Tech Megacaps Drag US Stocks

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Checking with Jay Hatho.

He's the CEO CIO Infrastructure Capital Management.

Jay, how do you think about twenty twenty six year?

Because we're coming out of twenty twenty five, I mean great equity returns, really solid returns in the fix, the come space off hearing commodities, gold, silver, platinum plated bore. You're looking good there. How do you think about twenty twenty six?

Good morning, Paul Alexis. Hey, I'm happy to hear. Well. You know, we remain bullish. We are bullish this year still.

We have a seven thousand target, which, by the way, you should sell targets now just buy them. So it's okay if we fade a little bit before seven thousand. So we use the same methodology that we did this year, twenty three times twenty seven earnings consensus and we get to an eight thousand target. So that's almost fifteen percent from here. So we're bullish and this is normal the rally and metals as well as normal when you come out of a FED tidening cycle.

And I'm going to ask you what I've been asking all of our guests today, and that is leadership in this market in the new year. We know that we've seen a rotation into value. Is that going to continue to the extent that it becomes the new leader for this market and tech maybe takes a bit of a backseat.

Ali So we have what we call GARP models of the magate, so includes Broadcom and last time when we had sixty nine, the upside of those eight companies is only two percent, so they're fully valued, even assuming they're pretty high growth rates. And if we look, we have dividend funds, so we have every sector and a lot of those companies are super cheap, pay great dividends, have good growth, and trade a really low market pay ratios.

So that's normal.

Same thing normal when you have a FED loosening cycle, there's rotation into other sectors, including small caps. So we do think that'll continue, and we're happy about it. Benefits our funds because we have small allocations towards tech and our income funds.

Jay, we came into twenty twenty five with a new administration here thinking that financials would be an area that would really benefit from, if nothing else, a lighter regulatory touch here. Talk to us about financials, how you look at that sector.

We had a little bit different take on it in that you know, I used to be an investment.

Banker, so I can kind of that's too best since when.

Heat up and so we were super bold up about the big investment banks early in the Trump administration, and that was a great call. The regular banks have lagged because the FED is lagged. So we think this year there'll be a rotation. Not the investment banks won't do well because they're blowing out their earnings, but they're very fully valued. But we're recommending investors rotating into what I call boring banks or standard banks like CFG. We hold

And I want to bring up we started this conversation talking about commodities, Copper topping thirteen thousand, got silver and gold add on near all time highs. What do you do with the commodities trade next year?

Well, I think I have to be a little bit costious because if you look at charts, they're pretty far away from their moving averages, and gold did break down when it blew out well above its moving averages. I think a bigger question is really oil. Oil has been horrible, which is great for inflation. By the way, you know, the seventies inflation was really eighty percent caused by oil, So if super bolish for inflation, we're modestly constructive on

Jay, you mentioned dividends here.

We don't talk that much about dividends because it's all about big tech and most of the tech players don't pay dividends here, what's your dividend strategy? How do you think investors should think about dividends.

Well, I think, particularly for more conservative investors, it's good to have a substantial amount of dividends that can cover a significant portion of your cash needs, and then the rest of it your portfolio can have a higher higher volatility companies. So we love preferred stocks pffas our flagship fond, has a great yield, has a good total return. We do like highyal bonds if we're right about the market going to eight thousand, and you want to be in

So we do think that you'll actually get paid for that.

It's usually kind of a thankless proposition that you'll get paid for that, because when there is a rotation, those stocks tend to do better because when you get money flowing in, they're looking for bargains versus just looking for the latest AI trade.

So well, small cap stocks continue to get some love next year, because I was looking at the Russell two thousand up about thirteen and a half percent year to date. There aren't They're sort of not the sexy index, right, the Russell two thousand. But do you see there? Do you see support for it next year?

We do.

We have a small cap fund, Desk Cap, and I would urge investors, whether you do yourself or hire people like ourselves, focus on the money making companies because that's where you stop gambling and you start investing. So if you invest in profitable companies, they retain earnings, grow earnings.

So small caps are.

