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Over the last month, we've seen small cap stocks outperform Big Tech with the Russell 2000 up over 10%, while the Nasdaq is up just a little over 1%. Joining me now to discuss how investors should play the current market is Lee Munson, Portfolio Wealth Advisors president and chief investment officer. Lee, you are all about that small cap trade. It's your second largest equity position. What would you tell the skeptics who think this rally and small caps won't last? Because I believe you did tell our very own Jared Blickre a few weeks ago that you had some serious concerns for smaller companies.

Oh my gosh. Two weeks ago, I was just complaining to Jared how small caps were the bane of my existence. I'm all overloaded on them. Why didn't I go to medical school or just, like, you know, do something else in my life? And I am my own tell. You heard it here first. I was maximum frustrated. And the funny thing is, that week was where this all started, and we've had this massive run-up in small cap. We haven't seen it like since whenever. And I and I think what's happening is that there's there's two things that's happening. Um, and by the way, it's okay to complain, it's okay to be frustrated, but what I wasn't doing when I was talking to Jared a few weeks ago is I wasn't selling those positions. The the idea is is that small caps generally do well at the beginning of an expansionary cycle. They don't do well in late cycle. And I think what people have to remember is that we're we have this um presumption that we're going to start slowing down. We have this presumption that the Fed's going to have to cut rates. Why are they going to have to cut rates? Because we don't want to cause a recession. So the market's looking 6 to 12 months out from today, and it's saying there's going to be some sort of slowdown, which the Fed is going to start cutting in September. I think it's going to be November. Nobody cares. Doesn't matter whether it's September or November or November. And so people are starting to load up on what they think is going to be this huge expansion going into next year. And the election and the presidential candidates have a lot to do with that, right? But I also think there's another story here. And the story is the marginal buyer for the mag 7 and artificial intelligence. People are starting to get the message that while I love Chat GPT, I'm on every single, like, moment of my life, but it's going to take time to really make the killer app, the thing that's going to cause Apple to have to sell a whole new line of stuff, that's going to cause Microsoft to have this whole new software to sell people, and that it's not going to happen in the next six months. And so people are starting looking at profitability, they're starting to question it, and honestly, it's not that people are just out there selling all their mag 7 stocks. It's really a matter of you know, why do I want to do this right now? Let's see where the uses, let's see that thing that will get everybody into the AI trade and you know, that's not happening right now.

So given that, Lee, how long will we see this market rotation out of Big Tech? And how could the the next round of earnings really impact that trade as well, because we've already seen some big tech earnings start to trickle in, and they were pretty much a disappointment.

They were, and I think that what's going to happen between now and the end of the year, you know, Google was fine. You know, everything's, you know, these these big firms, they're cash cows. But here's they're not telling people what they want to hear. They want red meat. They want blood. They want these big tech CEOs to say we're getting return on all the money that we spent shoving down the earnings of Nvidia. All this money we've been building out the data centers, the chips at great expense, these mega scalers like Microsoft and Facebook. They want to hear these CEOs say we're getting a return on our invested capital, and that is not what they're going to hear between now and the end of the year. So it's not about a selloff, certainly the prices are dropping. I think it's more of a buyer strike. And in the meantime, look at the valuations of small cap. And also look at the extreme valuations in small cap value where I like to hang out, you know, for half of my portfolio. Small cap value, small cap, they've been earning all year, right? They've been they've been sort of flat. I mean, as I was talking with Jared a couple weeks ago, we're talking, you know, at the time is like 700 days since the Russell 2000 had made a new high. And so I think there's a rotation going on because if you look at just the raw valuations, you're getting a big bang for your earnings buck. And until I see valuations that that claw, you know, the valuations from the Nasdaq to small cap, until that gets more normalized, you're going to continue to see small cap outperform. I don't think this this is just a one-month deal in, you know, usually it's going to be two to four months. I think we're a month and a half into it. I think this could continue all the way to the end of the year, because really, what are the CEOs of these big companies going to say? We're making bank on AI, not going to happen.

And and Lee, you mentioned that you do expect the Fed to cut rates at some point this year. Besides small caps, what other areas of the market do you think will benefit from that expected easing cycle?

You know, it doesn't I think large values going to benefit, banks are going to benefit. I think a Trump presidency, people think that's going to benefit. I think you've got energy that could benefit as as well. But I think the thing is, is that when you're really looking at it, getting these rates lower is going to help all the other stocks that are not mag 7. You know, your banks, your tanks, things that are economically cyclical, things that have to do with the real economy, places that actually make real stuff, that's what's going to benefit, because remember, all these small companies, especially in energy, healthcare, financial, all that stuff, they have a they have a lot of floating rate debt, and they don't have a lot of fixed debt. I mean, does Apple really need to borrow money? Does Microsoft really need to borrow money? And so I think all any company that you look at their balance sheet, and they have a bunch of floating rate debt, those are the companies that are going to magically have their earnings increase just because their debt load is going to go down. It's really simple. I mean, it's just math.

All right, a lot to look out for over the next year. Lee Munson, Portfolio Wealth Advisors president and chief investment officer. Thank you so much for your insights.

Thank you.