the following. We wrote a note back on June 1st, and I love writing. I wish I had more time to write, but I write fairly infrequently. but I wrote a note on June 1st, which I'll share with you, cautioning the semis momentum. And our takeaway was you hear all about demand constraints, to your good point, I think under the hood, in reality,

it's more about deployment constraints. You are ordering servers and chips and all these electrical components and industrial components ahead of 40 gigawatts, 50 gigawatts of projected data center construction in the next two to three years. Are all of those buildings going to get built, unless you're Elon, are all those buildings going to get built on time? And do you have a risk of double ordering in the supply chain of semis of service?

Absolutely. Is it a risk today? No, but is a risk from here for now? Could be. This is one of the most bears charts that I've seen. I accidentally, I was looking at this. I'll hold it up because it's not in the dock. This is a chart of Sienna.

And as you know, Sienna was around during the dot-com bubble for the fiber optic buildout, straight up, straight down, and it looks eerily similar. It doesn't look great. Yeah, and so that's a perfectly reasonable analog. I think a couple things I would argue, right? So one is when we look at our prime brokerage book and we're the biggest wealth manager in the industry, and I like to also say the best, we're the biggest prime broker in the industry on the institutional side. All right. So if you look at the net and gross exposures of our hedge fund book and our hedge fund clients, a lot of our hedge fund clients have not regrossed in memory and a lot of the first half winners in AI CAPEX.

they've been waiting. And we are paying very close. So the stocks came down and they didn't get back into them or at least not of the same size. Correct. Not even close. And where they rotated, they've rotated a tad to Mag 7. Some what's a software, picking the bottom in some of those areas. But it's been health care.

It's been some of these other parts of the market. So the reason I mentioned that, number one is number one, I think that's healthy. Like, I think the idea that everyone didn't jump back on the train. is a positive. They're kind of waiting to see how things go in terms of pricing, in terms of midterm political football and data center. But again, I think the healthiest thing that has happened in terms of this cycle vis-a-vis 2000 is the rotation that's happening. And lastly, let's not also forget, as Brian and I spoke about on Tuesday night, that all the major hyperscalers are in the early inning still of a cloud transition. And yes, the cloud business is

being in effect supercharged by the AI intersection today. But how many big Fortune 500 and beyond companies have fully transitioned to the cloud? You're not in the ninth inning. You're not in the sixth inning. You're probably in the fourth or fifth inning. So here's the key takeaway. The way this kind of differs from 2000 is when you laid all this fiber, you had no alternative for the fiber. It just went dark. And it was dark for 10 years until Amazon became Amazon. So did it eventually matter for creating U.S. exceptionalism? Yes. But not for 10 years.

We had to live through a 90% NASDAQ decline on the way to somebody inventing YouTube. Like we had to wait from first quarter of 2000 to 2013, I think, for the NASDAQ. On the NASDAQ to fully make a new high. Very great. Something like that. Very good point. And so where I would just put a fine point to just to end that comment is keep in mind that, taking both of our, I think, I think we're on the same page, well-founded risk factors around

data center deployment and double ordering, a lot of those chips can be reverted back to cloud. And so do we have dark GPUs the way we had dark fiber? Probably not as likely. I like what you're saying about the duration of the bull. So not having a bubble. So when Michael brings up like Nvidia blowout numbers, a week later, broadcom blowout numbers, why are these stocks flat down? It makes no sense.

I agree with what he's saying, but I also like what you said, if we don't rocket those two stocks up 70% right after earnings, it gives you more potential upside over time. And so those stocks can rally, but we don't have to have the rise and fall all take place inside of two weeks. 100%. I sort of like that it's in slow motion. Well, the glass half-fold version is we're building the wall of worry.

You need that. You need the wall of worry. Thank you, Michael. And by the way, the wall of worry. worry was like the Empire State Building in 22 and 23. Remember, when everyone predicted, and I'll give kudos to Ellen Zetner, our colleague, who at the time had the economics call, remember that in 22, 2023, we'd just gone through the most aggressive Fed cycle in 40 years, and the consensus was predicting this big, bad recession that never arrived. Why? Back to our earlier conversation, we have paradigm

shifted away from goods to services, away from a normalized income scale to a hyper-k-shaped income scale where the 10% is driving 40% and is less elastic to monthly changes in gas and food prices. And last but not least, of course, post-23, the AI super cycle. And so my point being is, I agree with you, Josh, I like the fact that you have, and Michael, I like the fact that you have these clouds hanging over the kind of Uber euphoria from happening, number one. But number two, I just want to come back to, and I know I'm doing a little bit of a weave, so I apologize. I just want to come back to your comment about the earnings growth risk, because here's where the onus on the baton being handoff from AI infrastructure to AI adopters is really crucial.

And the next two years, does the margin productivity boost from the AI adopters more than offset what could be a deceleration in the AI infrastructure spending? That is the key handoff. Well, I hope it happens that way. It better. And by the way, let me just say this, because a lot of our retail clients often, everyone thinks and talks and invests at, unfortunately, at times with their generational bias and their memory. And a lot of our average retail clients are still stung with the memory of 08, with 2000,

it's that, you know, for not good reason. And a lot of people are talking about is this 99 over and over again. And one of the things I would just argue is, in terms of how it's different, is, number one, the quality of the spenders today is so much different from back then. That's such a great point. And yes, we are talking about leverage now, but don't forget. These were all Mag 7, formerly Fang, the industry group formerly knows Fang, was once upon a time net cash balance sheets. And so if I'm an, as an investor, when I see a generational technology investment, I want to see more CAPX.

I don't want to see just buybacks for buybacks sake, which is what they had done for 10 years. Fang was capital light. They generated excess cash. They bought back stock. They did that to the tune of a trillion dollars a year. The same people who hated the buybacks, though, now hate the CAPX too. I don't know if you'd be surprised by that. It makes for the duration.

