Yahoo Finance

Welcome to Stocks and Translation Broadcasting from the New York Stock Exchange. I'm Jared Blicky, your host, and with me is Yahoo Finance's Madison Mills, who's in for the People's Voice. Sydney's on assignment this week. First, please like, subscribe, and comment on stocks and Translation on Spotify, Apple Music, Amazon, or YouTube, and today we are welcoming Stephanie Aliaga. She is a JP Morgan asset management global market strategist, and today we're gonna be talking about stocks around the world with a smattering of fixed income.For all you bond junkies, our phrase of the day, policy uncertainty. It's not a surprise, but it's here, and investors need to understand how the table is set only afterwards do we feast. And this episode is brought to you by the number of 50%. Fully half of all USA spending growth is going to be spent by 4 companies over the next year. Only 4, and you can guess who they are. So Stephanie, tell us right now what you think of the market so far in 2025.

So far this year we've seen as a continuation of the last two years that price momentum and earnings momentum have really been in sync. Now earnings momentum is still quite intact, but a lot is in the price of the start of this year and so markets have traded a bit sideways, but.That sideways action really masks what we're seeing underneath the hood, which is quite remarkable, a broadening out which we thought was the focus of what was going to be the theme of 2025 so far seems to be the case. The IFA is outperforming US equity markets, value is outperforming growth.The other 490 stocks are underforming the mag 7, and this earnings season, when it comes to the fundamentals, 11 out of 12 of the sectors are seeing positive earnings growth. So we think that's that's the theme this year is that RET is really the essence, and I think investors are taking the opportunity, particularly given elevated concentration in their portfolios within US growth and US.to lean into some of these areas with now some wind behind the sails.

Yes, and with that massive wind, I think people, people aren't happy unless the indexes they're screaming higher, but as you said, there's a lot happening under the surface here and part of this is related to our phrase of the day which is policy uncertainty. So let's break that down right now. Policy uncertainty refers to the lack of clarity ofPredictability about government actions such as regulation, taxes, or monetary policy, and this can impact business decisions, investments, and also market stability. So as I said before, we knew it was coming and policy uncertainty itself can be a tool. So there can be upside, there can be a downside. We tend to focus on the downside and the risks more, but tell me what you think about it.

Absolutely.I'll use an analogy that Powell himself used at the December Fed meeting was that the Fed thinks that they're driving through this fog of uncertainty. They know the road that they're on. They know the direction they're on, and that one, it's a pretty good road. It's one of the economy still growing at or maybe slightly above its trend GDP growth rate, inflation coming down, but there's this fog of uncertainty. What do you do in the midst of the fog?You slow down a little bit. That's what the Fed is doing. They're on hold. It's likely until the summer at least for investors, we have to decide how do we position in the midst of fog, given that there's upside and there's downside risk exactly to your point. The upside risk maybe we get more deregulation, maybe that that that is shown to be quite productivity enhancing. It could also be enhancing for many sectors of the market, particularly financials, industrials, etc. But lately, it's particularly in the last few weeks, what's been incredibly foggy.Uh, and worrisome in some ways has just been the storm of tariff announcements that we've seen, um, a lot of action from, uh, the Department of Government Efficiency Doge, and it's really hard to get reputable or credible or get a sense of the numbers around what has been done and what is going to be done on deficit spending.And then, and then you also have the uncertainties farther down the road on the fiscal front, the reconciliation bill. How does all of this net out? Yes, really remains to be seen, uh, will be a fun year to kind of be watching the markets, but I think the way investors are positioning is quite notable in that leaning into diversification.You know, checking your headlights, checking your brakes in the midst of a storm, how are you protected or potentially can benefit from the way that the chips fall?

Go ahead. How would you rate the idea of looking outside of the US, looking at Europe like you mentioned, even looking at China, some of the tech names there as a way to defensively position?

Absolutely. And I think it also comes on the on the heels of record high concentration in the markets last year and also very low investor positioning, particularly in US portfolios. US investors

not committed. People were not committed. They

weren't,

yeah,

they were, they weren't in the markets when it comes to, you know, international stocks.And hey, with good reasons, you know, US exceptionalism, uh, US profitability has really been leading the way globally, but when you're looking at expectations that have never been lower relative in US markets, expectations have never been higher. Well, the hurdles to reach are not that high, and now suddenly we have some new tailwinds, you know, we're gonna get more defense spending from Europe. Maybe we're gonna get more fiscal activism from those governments, particularly in the midst in in the wake of this trade war.Um, and you have some of these secular trends like AI maybe aren't only in a US story. And so, um, some of that I think is really coming to fruition in the evaluation rating in these in these stocks, which, you know, when it comes to diversification, you want to have a little bit of international portfolio. The last few weeks show that when US stocks zig, international stocks can zag and help buffer.They can.

