Talk Your Book: What's Working in the Stock Market?

Summary

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

Date: March 9, 2026
Hosts: Michael Batnick & Ben Carlson
Guest: Chris Galopo (Franklin Templeton)

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Episode Overview

This episode dives into the dramatic shifts currently playing out in global stock markets, with a particular focus on the ripple effects of AI, sector rotations, and surprising performance from forgotten corners of the market. Michael Batnick and Ben Carlson are joined by Chris Galopo of Franklin Templeton to parse through the “black cloud” of AI anxieties, the real (and perceived) pain in tech, and the opportunities and dangers lurking in both U.S. and international equities. The conversation provides a frank, sometimes sobering, and ultimately nuanced look at what's really working in the stock market right now.

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Key Discussion Points & Insights

1. The AI Overhang: Societal and Market Ramifications

• Opening Sentiment: Both hosts and guest reflect on the pervasive, gloomy mood stemming from AI’s societal implications, referencing recent articles that heightened concerns about the human impact (00:42–01:30).
  • Michael: “Right. The stock market could be just fine and millions of people are out of jobs. That’s the… human toll that is giving you the black cloud.” (01:30)
• AI’s Macro & Market Impact: While AI is expected to drive profitability and margins and theoretically keep the market afloat, uncertainty about its full impact (especially the risk of widespread job loss) hangs over investor sentiment (01:30–02:12).

2. Current State of the Market: “Bear Market Feel” Despite All-Time Highs

• Market Dislocation: Despite the S&P being near its all-time high, certain sectors—particularly tech/software—are seeing steep selloffs, leaving investors with a bear market “feel” (02:12–03:56).
• Notable Stat: “If you heard our conversation and… took out the stock market is 2%, near an all-time high, you would assume that we’re in a deep bear market.” – Chris Galopo (02:12)

3. Broadening Market Participation & Surprising Winners

• Rotation from Tech to “Left for Dead” Sectors: Dividend aristocrats, industrials, energy, and staples—overlooked for years—have turned into surprising out-performers while tech stumbles (02:25–03:12, 05:41–06:24).
  • “2/3 of all stocks are outperforming the S&P this year, which is like the highest number in 50 years…” – Michael Batnick (05:41)
• Equal Weight Index Outperformance: 68% of S&P stocks are up YTD. 41% are up more than 10%. The equal weight S&P (a proxy for the “average stock”) is outpacing the headline index (06:25).
  • “It’s just not the names that everybody knows.” – Chris Galopo (06:25)

4. Tech and AI: A Re-Evaluation and Rapid Shakeout

• The Bubble Conversation: The current downturn in mega-cap tech is compared to past bubbles:
  • Microsoft, for example, is in a 27% drawdown, and “the market is saying, we want nothing to do with this.” (07:11)
  • On the sell-off: “Stocks take the staircase up and the elevator down, right?” (09:37)
• Not a Classic Bubble: Chris contrasts the fundamentals-driven rise of the “MAG7” with past bubbles; most price increases were justified by explosive earnings growth: “MAG7 EPS up 750%… S&P earnings growth outside of those names was just 32%” (11:07).
• Rapid Re-pricing: The market’s speed has increased—downturns that once took years now play out in weeks. Tech's fall has led to panic, but other sectors are catching a bid (13:08–14:27).
  • “What can happen in two or three weeks used to take a year…” – Ben Carlson (13:08)

5. Investor Psychology & Sentiment

• Fear is Spreading: Even with the S&P near highs, there's a “virus of fear” spreading, with investors contemplating worst-case scenarios—job loss, recession, and capital preservation (psychological, not fundamental) (17:43–18:09, 24:25).
  • “It’s hard to reintroduce risk appetite when that black cloud is hanging over every investor.” – Chris Galopo (24:25)
• Shoot First, Ask Questions Later: Investors are selling indiscriminately in certain sectors, and “overreaction makes sense” given the magnitude of uncertainty (16:01–16:31).

6. International Equities: A Long-Awaited Turn

• Bullish on Non-U.S. Markets: Franklin Templeton has been bullish on international (ROW) equities for the first time in 15 years, pointing to earnings power and new catalysts for rerating (18:48–20:54).
  • “Foundational piece that is earnings power forward… is present in EM, in India, in Japan…” – Ben Carlson (19:29)
• Investor Skepticism: Investors have been reluctant to re-enter these markets, even in the face of strong data and currency tailwinds (19:19–20:54).