So I want to double click on what you just said because in 1999, in order for Cisco to hit its growth targets and Lucent and Dell and Sun Microsystems and Sienna and Juniper, and I can go on and on, in order for those companies to hold up, they were reliant upon selling to a customer that had gone public a week prior. Like literally, like our enterprise customers are Pets.

dot com, ETOys, CD Now, DLJ Direct, and all these things that didn't exist a year later, the

customers today are Amazon buying on behalf of its 30 million cloud customers who represent every sector of the

economy, hospitals, insurance companies, government, manufacturers, government. So it's, it is not the

same as I hope we get the next 100 IPOs so we can sell these people some some some micro products or some servers. EMC needs to sell, you know, some stuff. So let's hope we get another 500 IPOs next year. That is not now the asterisk is the two biggest players in the ecosystem on the buy side are not public yet. Correct.

Not profitable. Not particularly transparent yet because they don't have to be. And not proven through any sort of economic cycle. that's the wild card that takes everything I just said and invalidates it a little bit. I think it's really well said. And I think I'm somewhat limited, as you know, on what I can say on the privates or not. Understood. But what I would say in terms of what we've publicly written about and talked about is like the growth rates, when you track what they're doing, some of these companies on the privates were printing $10 billion ARs end of last year.

Now they're last month 60, 70 billion. So the growth rates are still astronomical. And that's what, ultimately what you need is the demand versus supply dynamic to still be at our favor. And we think it is. Let me just say two things quickly because I want to get them in. So one is the quality of the spenders is different. Secondly, I don't think what gets discussed enough is the credibility of the spenders.

And this is also in vast contrast to the pets.com analog. Look at, I'm a fundamental investor, but look at the technicals of tech relative to the S&P over 30 years. It always makes higher highs. I think that is an incredibly profound technical signal. Why do I say that? We go through our warts, whether it was internet bus, whether it was 08, whether it was COVID, whether it was 22 duration sell-off, et cetera, et cetera, but we always recovered in new highs. What does that remind me of the U.S., despite some of our political pitfalls and despite some of our issues of which there are several, is still the single best allocator of capital to new innovative technologies and enterprises anywhere in the world?

American exceptionalism lives. The historical analog, however, is that while we always figure out the next big thing and allocate to it appropriately, we almost always boom-bust on the CAP-X. So that was true of Internet fiber. It was true of Shale 2000-2015. Railroads, canals. Going even back to my, blowing off my history books, going back to Rails. No doubt.

Here's where this could be different once again. It goes back to our comment about invidion, broadcom, are not screaming after phenomenal earnings. I also like that. I like the fact that the market is signaling, one, that they're treating those companies with rationality, and frankly, a lot of its law of large numbers. And lastly, there's other games in town. There are private companies out there that are going to be coming out. So I like that argument that it's not that they are not impressed by Nvidia.

It's that they know they're not going to do 100% earnings growth next year. But in the meanwhile, there are snowflakes out there. Like there are other companies. that do have that sort of potential that the world is waking up to. That don't trade at a $5 trillion market cap. And the money is shifting from one to the next. All right. I would buy that as a great reason for the rotation and for why it's so healthy.

By the way, last point is 40x mutual funds. Think about the mechanical ceiling or the issue with a lot of those funds have on being relatively an absolute overweight Nvidia, right? Like, they get capped out at a certain level. They can't go to 10%. They can't go overweight. So who's the incremental buyer? A lot of our wealth clients, and frankly, to their great intuition, have bought the dip.

When you look at the trading patterns and the statistics in the last year, five years, 15 years, they've been better buyers on the dip. And a lot of them have gone back to Nvidia. But at a certain point, if you're a retail investor, how much of your overall wealth can be in Nvidia? So all of this hinges on the hyperscalistibility to make an ROI on all these investments. Sambalist, a former guest of the show. I watched the program. It was excellent.

Michael's great. Hyper-scalers and Nvidia, new investment-grade debt and SBVs. It's $320 billion in 2026. This is from his note. So he argues that perhaps there's so much money. I mean, this is dramatic. There's so much money here. This is help pushing up government bond units.

Is this going to work? So at the moment, the demand we're seeing. and even the terms and the spreads we're seeing for a lot of this issuance is still relatively benign. And again, it goes back to my point that these, the names you all cite on this chart were all net cash balance sheets. And is there dispersion between the oracles of the world and the Microsoft's? Absolutely. Microsoft and J&J are the only two triple rated, triple A rated names in the market left.

Oracle's CDS spreads trade at, you know, very wide levels. So is the market, in my opinion, vis-a-vis that example, pricing in some of the risk? in a dispersed manner as it should, yes. So the market is fully aware of this. But Michael, you made the point earlier in terms of just how much liquidity is out there. And what types – I'll also add – what types of new buyers are out there, including the insurance community, which I think has been another source of major demand for this paper. That's such a good point getting back to the point I made earlier.

God forbid the price on these come down, the yields go up, a tidal wave of money waiting to buy these. Agreed. The world wants this paper, otherwise it wouldn't be. be issued. Absolutely. And it's not being issued out of desperation. They're calling up alphabet and saying, hey, guys, like, there's an opportunity here, you know, given your credit rating and your cash flows, there's an opportunity to do something that's potentially better than equity financing if you don't want to just keep doing. They're going to spend anyway. Yeah. So, okay, how do you handle people asking about the circular financing question? Because that's, I would say five days a week on CNBC,

that that's being debated. It's not going away. There are some great answers for it. I'd love to hear your answer for it. So if you listen to Jensen's comment on the October call of 25, on that same risk or that same feedback, it was, hey, we have a really unique line of sight

in terms of some of our supply chains and some of our partners' future growth. And he's talking about the private labs. And he said, given that line of sight, given our net cash balance sheet, as an investor, you want me to take some type of leverage or take some type of skin in the game in terms of some of our partners? And frankly, I thought it was a really convincing statement.

Wouldn't who want him? His own shareholders? Because I know the shareholders of these other things love him doing that. No doubt. No doubt. And look, to your earlier point, does it create a risk factor? Absolutely. And so, you know, what I would say is, I think it goes back to, It's more of a qualitative answer, but it goes back to my comment about 2000 to 226. Look at how all these companies have managed through every technology wave, whether it was internet, yes, social, e-commerce, online ads, streaming entertainment, cloud, now AI. And oh, by the way, the next round, which doesn't get talked about enough, Adam Jonas talks about quite a bit, robotics, space, quantum, and autonomous.