They just haven't done that necessarily much this century, so US exceptionalism has been a big theme, and I guess investors might be wondering, has it peaked? Do we have an all clear to kind of venture into these other waters here? You mentioned diversification.Um, as part of a balanced portfolio, but how far do investors, like, how long does this last? How long does this foray into the rest of the world last before maybe investors are thinking, OK, we're gonna, it's going to pull back again like it has so many other times this century.

Absolutely. So the way I'll take this is.US exceptionalism is quite consensus view. It's what has driven US gains to really dominate the global marketplace, but a lot is in the price, and if you look at valuations for the S&P 500, they're not screaming bubble. They're not incredibly profiting, maybe they're justified, uh, but they're elevated.And while elevated valuations won't tell you much about where the market's going to be one year from now, they do limit the kind of returns you can expect over the longer term. We've assigned the guide to the markets that shows this, um, and over a 5 year, 10 year horizon, higher valuations in the US are going to limit the kind of returns you can see in US equity markets and our.Long term capital market assumptions. This is our view. Eventually we are expecting to see that international stocks are really gonna return a greater amount relative to the US. Um, we have a 6.7% average return expected over the next 10 to 15 years in US stocks compared to 8.1% for the rest of the markets.When does that turn? I mean, this year we're seeing really

thresholds like market thresholds. You look at currencies, the dollar, anything like that.

So one of the things that has really been, you know, placing a ceiling on international performance in recent years has been the dollar. The dollar's been really strong. It's been getting a

wrecking ball at times

ithas been, um, and this year we're seeing the do is softening. It's, it's, and I think over the medium term we expect to see more of this, um, growth differentials are narrowing and interest rate differentials are narrowing.Investors are likely going to reposition given record high US uh concentration and, and, uh, just in portfolios, um, and all of that process should likely lead the US dollar to be flat to down over the medium term so we don't think it's gonna be as much of a headwind for international equities going forward is what I'll say.

What about the bond market? We've seen the 10-year T note yield, which is kind of fall as the dollar. So as you said, the dollar has been, uh, a little bit weak this year, and the 10 year T note, I think it it either peaked in early January or December. It's well off of those highs, but 5% was just this huge psychological number that people had in their minds. I think the 30 year got that. People were scared the 10 year was gonna get that, get there. How do rates figure into your perspective?

So we're seeing different impulses depending on where you are on the curve and on the longer end of the curve I think you know the market rates have been higher despite the Fed cutting interest rates we've all been reminded that there are plenty of factors that are really driving the longer end, and we think, you know, the, the longer end is likely gonna remain range bound if not slightly have some upside risks to it there given.The reality of deficit concerns, particularly as we get to the summer and the fall and market shift focus there, we're going to get a lot more treasury issuances over the next few years, not necessarily more demand. In fact, central banks, they're buying more gold than they areUS Treasury.

Is that a problem? I mean, is that a problem foreign demand for US Treasuries? I mean, this gets into the global currency system and the dollar.You know, reserve currency, what do you think about that?

We have seen the secular trend of diversification, uh,

dollar,

yeah, yes, to a degree, but when it comes to how are you actually going to finance large purchases, finance your government finance commerce, there is no alternative to the safety, the liquidity that you get in US markets, so we don't think that look, the demise of the dollar is anytime soon, but we might continue to see this diversification now who's buying treasuries if it's not central banks?

China and Japan, you know, those have been the big, some of the biggest. They

have some of the biggest, but most recently more US households. So actually maybe it's not so bad. Some of the coupon payments that we're making are getting recirculated into, you know, income payments and 401ks and such. And so I think that's some of the stability that we're seeing underneath the hood when it comes to global treasury markets.

And really quickly, since you mention consumers in US households, I know a lot of people who put a significant portion of their 401ks into the mag 7 and now they're starting to get a little bit worried.What would you tell those people?

Um, look, the fundamentals underneath these companies are still quite robust. I think the amount of upside that you're going to get from these seven names is, is more limited in the year ahead, but this is nothing like what we saw during the dot-com boom and bust. I mean, fundamentals have really been the driving force.

Thebalance sheets are different. The cash flow is cash flows are different,

yes.

A lot of differences there,

but having a concentration portfolios does leave you vulnerable to greater kind of volatility, particularly given the fact that, you know, some AI, the AI theme is evolving quite rapidly. Some of the assumptions that we have may call, you know, the market leadership into questionat times.

I mean, to Madison's point, anybody invested.The S&P 500 last year, which I think is a lot of people, maybe those people should have had concentration worries. So I mean, given the structure of the dominance of the mag 7, I think that was a legitimate concern. What about now? because we've seen the mag 7 just really not, and you mentioned this, uh, at the very beginning that we've finally seen a little bit of this broadening. So how does that play out?