7. Handicapping AI Risks: The Walmart Example

• Ambiguity in Forecasting: The hosts discuss the challenge of projecting AI’s long-term impacts and how impossible it is to confidently handicap multiple plausible macro futures (26:35–27:09).
• Walmart Case Study: Walmart projects 5 years of revenue growth with no increase in headcount, highlighting AI’s potential to boost productivity (27:13).
  • “Walmart… expects to grow revenues for the next five years at the same rate… with zero headcount.” – Ben Carlson (27:13)
  • Shoppers using AI tools in-store spent 35% more than those who didn’t (27:26–28:36).

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Notable Quotes & Memorable Moments

• On Market Reality vs. Perception:
  “If you heard our conversation…you would assume that we’re in a deep bear market.”
  — Chris Galopo (02:12)

• On Sector Rotation:
  “2/3 of all stocks are outperforming the S&P this year, which is like the highest number in 50 years…”
  — Michael Batnick (05:41)

• On Tech’s Peak:
  “Stocks take the staircase up and the elevator down, right?”
  — Ben Carlson (09:37)

• On AI Anxiety:
  “The stock market could see plenty of profit increases… and millions of people are out of jobs. That’s the… human toll that is giving you the black cloud.”
  — Michael Batnick (01:30)

• On Market Speed:
  “What can happen in two or three weeks used to take a year and now it’s like boom, boom, boom.”
  — Ben Carlson (13:08)

• On AI’s Market Impact:
  “Walmart reports good earnings. They expect to grow revenues…with zero headcount…Shoppers using their AI tool…spent 35% more.”
  — Ben Carlson (27:13, 27:26)

• On Investor Psychology:
  “It’s hard to reintroduce risk appetite when that black cloud is hanging over every investor.”
  — Chris Galopo (24:25)

• On Market Bottoms:
  “Markets bottom on bad news. Guys, got to remember that.”
  — Ben Carlson (30:38)

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Key Timestamps

• 01:30 — The human toll of AI vs. stock market outcomes
• 02:25 — Forgotten sectors begin to outperform
• 05:41 — Historic breadth: 2/3 of stocks outperforming S&P
• 07:11 — Tech drawdown: Microsoft as AI proxy, bubble debate
• 09:37 — Parabolic tech run: “Stocks take the staircase up…”
• 11:07 — Five-year breakdown: MAG7 vs. S&P earnings
• 13:08 — Rapid market repricing, speed of information
• 17:43 — Spread of fear beyond fundamentals
• 18:48 — International equities’ surprising run
• 27:13 — Walmart’s AI-driven growth, productivity and margins
• 30:22 — Falling prices reduce risk; market pricing in bad news
• 32:31 — Eye of the storm: Political, human, and market risks

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Conclusion & Takeaways

• Breadth Has Returned: The era of ultra-concentration in megacap tech may be ending; equal-weight and forgotten sectors are outperforming, even as headline indices conceal pain below the surface.
• AI Anxiety Looms: The rapid adoption of AI creates both optimism for profits and deep concern for jobs, feeding an unusual cocktail of fear even as top-line results remain strong.
• Rapid Cycles: Sell-offs and recoveries happen faster in today's market, compounding investor anxiety.
• International’s Moment: For the first time in years, international equities (especially EM, India, Japan) are matching or beating the U.S. in terms of earnings power.
• Investing Admonitions: The market is pricing in a lot of fear—possibly too much—and “markets bottom on bad news.”
• Endnote: Despite prevailing angst, the macro picture is “pretty okay”; unless labor markets dramatically deteriorate, the risk of systemic collapse remains low.

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For more from Chris Galopo, subscribe to his weekend newsletter (LinkedIn: Chris Galopo).

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Tone: Frank, candid, sometimes anxious but data-driven and balanced.
Utility: Listeners gain actionable context about current sector rotations, cultural anxieties around AI, and how behavioral heuristics can override fundamentals—even as the tape shifts beneath our feet.

Transcript

[Michael Batnik]

Today's Animal Spirits Talk youk Book is brought to you by Franklin templeton. Go to franklintempleton.com to learn more about all their different funds, research, analysis tools. Franklintempleton.com to learn more. Welcome to Animal Spirits, a show about markets, life and investing. Join Michael Batnik and Ben Carlson as

[Ben Carlson]

they talk about what they're reading, writing and watching.

[Michael Batnik]

All opinions expressed by Michael and Ben

[Ben Carlson]

are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only

[Podcast Disclaimer/Franklin Templeton Representative]

and should not be relied upon for any investment decisions.

[Michael Batnik]

Clients of Ritholtz Wealth Management may maintain

[Chris Galopo]

positions in the securities discussed in this podcast.

[Michael Batnik]

Welcome to Animal Spirits with Michael and Ben. Today is February 23rd. Recording our intro. Michael is depressed and we are thinking through the ramifications of AI. We just had a great talk with Chris Galopo from Franklin Templeton and we're just, we're trying to think through all the different ramifications here. What's going on in the market? Why is this moving? Why is this changing? Why is this overreacting? And obviously everything just comes back to AI eventually.