And by the way, the mag-7s get to dominate in a lot of those sectors as well. Right. And so my opinion is he's saying we have a really unique line of sight in terms of how all these businesses are being allocated, how they're being allocated in the enterprise I'm meant to say, and we have the net cash balance sheet. So wouldn't, as an shareholder of our stock, wouldn't you want us to take that opportunity? So vendor financing was a big issue during the dot-com boom bust. And people remember, like this is one, uh-oh, when the equipment suppliers are giving money to the body. who's then going to buy their equipment, that's usually closer to an end than the beginning or that's the thing that people are worried about.

So watch the spreads, right? So the debt market, just like in 98-99, when you had the Fed raising and you started to see the bond spreads on the tech names starting to widen out. We're watching that too, right? And so, look, I mean, that was go back to the fall of 25, Oracle CDS really was the predictor of Oracle stock in the coming year. Dan, and this is weird. So we're looking at, in red, is the high-yield corporate bond spread, okay?

And in black or gray is the triple C, so really junky junk. And they go in the same direction almost all the time. And there's been a very, very notable divergence where high-yield corporate spreads haven't budged, good. But the shittier stuff is ticking up in a pretty meaningful way. What's in triple-cy? I was just going to say, is that like private equity? private equity back companies. Even worse-rated stuff.

So take it with a grain of salt from the equity guy, but my extrapolation of this data series is when I look at the underlines of high yield, I look at energy, I look at materials, I look at chemicals, I look at industrials. One, a lot of those industries are benefiting fundamentally from the geopolitical issue in the Middle East right now.

Second, if you just stick with energy for a minute, right, pre the 2015 shale bust, KAPX bust, a lot of executive compensation frameworks were incentivized towards production growth. So commodity prices would scream higher. What would all the EMPs do? They put on extra production growth.

What changed dramatically post the 15 implosion? A lot of the executive compensation structures today are more balanced in terms of capital return. And so what have a lot of energy names become today? They've become higher dividend payers. They've become higher buybacks. Secondly, let's go downstream, to materials and some of the industrial components, okay, well, we just talked about the AI

data center buildout. They're fundamentally benefiting from that buildout. So maybe there's more of an idiosyncratic. Steel, copper, like you name, chemicals. I feel like this series is diverging because in part, because of AI and because of some of the compositional and fundamental changes in the energy sector. I think that's right, especially on the energy side. We were talking earlier about the Wall of Warre and how there does seem to be a percent. level of disbelief, which in the short term is maybe something to pay attention to, but longer term, that's healthy for the continued secular bull market. John, chart six, please.

So this is from Goldman, leverage funds versus the NASDAQ 100. Never heard of them. Bears are piling into NASDAQ 100 futures. Short positions have surged 35% since mid-June and are now near record levels. So I want to share another chart that we made, John, chart seven. So Chart Kid Matt made this. And we're looking at the median S&P 500 stock short interest as a percentage of market cap going up until the right in a pretty steep way. And on the right side, you have the bottom decile.

So these are the ones that are least shorted. And even the ones that are the least shorted are going up in a material way. Is there anything going on in here? Like my first reaction was, well, maybe dismiss this because there's a lot of other different hedging instruments. These charts are 30-year charts. But these are something going on that. But they're moving. Wait, did you just get bearish now?

I just got very pensive. So let me, let me, so I've got to take this all in. This is a lot. So while you're thinking, I've got the stocks that are. This is not a squawk box exercise. Hold on. You could think. So the stocks that are in the bottom, so the least shorted stocks makes sense.

This 99th percent tile. Yes. Yes. So what's in that basket is Google. Probably like Apple. Google and Berkshire, because who the hell is short Berkshire? Morgan Stanley number three. Let's hear it.

Morgan Stanley number three. General Dynamics. To withdraw, Dan Skeli. Walmart, Amazon, Wells Fargo, Eli Lili, Apple, A-Net, and Chevron. So these are stocks that nobody wants to short it. Even them, it's at the highest it's been since 1994? But could this be mechanical,

people hedging even bigger long positions? So the only way, this is fascinating, and I'll come back to you with the fuller answer, because I want to study this. Well, Chris Metley is our leader on the quantitative derivative strategy desk in I, Boston's been around forever. When you introduce him, do you say, this is my quant?

This is my quant. Okay. Chris. All right. From Boston. Here's the only thing I could say because I'm just still focused on this left-hand side chart on the median stock. Remember that as of late, second half 25 until June 22nd when the semis locally topped

is we had this really hyper-concentrated market in AI Cap-X. So it's year-to-date through June. we had 90% of S&P's attribution come from three industry subgroups, semis, IT hardware, and power, all tethered to data centers. Yep. And so if I think about what's going on the left-hand side of the chart, simply put, is I think you have people rotating out of those names and also shorting the median stock as a counter to that.

There's interesting stuff. It's hard to. So, all right, the top designe, so the most shortened. By the way, look at the y-axis. Obviously, the bottom decile, nobody's short, okay? It's at an all-time high, but it's 1.2%. If you look at the top desksized, so the most shorted, it's 9.8%, which is in the 70th percentile. These are the names, the most shorted stocks.

Reddit, 13%. I don't even know a lot of these names. KMB, Akamai. This is helpful to see that. Okay. Charter, SMCI. I don't know, I don't know all these names. Trade Desk, I know.

So I know almost... This feels like a rates move. So like the curve, we were priced for three rate cuts from Jan till Iran, March, April. And now that's completely flipped. And I don't, I can't, I didn't see what happened this morning, but I think we're now 50-50 price for this month in terms of rate. So if I look at this cohort on the left-hand side, it's super low quality, less balance sheet strength. On the right-hand side, it's much higher quality. So to me, it feels like the short entrance in the lower quality things.