Attracted if you if you curate them for being profitable. And what's the biggest trade you're making there is it is a notch and that's so the value part of it's on about ten percent tech, So it's really part of that whole trade. It's not that small caps borrow way more much more money or have superig amount.

Of floating rate.

It's just the normal rotation out of tech into other sectors. And although the small cap sectors are do have slightly lower valuations and do have upside like Digital Bridge you know you mentioned earlier, right, it is smaller cap stock. So that you do benefit from M and A as well. So we do think it's going to be a good place to be next year, you know, and it has been since the FED became more dubbish.

It's worked this year as well.

Jay, thanks so much for joining us. Always appreciate getting a few minutes of your time. Jay Haffield, CEO CIO Infrastructure Capital Advisors also reformed investment Banker did substance of Morgan Stanley, CIBC, Oppenheimer, all those haunts down there in the city.

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You know, Paul, when you look at it, we're heading into the new year with a lot of the same old problems and concerns. Right, We've got Tariff's inflation debt, we still have global wars going on. Yep, the vix is pretty low compared to all that. So our next guest is that might mean the market a little complacent, maybe we're ignoring the risks. Joy Yang, head of index product management at market Vector Index's, joins us in studio. Joy, good morning, Good to have you.

Here, mining thanks for having me.

Is this market getting a little too comfortable and are we ignoring the risks?

Yeah?

I think it's a good time for us to just step back and look at what's happening.

You know.

So we're looking at another twenty percent year in the markets, and I think we've just gotten used to twenty percent because we saw it last year, we saw it the year before. But we now have over one hundred years of data on the markets, and do you know how many times that we see the markets deliver over twenty percent three years in a row.

It's got to be pretty low.

It's very low. We've only seen it twice and the last time was the lead up to the dot com bubble, So that was three years of positive twenty percent returns followed by three years of negative returns. So I think we investors have to be careful because on average we only see the markets deliver about eleven percent returns per year. But we never see eleven. Sometimes we'll see twenty, which means next year we'll see maybe negative ten, but on

You know? Right?

You know, time diversifying?

How about diversifying? Maybe we saw even a little bit earlier in twenty twenty five people diversifying outside of the US, maybe going to European equities, and we weren't sure whether that was is a short term trade maybe a longer term rotation. How do you look at diversification outside the US.

So I think price still matters, and then US earlier, you know, everything seems expensive. Well, I say, look outside of the US, because I think we tend to think of you know, just US markets. You know, markets outside of the US still look like they have good valuation. So international markets, emerging markets this year, they already had a strong rally, but that's on the back of being under allocated and undernoticed. You know, in the previous years.

You mentioned we didn't have a lot of volatility. This past year is twenty twenty sixth the year that comes back. And why well, something's got to give.

You can't have high returns low volatility, So either returns have to come down or volatility has to go up. And I think one thing that's interesting about the VICS is because it doesn't seem like it's telling us the fear of you know, what investors are really feeling, because if you ask anybody, they are thinking about is this above all? But it's not reflected in the you know VIX. So I think we tend to look at crypto markets and bitcoin. We have the crypto heat Index, which is

Yep.

Looking at bitcoin here for tom Keen, just under eighty seven thousand dollars per token. We've been anywhere from seventy thousand to one hundred and twenty seven thousand this year on topic.

Volatility exactly right.

Yeah, but that's also interesting because you know Bitcoin is negative this year, but for you know, bitcoin holders and ETFs, you know, it started back in January twenty twenty four, it's up, it's delivered still one hundred percent returns for investors.

Absolutely absolutely, Alternatives, private equity, private credit, you know, I don't know hedge funds. How do you guys think about all these days?

I think it's interesting because we're seeing this, you know, the launch of the number of ETSS indexes that are trying to measure this space for kind of daily flows into an area that's meant to be a long term buy and hold strategy. So what's the right price? You know, you can't look at it every single day and it's meant to be a diversified holding for investors. So I think investors should allocate to alternative.