Um, we're seeing a broadening in two things. One, it's not only the Mac 7 driving earnings growth this year. Now other sectors of the markets are seeing earnings growth. But then the other thing quite fascinating happening is that the AI theme is broadening out. We're realizing it's not only just a few companies that are going to dominate or reap the benefits when it comes to AI, particularly if you get lower cost of compute in the wake of Deep seek in the wake of some of these innovations, right? Maybe more companies can participate and.Adopters of AI, those, those companies across sectors have not really participated as much in the rally, given that so much of the focus has been on the infrastructure build out. So we think that that's likely going to continue.

All right, hold that thought. We're going to return to that in a second. We need to take a short break, but coming up we're going to break down the hundreds of billions of dollars spent on AI by only 4 companies, plus a runway showdown featuring US versus Europe, very 20th century if you think about it.We are back and this episode is brought to you by the number 50%. And as you noted earlier, Stephanie, prior to the show that this is a share of capital expenditures or capex being spent by only 4 companies that's Microsoft, Alphabet, Google, Amazon, and Meta. And just to break down CapEx real quickly for the viewers, capital expenditures is the money that a company.Spends to buy or to improve its physical assets like buildings and equipment with the goal of growing its business and helping it operate better, but here in the context of capital expenditures we're talking about what data centers and video chips, it's kind of narrow. I haven't seen this before in my investing lifetime, so it's pretty interesting to watch it unfold. What do you think about this particular concentration?

Um, in the scale this is unsustainable I think it's fascinating. I mean, actually I've seen data that if you even take into account all the announcements of caps for this year, we're not at what we saw during the internet yet, so there's likely room for this to continue to scale.And the big uncertainty here is it's really hard for any one of us to fathom how much AI we're going to need and use once we figure out how useful this thing is

based on my current levels, it's unimaginable.

Uh, I've started using it for nearly everything across personal life and work life and research, you know, all everything underneath the hood, but, um, we're in really early innings when it comes to adoption. Not only are, you know, the share of businesses right now that say that they're actually using AI to reduce goods and services like 7% in the US, we want that the company spending all this, see that expanding, obviously it's going to 100% and it's deepening.Now the uncertainty here is how much infrastructure do we need to service all of this because longer term you get a bit of a balancing act. We're going to have all of these efficiencies come from AI because AI is going to get us better at innovating. It's going to reduce the cost for R&D. It's going to innovate itself. It's going to innovate itself. There you go. It's going to show us what we, what we're not focusing on that we should be focusing on. And um and that is what it's so hard to imagine. So we want to look just in the next couple of years and in the next couple of years, the 4 companies are expected to spend.Pretty significant amounts this year alone, $318 billion and we think they have a pretty good sense around demand in the next 12 months. Farther out there's a bit more uncertainty, but 1224, 36 months, all of that spending I think is likely going to be done, and it's helping fuel the economy right now.I mean, typically when the Fed raises interest rates, the cost of capital gets more expensive. Businesses start to rethink some of their capex plans, but instead we're seeing this really powerful secular tailwind on the X front, which is helping boost the economy.

What I ask you, I want to dig into that a little bit um.You know, you mentioned that AI is just kind of pervading everything, and we have seen investors really get excited about electricity and all these spin-off plays last year. Do you think any of this is overdone? Where do you see the next opportunity? Because we had a value investor on recently, Lee Munson, he was talking about companies like SAP Enterprise.Software, um, CRM, Salesforce, these bolt on additions that they're doing to make AI better for their particular businesses, they, he said that thesis is they're able to monetize more quickly and that's coming later this year, not next year, not 2027. That scale, that, that whole movement may have been shifted a little bit forward.So there are different plays here. Where do you see the opportunities?

Um, the first thing that really that makes me think of is, um, you know, with the build of the internet, it costs a lot of money to invest and build out that infrastructure, but some of the biggest beneficiaries of the internet ended up being companies like Netflix and Facebook that could just piggyback on the infrastructure years later.Um, but things are moving quite rapidly with AI, uh, and I think that's really the question when it comes to software, you know, what are the companies that can benefit from lower cost of compute and really lead the charge on enterprise adoption because the difference with enterprise adoption versus just consumer adoption is that enterprises need precise AI and there is a big market there to service and and train.AI models and applications that are actually useful for enterprises that they can then adopt and pay for um that I think is a is an is an area that is ripe to participate more in this in in the kind of AI thing.