So it makes sense. It's rated as rates of rerated. So maybe the debt-to-equity ratio looks terrible. There's a lot of... Profit margins, cash flow. There's idiosyncratic stories in here that, like, the trade desk has been an abomination in a very good tech sector, not representative of anything else. SMCI is accounting scandals. Charter is cable.

Like... Reddit has the Google algorithm change. Right. Reddit has to contend with the source of all its traffic changing how it sends people. Like, you can... Echo is competing with SpaceX. Have fun with that. Like, you can go through this and come up with a reason why this is not a market story.

It's an idiosyncratic story. So, Dan, you'll like this. The only, not to interrupt, Michael, the only outlier on the right-hand side, Charles, I'm not sure why Microsoft wouldn't be there. Because I think what was really crucial to their narrative in the last month was how they tempered the CAPEX comments on the earnings call a month ago. And the stock reacted so positively towards that. And it feels like people are now siphoning out within the group. Maybe Microsoft, Amazon, Apple's in a different category,

but they are in a different group at the moment than meta, Oracle. It's funny that you say that. I don't think that's at all behind the rally in Microsoft. I think what people really liked was the public divorce with Sam Altman and the end of exclusivity with OpenAI. I think people felt that Microsoft was not getting the best end of that deal and that they might be better off using cheaper open weight models to fulfill those.

AI software product commitments to their users. And I think that that's probably where Microsoft gets its mojo back. It's some combination. Absolutely. No, that's a great point. I think they went 180 from being tip of the spear investing in frontier. With the open AI player. To now being more rational.

I think that's a great point. I want to introduce two charts to present evidence that the stock market is functioning pretty well, I think. Fundamentally, I think it's responding appropriately the stocks that are doing well and stocks that are doing less well. John, let's start with chart four. So this is a, this is a CNBC chart three-month intrastock correlations. Is that basically as low as it's been in almost 40 years? Like, each stock is marching to the beat of its own drum. But Michael, I thought index funds were ruining the market. Is that not true? So Adam Parker, your friend, our friend, John,

let's jump to chart nine, has an awesome, awesome, awesome chart. That shows the mean 12-month industry group relative return of companies with year over year growth margin contractions of more than 1%. Okay. And these stocks are getting the shick at them relative to the index. And what he's saying is basically, if your gross margins are missing, you are in big, big, big trouble. And we're seeing that over and over and over again with these earnings reports. So I'll jump on.

Oh, Broadcom today, by the way, their gross margins felt 200 basis points. Blow out numbers, yeah, their margins weren't great. And the stock was on 25% going to the print. Crucial, crucial point, Michael. So let me jump in on two things. I think the reason why this particular vector is compounded at the moment, one goes back to what I said earlier in terms of this synthetic tariff-related cloud in first half of last year being now synthetically boosted by pricing. So if you're not getting the gross margin benefit from that pricing right now, you're in this camp. And secondly, maybe a little bit of this on the gross margin line even is on the AI

productivity as well. And so like if your peer group is experiencing some modicum of AI adoption productivity and you're not, I think that's why you're getting triple dinged on this particular data series. Okay. You know what's in this in this, the stocks that are missing on gross margins? It's a lot of food service. Okay. It's a lot of QSR restaurants. It's your shake shacks, your Chipotle's. The K working in reverse, which is a thing now. It's just, right. It's just not a, it's not a lot of fun to be in that business right now. Like, Shake Shack is not supplying French fries to data centers. You know what I mean?

Like, they have less to look forward to. They had an earnings blow up a couple of months back. They blamed paper goods, the price of beef. And it was all Iran-war oil-related, whatever. But they don't have that offsetting. Yeah, but look how much money we're making from AI. Like, they don't, there's probably a thousand stocks like that in, you know, in the U.S. market of 3,800-st stocks.

They're small. They don't actually matter to the return to the index. It's 100%. And it's helpful, Josh, to your point, to see it through the lens of which business models, because, like, let's just drill down for a minute on food staples, which are going through two massive headwinds at the moment. Cyclically, you've got the backup in rates and the volatility mostly to the higher side of the chart on oil.

So the K-shaped, which has been incredibly resilient on the lower run. I mean, we talk about everyone folks on the upper run. Let's talk about the lower rung for a minute, which, I mean, I could argue, and I think there's been this debate around, does the official data capture all of the gig economy and all of the ways people are making money off balance? Because the data comes from the 1950s. We didn't have that. Right. We can use an update there. Yeah.

So I think on the one hand, the data is skewed. But on the other hand, let's face it, like the middle lower income cohort has been, I think, more resilient than most has, most have perceived or anticipated until now. I think now you are seeing some degradation on the middle income worker, maybe vis-a-I in the beginning stages, but just the macro factors. And then just drilling down into food staples, because as a generalist, I could talk to all these sector experts. I think the GLP thing is real. I think when you look at Pepsi going back five years, five years ago, I think they were incredibly convicted that they were going to sail through the issue. And when you look at Frito-Lay and some of the food businesses missing their organic revenue growth targets for like two to three years running, I think it's a very, it's a very real thing. The mistake is to look at McDonald's earnings and try to extrapolate something about the economy because it's just not it's not the way that.

Look at the stock of Hershey. Horrible. That's years. Now, Dan, I am a salt to the earth person and I am equally likely to be shopping at Americana, Manhattan, Manhattan. Or dollar tree. as I am to be at Roosevelt Field. And Michael and I have been harping on this for like three years. Every time the banks report earnings, less so Morgan Stanley, the banks that issue credit cards,

it's almost like the audience is clamoring for them to say the bottom desile, the bottom quintile is breaking. And now they don't even wait for the question anymore. Like, J.P. Morgan, they lead with it. They're like, before anyone asks us, everyone's paying their bills. Delinquencies are well within norms and at historic lows and car loans are being paid off. And just anecdotally, like, who is filling up all these flights? The movie theaters are packed again. Like, you walk through the mall.