What percentage do you think. I've talked to registered investment advisors and I would have thought either they're not really in all they are, and I would have thought maybe the allocation would five percent. They're talking much higher than that. How do you guys think about it?

Well, I think with everything you should really it's really based on your own risk allocation. You know, people say even twenty percent gold. Now you know, but that seems quite a hot and that seems like nobody's up there at twenty percent. It should never be a core portion of your holdings. And if you have twenty percent cent to gold, five percent to private equity, you know, it builds up. You know, what does that leave your core holdings?

I'm going to put you on the spot, Joy and ask where are we going to see leadership in twenty twenty six? Make place your bat.

Okay, that is on this spot, and I would say, still look at a diversified global allocation to all assets, but adjust it to you know, their weight in the markets, which is still have a you know, solid portion in equities and bonds, but also think about your allocation to whether it's gold, bigcoin, private equity, so you know, be be strategic and long term about it rather than what's driving next year.

How about just just in terms of leadership in the equity markets. Boy, it's been AI has been really the story for I don't know three years now, is that still me?

Hang your hat on that big cap tech trade?

Do you think?

I think AI is a disruptive innovation, but you know, can it come from a five trillion dollar company? You know, people have been People haven't noticed the leadership that's building up in Asia. You know, China's coming up with really innovative, disruptive companies, and I think people should be more diversified in their AI holdings.

Joy, thanks so much for joining us.

Really appreciated.

Joey Yang.

She's a head of index product management at market Vector Indexes.

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Well you go out to side, you go to over to Europe. The eurostock index justin for currencies up thirty three percent?

How about that?

Asian indexes up, you know, mid twenties returns. Everybody's making money in the equity markets here, what do we do for twenty twenty six? Chris camp pitsis joins us here. He's a managing partner Barnum Financial Group. Chris, you know, investors had a really good three year run in equities. They made a lot of money in the bond market in twenty twenty five. What's the conversations you're having with your clients is to expectations for twenty six.

Yeah, that's a great question.

And expectations I think as we look to go forward into the new year.

You know, the.

Reality is if we look at how the last time we had four double digit up years in a row, that didn't end so well, right, that ended with the dot com bubble burst. And so if we're going to see another double digit, high momentum, high growth kind of year, we're going to need some kind of goldilocks economic and stock performance in order to do that. So what has to happen for that to be the case. Well, First, we need to see those accommodative interest rate cuts from

And third, we.

Can't have any AI bubble bursts, and that means we need technology companies to really show and prove when earning season comes along. The market didn't react too positively to the last couple earning seasons, even though these big tech companies delivered great results, and so that leaves us a little cautious headed into the new year.

So if you're cautious and you talked about tech, Chris, if you're widening out, I see in your note you like utilities, which makes a lot of sense because in an environment of lower rates, but also all the electricity, all the data centers right that are being built to support.

AI exactly right, So we think of that as almost an AI adjacent play, if you will, what are the sectors, what are the industries? What are the companies that are going to benefit from artificial intelligence but aren't necessarily the semiconductor of companies themselves and thematically, if we can see real companies start to increase their profit margins and their earnings as a result of actually implementing artificial intelligence into

Chris, talk to us about how you think about investing in the US versus non US, and maybe that's developing markets and merging markets.

How do you think about that?

So, you know, if you look at the typical investors US based investors portfolio, it's extremely S and P five hundred centric S and P five hundred almost has a monopoly on the average investor's portfolio. And twenty twenty five was a year in which the international markets, you know, waved their hands and said, hey, take a look at me, because we're here too. And meanwhile, you have governments who

Where I'm curious where you're looking in the world. I mean, I know, we say Europe, we say emerging markets, but when you sort of drill down.

Sure, So one country that we find very attractive right now is Japan. In general, companies in Japan have very cash rich balance sheets. There's been a renewed focus in Japan about delivering shareholder value. You're seeing a big increase in buybacks, You're seeing a big increase in dividend hikes, and then you have a much more accommodative fiscal policy the last couple of years. And what's interesting about Japan is, you know, the knock on them for a long time

We haven't talked about Japan for thirty years, but it's back in vogue here. I mean, is this something that's a longer term trend, and my son's about to do a semester brought in Japan, and he's all in on Japan. But I'm like, all right, that was in nineteen eighty that would have been a good call.