I meanthat's kind of the future business is figuring out how is AI gonna help me, not necessarily the picks and shovels. How do we load up this entire system, you know, you mentioned the dotcom era and what it reminds me of, and it just kind of occurred to me that.The time high speed internet, so we were laying down all kinds of fiber. The telcos were kind of like the utilities, the electric, electricity production of today. That was kind of the theme back then. We're going to build out fiber. They overbuilt it to a huge degree and then after we saw the dot-com bust, there was just all this excess fiber capacity, but that kind of spurred the next wave of development and then eventually Netflix and others were able to capitalize on that.So I mean, as you said, this time frame is kind of condensed here, but I guess I'm not even sure where I'm going with this anymore. I just, I like the fact that there's historical parallels. Do you see anything there?

I'll say the starting point at the end of last year, the vacancy rates for data centers were incredibly tight, below 5%, and in, uh, you know, West Virginia, the kind of epicenter of data centers is 2%. So we're starting at really, really tight supply and demand levels. Maybe we overdo it and build a few data centers that are vacant, but I think over uh give it a few more years and those they won't be vacant long term, so it's worth the risk of maybe a little.Bit of oversupply for this longer term vision of a lot of adoption of AI and I think that is really what is powering all of the confidence around this capex spending trajectory.

And one thing we haven't really talked about is Deep seek that led to that $600 billion sell off and Nvidia stock. They were able to train their AI for far less than a lot of the companies that we're talking about. One of the questions I get a lot on social is how to play the deep seek problem.How are you thinking about the deep sea problem and is it such a problem?

Well, look, when costs for technology move down, margins can expand, more innovation can take place, and you can get a lot more adoption, and I think that is one of the real shifts that we're now seeing in AI. It's just a lot more players can potentially come into the space and then even when it comes to the leading tech companies, we realize it is not enough to have the best technology.In the game, it is not enough to be first. You need to continue to innovate you need to continue to adapt and it all comes down to your business model. Can you turn innovation into profits? It comes down to your distribution, right? And that's why you you've seen some companies, for instance Microsoft.Swiftly moved into adopting AI or bringing sorry, DeepSeek into the model catalog. It wants to be the provider that sells you service to AI regardless of who builds it. So I think continuing to invest in distribution as the mode because models and the technology, maybe they can come and go.

All right, cue the catwalk because 2025 markets are serving some unexpected looks. The US has long been the supermodel of global equities high growth, high efficiency, and balance sheets that go on for miles. But this year, Europe is catching the fashion vibe and strutting down the runway like it owns the place. Germany's DAX and Spain's ibex have each surged 14%, even.France is turning heads with a 10% pop. Meanwhile, in the US, S&P 500 is crawling up 2% with the Nasdaq not far ahead at 3%, but fashion is forward looking. So can Europe keep its streak alive or is the US just between wardrobe changes? And let's settle it, Stephanie, who is wearing the 2025 market environment better?

I think Europe really came in with a with a surprise, um, but I don't know if it's if it's streak will be that long lasting and I think just as quick as fashion trends go, uh, sometimes the, um, uh, the incommitment what is known and familiar, uh, really ends up leading the way and I, I, I think this year will continue be another year of US exceptionalism, but with others on the runway too.

It's kind of funny that we're acting like it's.Such a bad year for the US when we've got multiple all-time highs after hitting record last year. I know.

I think it's you know markets this year have become tiger parents. It's like we're only plus plus from here on out. I don'teven bother you,

we have a couple more minutes here, so I thought, um, why don't we.Why don't we do this? I have your notes, and one of your surprises is you have flown a fighter jet. Can you break that down for us? Tell us that story.

Livemy top dream. Um, funny enough, I, I have a friend that flies planes and, and in this family they have a fighter jet, and he took me up with him and I basically learned the importance of precision.Of, uh, patients and also, you know, listening to instructions, particularly on the G's or losing your breath,

just has a fighter jet.Yeah, those

people out there, high risk

tolerance for people to go.

Maybe there's a read through here for, uh, for investing because a lot of, a lot of, you know, precision is very, very helpful in the markets. Um, you don't necessarily want to be a slave to it, but how do you think about risk management and the thought of being before you go out into an investment, just kind of thinking through it and having a trading plan and preparing for the worst as well as, you know, the good stuff? I mean.

I think investors want to make sure that they have the eye on the prize when it comes to the time horizon for their uh for their for their investment needs, um, and then also just making sure you have some balance in portfolios and continuing to really ask yourself that the big action item for us that we gave investors this year is leaning into diversification given the likely shift in portfolios that has been experienced with the dominance of US tech and US growth, where can you lean into diversification.And build some sturdier foundations but underneath portfolios, not just for risk management, but also to opportunistically make sure that you you're position to benefit from the broadening out and performance that we're expecting,

right, wise words there and we're going to wind things down here at Stocks and Translation. Be sure to check out our other episodes on your favorite podcast platforms as well as the Yahoo Finance site and mobile app, and we will see you next time on Stocks and Translation.