It doesn't matter which mall. There are people in it. So even if you don't know the data, if you're a normal person and you talk to the people in your life and you look around and see what they're doing, they're leasing new cars, they're going to work, they're paying their bills, and then for some reason

there's like this internet component that is insisting that it's all fake and nobody is paying their bills. And it's about to collapse. And that's the hardest part for me because the arguments are so seductive that we're at some sort of peak something and it's being hollowed out from the bottom

and you up there on Wall Street, You don't see it yet. Have fun with your micron earnings, but you'll see it soon. Or when? I keep waiting. Do you feel that maybe we get to a point where we're ignoring that risk too much? Or am I ignoring it just about the right amount? It's really an important comment and I think super well said.

And I'll say a couple things. First is, number one, I think it goes back to my statement, which is unproven at the moment, a minute ago about the gig economy, it goes back to COVID, which, you know, a crisis doesn't usually create new trends, but it certainly can accelerate things that were already in place. And I think the whatever you want to call it, social media influencer economy vis-a-vis COVID got supercharged. And it's still going forward. People starting businesses.

New business. I was going there next. The entrepreneurial spirit. Absolutely. I was going there right next. So we're on the same page. So new business formations that are two-decade high is part of that vis-a-vis AI? I absolutely think so.

AI in many ways is lowering the barriers to entry to being an entrepreneur if you have a good idea. Now, does everyone have a good idea? No. But do I have more scale in advertising and marketing and process and technology if I have AI? Yes. And so what are those new businesses doing, Josh? They're hiring people. And maybe it's not all counted on the official monthly payrolls, but they're hiring people.

And so my point is, I know you're coming about the big bank's earnings transcripts so well because we see the same thing. And it's true. Like the data is too diverse and too rich and too widespread to try to poke holes in it. Right? It's travel. It's eating out. It's all these different parts of the economy. Yeah.

And so, in my opinion, it's not a kind of one-off phenomenon. There's something underpinning it. And I think these comments are underpinning it. Don't you think one day there will be a Bank of America or a Capital One financial conference call where they actually do say, okay, we're seeing an uptick in the United States. delinquencies or bills past due, like 30 days past due or whatever. But by the time they do that, we will all be like, yeah, no, duh. I was just going to say, look at the earnings.

Want to be obvious to all of us? Right. How unlikely would it be that earnings prior to that moment? Hold up. How unlikely it would be that earnings continue to trend quarter over quarter, not year over year in the short term. How unlikely would it be that they continue to accelerate? Very unlikely.

So we've talked a lot about idiosyncratic, nuanced. which I think today, this cycle is unlike any other cycle. It's been a underlying threat of all of our comments. But to be fair, economics 101 just goes back to earnings and job growth. And it's very unlikely in this earnings picture to have that future B of A moment. The lower shape of the K, I was looking at a firm's delinquency rate. Which customer do they serve? A firm?

It's not Amex. No. Buy now pay later. Yeah. So lower FICO. The delinquency rate is nowhere. Okay. Yeah.

The delinquency rate is nowhere. It's nowhere. It's 2.3%. Well, because that's the pay later part. You don't understand. You just don't understand economics. I'll add to that. I don't know if it's...

They say pay later. You don't know how much later. I don't know if it's GOPs at the 25-year-old cohort level. But what I do understand from a lot of our clients and our partners' anecdotal comments about their children and the next generation is that people aren't going out as much maybe to bars, maybe drinking, but they are gambling. They are making wages. Wagers.

and maybe on average they're doing better than we would have anticipated. So maybe they have this excess capital from this proliferation in the gamification of betting and gambling. All these other things going on. So instead of overeating, they're betting. They're overbeating. So it's so funny, like the next generation, they're just going to do the GLP1 right into the womb. Like in vitro G. I'm going to be the last fat person left in this world.

Yeah, less of a copay. Okay. All right. I want to make sure we get to a couple of more things. stocks selection. You're managing money. You're also advising other people who manage money. You're on the committee.

You're in all these conversations. What are you telling people about the end of year run? Hopefully it's a run. And into 27. Like, I don't know if it's your opinion, the House opinion. I don't know where one ends. But talk about our audience are investors, right? They love the stock market.

People listen to compounded friends. love the stock market. So talk about stock selection, what you guys are excited about, what you're looking at, and maybe what you're leaving behind from the first half of 26. Yeah, all the above. So let me bifurcate it between my asset allocation hat and my day-to-day PM equity hat. So on the asset allocation front, Josh, we've been overweight U.S. equities for well over a year. And I would say, while that has certainly served us well, we've also, no doubt, experienced this AI spending AI highly correlated concentrated phenomena as well.

And so at the asset allocation level, we've also told people allocate towards real assets, allocate towards long, short, hedge funds. That's a counterbalance. No doubt. And, you know, in some instances, allocate towards EM. And we saw what happened when AI caught a cold this summer. We saw what happened in the U.S. rotation was the outcome. Peaked at Troughdown.

The S&P was 3%. because of that concept I alluded to earlier, semis went to Mag 7. And mathematically, Mag 7 might be 35, 40% of the market. Semis are much bigger, but they're 18%. If I add in health care at 10% and financials at 15%, that's what really offset that cold metastasizing for the U.S., not so for the Cospi. So the Cospy had a truly concentrated two stock. So we've told people to be selective in E.M.

So what I'm trying to outline, Josh, at the broad level, is asset allocation. We've been overweight U.S. and are sticking to that for a lot of the reasons we've talked about, resilient economy, accelerating earnings growth. But we've also tried to plug and play through diversified asset classes. On the stock level, again, the healthiest thing I would say, because I'm most focused on long-term investing. You know, my team originated in 1995 under Byron Ween in the Equity Research Department. and Byron, who is truly a visionary, thought of investing in a concentrated portfolio along a continuum. And we run 40 to 50 stock portfolios. And the idea being, in a 50 stock portfolio, you want to have the majority of your names, 40 names, 45 names, be coreholding-esque, plus or minus the market in any given year.

And they're going to be 2ish percent. Two-ish percent, correct. So not super big absolute sized. but I also want to build in maybe five, six positions that are big ideas. And this was truly Byron's philosophy. If I can get big ideas right over a cycle, be it invidia 10 years ago, V's a mastercard and processing, be it thermo Fisher and the proliferation of life science, if I can get a lot of the big ideas right over a cycle, they can now offset the average over a longer period of time.