But maybe it's coming back here. I don't know.

I think it is because ultimately, well, we have the volatility of what's happening with AI and a little bit of political uncertainty in the US and of course conflict and tensions with China. People are looking for a consistent story and Japan looks to deliver that here and they've got a lot of characteristics of what could present a big opportunity. That started in twenty five, and I think the momentum will continue into twenty twenty six.

Just crossing the tape here in the Bloomberg terminal, red headlines SoftBank to buy Digital Bridge for sixteen.

Dollars per share in cash.

So they still speaking about Monday Bank h exactly even on a holiday weeks. Back to the US for a minute, Chris and we talked about we ticked some boxes, talking about utilities, talking about tech, what about consumer staples, what's the outlook the prognosis for them in twenty twenty six.

I love that question because what happens is technology has been driving the market, both in the short term and long term. I think most people would agree AI has a tremendous long term.

Thesis, right.

But as we see these valuations reach these highs, we want to start to look to take some profits off of the table. And then the question becomes where am I putting that portion of my portfolio if I'm trimming slightly from my technology and my growth story. And so consumer staples provides a tremendous contrarian almost allocation, one that is inflation friendly, one that provides a consistent dividend in a lowering interest rate environment, that in essence pays us

What are you doing in Chris?

In the bond market here, we had some nice high single digit returns in twenty twenty five, and if you took some credit risk, you know, doing pretty well rewarded there.

How about in twenty six.

If I'm going to take on risk to get that risk through dividends rather through yield at the moment, especially because the biggest risk to twenty twenty six is stock market volatility and a worsening economy. Right, those are the traditional concerns around what could the end of a bull market be as we potentially go into theoretically a recession. Right, So I don't want to own the types of bonds that are going to act like stocks if the stock market's going down. So if I'm going to own bonds,

Very good, Chris, thanks so much, appreciate it.

Chris Campittsis He's a managing partner for Barnum Financial Group of.

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I want to talk a little more fixed income because what a year it was for fixed income and can twenty twenty six continue that run. Vanessa McMichael, head of Corporate and Public Entity Strategy at Wells Fargo. Vanessa, I'm going to jump right in here with something you call cash segmentation because we are expecting, or at least the markets expecting two interest rate cuts from the Fed next year. And you said in that scenario, cash segmentation is important and will be back in style.

What do you mean by that, Well, thank you for having me this morning. Yes, So, for the clients that I cover are corporate and public entity investors, they're using fixed income markets to enhance their cash management process overall, and so they're typically not chasing yield. They're more interested

So that's what I mean.

By that, Vanessa, I mean if your job now, I know you went to Chicago Business School, which means you like math. So right right off the beat, I got a problem here. How about it to your treasury? I mean three and a half percent isn't your job kind of done? You could say, put yourself in to your treasuries for three and a half percent. That seems like a nice return.

Well, and you bring up a really good point because we're still in an environment and we're going to be, at least for the foreseeable future for this particular investor base that I cover that invests so short on a yield curve where you don't have to take a lot of credit risk to continue to enhance your yield and stabilize some income generation. So we are in our seats. We are encouraging those clients that can and invest out on the belly of the curve because of their investment policy.

What's going on with money market fund assets, Vanessa? Because they reached record highs, there was all this talk about we're going to see a bunch of outflows that never really came to fruition. So what's your outlook for MMF asset growth?

We think they're going to continue to grow. I mean, this year we kind of hit two new records seven trillion excuse me, and then eight trillion. We think growth going forward may be a bit more incremental. Our clients, our corporate public entity clients are using money market funds as a substitute for bank deposits, and so they're going

Hi, Vanessa, thank you so much for joining us. Really appreciate it. Vanessa Michael. She is head of Corporate and Public Entity Strategy at Wells Fargo, advising her public clients on the fixed income market and word to allocate capital there.

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