So what we're telling clients today through our portfolio process. I like that approach. What we're telling clients today through our portfolio, process to conclude is, yes, you wanted to be cautious AI and semis in June. I think there's a lot more interesting ideas there today. But coming back to our overall thesis, this adoption wave is going to be a decade long. And so we want to own a lot of those Fortune 100 companies that are quality-oriented. And I know it's a off-sided cliche to be quality-oriented. Quality has not worked this year. It has not worked in several years. But when I think about the rotation as of the last,

last three months. What's working again? Again, kudos to Mike Wilson. Quality has been coming back in vote. Rates are higher. The onus on whether or not you can make money and out-compete your peer set on AI adoption is higher. And I think this really augurs for a quality, diversified equity portfolio across healthcare, no doubt. AI, in many instances, is taking a six to seven-year timeline in terms of phase one drug discovery to like less than 12 months. One of the things I'm most excited about. Like what is seeing that play out and seeing drugs in our lifetime. Safer drugs come to market faster, I think is a phenomenal outgrowth of all this spend. And and the downstream winners beyond that, the life science tools, the consumables, the lab and

clinical trial managers, keep in mind, healthcare couldn't comp the COVID comp. Then it had a deal at the 22 rate cycle. Then it had a deal with everyone who had growth equity capital going to tech. So healthcare used to have growth equity capital. So that's one sector we like on the AI adoption theme, capital markets. But are you top down on this 50 stock portfolio? Are you saying we're really bullish on health care, so let's find health care stocks that fit our thesis? Or are you arriving at that top down because from the bottom up, these are the best earnings growers? How are you doing that?

It's more of the latter. For 30 years in a 50 stock context, we've been bottom up focused. So do we make sector calls? Yes. but our sector calls are modest in nature, two to four points over underweight any given sector as a way of controlling tracking error and risk. So to your good question, Josh, if we like a stock from the bottom-up thesis, we might overwrite the sector call. But at the same time, as our old strategist and our friend Henry McVeigh has always said, who started out as a financialist analyst,

now at KKR, a great friend of Morgan Stanley, you got to have a view. And so we think you you no doubt have to marry the bottom-up selection effect with the sector calls. Are there scenarios where you did get, you got the sector right, you thought you got the stock right, but then there's an execution misfire on the part of management, and you say, we're still bullish on this theme, we're riding the wrong horse. You must have to do that all the time. Let's talk about software. How hard is that? Oh, that's the hardest part.

It's got to be the hardest part. Hardest part. Hardest part. Because in a, you know, going back to the process. Right horse wrong jockey. Right race, wrong horse or whatever. No doubt. I was supposed to get on a flight to the Derby, and I ended up at Belmont.

So what I would argue is in a 50 stock portfolio with a 2 to 3% tracking error, which is our process, you live and die by concentration. And so we try to temper the sector bets as a function of controlling that risk factor. But the stock selection effect drives really everything at the end of the day. And so you asked the right question, which was got the sector call right or wrong, what happened in the stock selection? No doubt software has been, I think, the most acute realization of that question in the last seven or eight months. So I told you earlier, I don't write often. But when I do, I've actually been fairly, you know, directly correct this year. I cautioned on semi's June 1st.

I said software is oversold in mid-February. And my conclusion in software... Little early. My conclusion in software, it was at the time, if you look at IGV, the new Claude plugin had just come out in mid-Feb. And the whole sector was being priced for obsolescence. It freaked everybody out. My statement was, I think it's very unlikely that as private entities, the business plan for these labs pitching Wall Street future investors is our plan over the long term is to put a lot of corporate America out of business. I think that would be a very futile business plan to the street.

More likely, in my opinion, back in February, was forget about obsolescence. You're going to see chronic interdependence between AI and software. what's going to be most likely is dispersion of outcomes across the spectrum. And so I'd like to say across the holdings we had, we had 100% hit rate across that outcome. We were right on the concept, but there's been so much variation in terms of the individual names. Yeah, like if you take the bet on Adobe based on what you just said versus take the bet on crowd strike, it's like, okay, we were right. Software was oversold, but we didn't get the full benefit.

And that's got to be when you're doing 50 stocks, that's got to be the thing that's like, oh, man, I hope this is the right one. 100%. And look, we had... It's hard for everybody. We had puts and takes. For us, Microsoft's rebound, service now's rebound. We were out of Adobe over a year ago.

We were in Palo Alto as of the last two years, but it got to 70 times. And in the last two or three months, we said at the top end of the PE range, the market has correctly discounted. It's an AI winner. But we run a 50 stock portfolio at 70 times. It was a high tracking error winner. So let's take it out. What's the stock in that?

portfolio that you are most convinced the market misunderstands in the software space or just overall just period like what i have mine in my own portfolio i think the market i think the market is uber wrong personally um you look like you're short you look like you bear long only okay so so i've been in and out of uber over the years so let me let me put this way what's your version of that where i'm saying to people can i give you two names yeah no you give me as many as you want i'll give you two names okay so back in for go back to february so it seemed like every other week a big liquid part of the market was being priced for absolescent. We talked about software. At one point, it was insurance brokerage. At one point, it was wealth management. CBRE. Michael, we're also on the same

page. SPGI. So, Morningstar. That's where I was going to go. Okay. The idea that data, forget about software at the moment, the idea that data-centric businesses were also being priced for obsolescence. And in many instances have not rebounded. So S&P as an example in one of our, full disclosure, one of our holdings, does multiple things. It has the, issuance business, but it has the data business, what they just started talking about potential alternatives. But I don't think the issuance business is frankly getting enough bid in a world of going back to your debt charts in a world of massive financing.

Yes, bond investors need ratings. They don't, they're not going to take Claude's word for it. It's regulated. It's regulated. It's regulated. They have to be waiting. Go back to health care. Okay, I'm with you on that.

So it's highly regulated data-centric businesses. And last one is NASDA. Because when I think about that business, I have these future franchise IPOs on the rise. NASDAQ for the year, it might be at highs, but for the year, point to point, is flattish. The last time I looked at it. It should be able to. It should be up more. The earnings continue to grow mid-teens to high teens.

The multiple has stayed rarely flattish. And to me, again, it was caught up in that February-March sell-off of data's going out of business. So NASDAQ is three businesses. they have a small fintech business. They have a data business, which is the crown jewel. And then they have the exchange business, which it is what it is. All three of those things feed each other.

So they're not really three distinct businesses, but that's how they report. Right. I remember thinking NASDAQ is the bet because all of this IPO activity, listings, great for the exchange. Then you think about the data business, which is...

And AI optimization on the data. And the market said, Joshua, I got stopped out of that. I think it made money on it, but I had been in it for a while. And it's been a great name for a long time. Yes. The market told me this spring, to your point, that I was wrong. And I couldn't process.

Wait, we're saying there's this whole wave of AI disruptors coming along. And NASDAQ's not going to capture its share of that upside. It makes no sense. It doesn't make sense. Highly regulated industry data. The cyclical tailwind from the capital market cycle. And look, our analyst, Mike Cyprus, who's a great partner in front of our business, has been positive on the stock.

And as the last two to three quarters of evidence shows, they continue to generate AI, strong evidence of AI utilization in their business. And the market is just not roaring. So that was the example of- Around here, we don't believe in triple tops. That's going to go, right, Josh? Everybody loves a trilogy.

When do you know you know you're wrong on a stock and it's time to take action? But it's too late. I know it's always different. But what are like the big picture things that you think about? So before I answer that, just to also reference having a hard and fast stop loss in a context of 50 stocks where we try to generate 30 to 40 percent turnover a year with a tax sensitive retail type client, I think is too rigid. And so to your question, we've adopted quantitative and quantum mental to use Adams phrasing, quantum mental inputs, but it's also just at the end of the day, a decision tree usually binary. Did you see Adam's piece on stop losses this weekend?

We just, we had to call you the other day on it. Yeah, yeah. Okay, go on. And so look, I would argue that there's the good news and the bad news. I told you Palo Alto earlier. When I have something in the high tracking error bucket that we've taken a idiosyncratic risk on and it re-rates and we've owned it for our time horizon, in one and a half, two years, and it's everything that's worked out. It becomes my 40th idea isn't as good as my 41st potential idea.

It's friction and opportunity cost of them. Because if that's still in the portfolio, it doesn't matter that it just doubled. You're allocating fresh cash to the portfolio. Do you really want to buy that stock now? Opportunity cost. So that's the good scenario. Let's talk about the much more difficult conversation, which is when something goes against you.

And it goes back to, in our world, the original thesis. So we build out every time we write up a new idea, it's a 20-page proprietary note that my team builds. I have a seven-person PM team. Yes, we use Morgan-S research. and have used them for 25 years and we really benefit from that relationship. We use street research. And since I took over the team 12 years ago, I realized, hey, we've all these asset managers

on our platform trying to talk to our wealth management audience. Why don't we talk to their PMs? So we talk to a lot of the by side as of the last 12 years and have established great relationships there. That's a great filter. Those people are putting risk on in those stocks or taking it off. And in some cases, they look like me in terms of process. In some cases, they have a shorter horizon.

or a riskier horizon, but I love the mosaic of all the input there, and we have great relationships there, and I can recommend some friends for the pod. But what I would just say is, when I look at that second scenario, it comes back to the original thesis, did something unforeseen happen in terms of competition, regulation, management, governance, and is the earnings power temporarily impaired or permanently impaired, is the competitive moat temporarily in question or permanently impaired, and you have to make that trade-off. So two things I'll tell you.

One on the stop loss front and one on just my 20 years deducing kind of qualitative signals. On the stop loss, cut your cyclical losers faster. Give your secular- Faster than the growth stops. Faster, because, correct, because the cyclical momentum almost always begets more cyclical downside momentum. almost always, whether it was oil rigs in 2014, 2015, whether it was banks in 0708. And like, when the earnings drop out on the cyclicals, you're not talking about an earnings

haircut of 10% or 20%. Less likely for a V-shaped recovery in a material stock, for example. 1,000%. And so let me give you the counter to that. That's a good. Are you writing these down? Okay. The counter to that is on the secular names.

And I'm going to bring in my second comment in a segue here on the same. on the secular names, maybe manage them down, maybe risk manage them as they begat negative momentum. But if they're really those Byron Wien, big idea secular winners, you know, Mike Durbin, Durbin Amendment 2010 Visa and MasterCard, they were down 30% in a six-month period. They're at 10-baggers since then. You know, Apple, we're worried about advertising, worried about Samsung, you know, 10 and 20-bodies. So if they're really the secular winners, it can almost always come back. cyclicals, different story. So you're treating different types of stocks differently in the risk management process. I wish there was. There's no formula. But it's one of those experienced judgment things we've

learned over 20 years. And the second common, I'll come back really quickly to end. Two types of risk factors. You need to end. You're not getting out of here. On this topic, on the risk factors, competitive risk versus government and regulatory risk. Here's where I've also extrapolated a lot of signal over time. On the government regulatory front, it's almost always temporary and overkill in nature. And there's exceptions to that. But Durbin Amendment 2010, as a case in point, I just mentioned, it's almost always more fear and more quickly discounted incorrectly by the market than not. I learned that lesson every six months. I'm a shareholder in Live Nation. So I know. Oh, great, new high soon. As soon as people start freaking out about the next attorney,

general is suing them. And we've talked about this a little bit in terms of the macro, but oftentimes you need a wall of worry for a stock fat call to work too. Last comment on this topic, by contrast, the competitive risk is so vastly different. And this is where it's more nebulous by nature and just harder to discern when companies are losing market share, when a brand is starting to fade in terms of its relevance, that is almost always the death now of many businesses. And here's the hardest part for me because we only fish in the ascendant and high quality cohorts. It happens to everyone. It even happens to high quality. Nike. Yeah, Lulu Lemon was a quality stock at one point. Right. And then things go in and out of favor.

But Abercrombie is back, interestingly. That stock is on fire. The competitive dynamic in terms of brand and market share, brand equity, and really just governance. Management change over time. one of my first managers when I started on the team 18 years ago, first exercise he had me do as a first year associate, fresh out of, you know, the analyst program and I was a liberal arts major. Dan, do a study of executive compensation across all of our 50 holdings and tell me about the correlation between compensation in pay and shareholder return and try to find outliers.

And he had me do that exercise probably 11 or 12 different times. And so I mentioned governance earlier before. Changes in governance, lack of credibility, lack of capital allocation, consistency. Those are some of the qualitative things that we pay attention to. You know, it's so funny because the way that you do things lines up so much better with my actual lived experience in the stock market. But when I started, and maybe you experienced a version of this, this was not the way things were done.

It was much more about metrics and it was much more about math. And it was much more about, well, this PE ratio. is lower than that P.E. ratio. Remember when valuation mattered? Right. But so, so, but that's, that was like everybody coming out of Wharton, that's what they were taught. And so they would look at like the steel sector and they would say, Bethlehem Steel is the lowest PE ratio.

Yes, it's got the highest debt. But, you know, we're buying a dollar for 50 cents rather than Ishpat's deal, which is, you know, a dollar for 80 cents. And that was just the way people thought about the market. I don't think anyone. thinks about the market. I think more people now think about it the way you and I do, which is that the price is behaving,

in whatever way it's behaving relative to valuation, because the market is smart. The market has figured out. The market has figured out that this stock should be an elevated valuation. That's not a negative. I'm not saying it's a positive and we only want to buy expensive stocks, but oh my God, are we saying it's expensive by accident? We can't be saying that.

It's amazing how many people were trained thinking that expensive stocks relative to their peers were accidentally, they'd call it a mispricing. What do you mean a mispricing? No, it's not mispriced. They want to own Dell because Dell's better than compact. What part of that don't you understand? So I think people have come along to that. Well said. And I think the two things I would just add to that, Josh, or number one is the access to information, the speed of information and the proliferation of information.

has helped that efficiency in nature. And secondly, it's the microstructure of who's invested in the markets. Think about the proliferation of CTAs and quant funds on the institutional side. Think about all the liquidity on the retail side. You know, I didn't mention it earlier, but I meant to. I made a mental note of it. But something like 40% of homes in the U.S. are owned outright, no mortgage. So think about an aging population with excess capital on hand,

and maybe from the other part of the spectrum, the younger cohort who has more access to investing gambling tools. And just think about the momentum and trend followers in the market versus classically trained Wharton MBAs doing valuation work. The microstructure has changed, the technology, and the speed of information has changed. Making momentum, one of the single most important factors in markets this year through June 22 in the last five years.

And so what we say is, look, it can be true on the one hand that we're quality-oriented, we're diversified, We're long-term investors. We have one client in mind who's wealth management and we manage the tails. That can be true on the one hand, but on their hand, don't pay attention to the technicals and the momentum at your own risk. That's right. It's nice to be able to punch into Google, what is the P.E.

ratio in this stock, but everybody knows that already. So the momentum is the actual story. The stock is under accumulation or it's not. And watch for one momentum changes. We are at a crucial inflection right now, whereas the aforementioned semi-semition semis hardware and power names have either traded sideways since June, failed to recover the 50 day, not had the P.B. HFung guys regross back up. That's going on on the one hand, and we've talked about it. Health care is working, parts of software's working, financials are working,

energy is working. You know, one of our very simple tools this year has been every time we've had a ceasefire is to buy more energy in the book, because every ceasefire deal has been pretty short-lasting. And so, yes, you have to pay attention to the momentum. You have to also try to exploit some of the anomalies out there, too. Last thing. You think the year-end setup is favorable, given the earnings growth and all these tailwinds we talked about? You're feeling pretty good about, like, I mean, most years we go out close to the highs,

so it wouldn't be surprising. Yeah, it's been tough to bet against seasonality the last several years. So I would say, per our pop-up ad exchange earlier, I think at best we trade sideways into the midterm. As you stated, Josh earlier, I don't think there's any real profound. outcome from the midterm. But then I think it's all about, you know, in terms of October earning season, I think all of the trends and data we're seeing suggests, and the conference season this September should also predict pretty solid acceleration there. And then it becomes

what happens in 27. So let me leave you with my 27 thought, which is in my mind, 27 could look a lot like 23, where it's a return of more monolithic mag-7 outperformance. I think the average company is going to have trouble comping that synthetic tariff operating leverage. So if I were to make a more of a thematic call for next year, it could be one of these ideas where it's bigger is better again. Bigger is better. Quality is back. And it could be a broader, it could be a broader market, but you definitely want to be in kind of the 23 kind of AI enabler mag seven names and maybe some of the healthcare adopters, and maybe it's not as good a year for small caps or the average stock. I love it.

Good stuff. Do you have fun on the show today? It was really fun. Thank you. You're happy on your end? Okay. We're going to take a brief recess and then we're going to do some Israel, Palestine, stuff. Is that okay?

Is that good? All right. You were awesome on the show today. Put the headphones back on. We're going to give you your flowers. I want to tell people where they can learn more and get more of your insights. So you're going to do squawk from time to time. Do you guys publish anything anywhere?

Are you on LinkedIn? Tell us where we do. And thanks for that. Of course. That heads up. So, Josh, I'm on LinkedIn and the firm, Morning Stanley's on LinkedIn. So we are available through those channels. And then, yes, we publish through the Global Investment Committee.

I publish a quarterly letter, which I'll share with you both in terms of my fund, the SMA. And then at times, as per the software in semi's comments, we'll write more tactical ad hoc client-facing material. So we'll share all of those with you. That's great. And I know the audience definitely is going to want to hear from more from you. Thank you so much for joining me. Thank you for having me. A lot of fun.

You really appreciate it. Guys' great job this week. John Duncan, Nicole, the whole team. Appreciate it. Thank you so much for watching. Thank you for listening. We'll see you next week. Thanks again.

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