[Chris Galopo]

It's a Monday, it's snowy, it's gloomy. We all read Citrina's piece over the weekend about what could come to pass. And I am, yeah, I'm not feeling, I wasn't feeling too great after reading that. More on the, more on the human level. Like, you know, obviously the stock market as we get into today is not, is not, you know, confidence inspiring, but it's so much bigger than that.

[Michael Batnik]

Yeah. This has the potential to be a societal shifting type of technology. And you're thinking through the macromifications and the market ramifications and the human side of things too. Right. That's, that's a whole other thing. Like, hey, guess what? The market could be fine, but there could be a huge human toll for this. Right. Market could see plenty of profit increases from this, margins increase. Right. The stock market could be just fine and millions of people are out of jobs. That's the, you're right. That's the human toll that is giving you the, the black cloud. I, I think we're going to be okay. That's, that's where I've landed on this. We'll, we'll keep discussing this, but the, the stuff with Chris that we talk about, I think that is probably the most surprising to people is just how the stock market is reacting to this.

[Chris Galopo]

Yeah. If you heard, if you heard our conversation and you, we we took out the. While the stock market is 2%, near an all time high, you would assume that we're in a deep bear market. That, that's been, that's been like, you know, years on end.

[Michael Batnik]

I mean, yeah, there's all these areas of the market right now that are working that really haven't worked in the past. I looked the other day. So again, this is through, you know, almost the end of February. Dividend aristocrats are up like 10 this year. Right. These are just boring blue chip stocks

[Chris Galopo]

that, who cares, get out of here

[Michael Batnik]

with the dividend risk, slowly but surely increase their dividends. But you're seeing all these areas of the market that were just left for dead. And I wonder how many investors have completely given up and if that has a lot of angst to do. This is the fact that so many investors are so heavily reliant on tech in their portfolios that that makes this, this feel worse than it is market wise. Because the people who are sitting in these, these software stocks are down 30, 40, 50%. They're going. I don't care what you say about the market, I'm getting crushed.

[Chris Galopo]

Right.

[Michael Batnik]

I think that that's probably a lot to do with it too, the sentiment.

[Chris Galopo]

Yeah. We had a good conversation with Chris today. I don't know if it was uplifting, what. But it was. If nothing else, this conversation is a snapshot of the moment in time. So here is our conversation with Chris Galopo from Franklin Templeton. Chris, welcome.

[Ben Carlson]

Michael, thanks for having me.

[Chris Galopo]

You got it. All right, so we are recording this on February 23rd. The financial ETF is down 3%, 3.2%. American Express, not sure what's going on there, but it's getting mauled down like almost 9%. Software stocks are getting humiliated once again making new lows. The IGV ETF is down. Oh, boy. Down 5%. New lows there.

[Ben Carlson]

Don't forget IBM, Michael. IBM, new high to minus 30% in three weeks.

[Chris Galopo]

Holy mackerel. Yeah, so the market is at least, it's exciting. So we'll obviously get into what's happening today and a lot of the anxiety around AI. Are we all going to die? Are we all going to not have a job? Well, we're all going to die eventually, but. All right, so let's rewind. How did you feel about the market coming into the new year and how do you feel today?

[Ben Carlson]

We came into the year constructive on equities, and I think it's one thing. And our clients get, I think all investors get myopic on, on the S and P on the index. Right. So we came into the year with a target range for year end, 7,007, 400, which to the best of my knowledge is on the low side of where the street is. Right. I think the median target, 76. So that was the first thing. So constructive but not crazy. Right. The bigger story, honestly through our lens was what we thought would continue, which was, which is a broadening of the tape, which has continued. Right. So we've been on that since coming into calendar 25. So for us we've given the same sort of message. I think, you know, when I, when I try and justify or explain why our target is where it is, it's easy. Right. So we roll into the year trading 22 and a half times forward and if you start to walk the targets up 76, 78, you're talking 23, 24 and a half forward. That's a big number. Right. And so our view was you have better EPS growth away from the index and probably much better valuation as well. So those are kind of the two calls, but we came in positive on straight.

[Michael Batnik]

Now it's funny because a lot of people keep using words to describe this market, like it's a weird market, it's a confusing market, but you're right, the broadening out has happened. The number from I think Ned Davis research the other day was that 2/3 of all stocks are outperforming the S and P this year, which is like the highest number in 50 years or something. It's a huge number of stocks that are doing well. So the ones that are doing poorly, it's more of a smaller segment of the market. There's a ton of these stocks that are getting crushed. But on the whole you're seeing all these other sectors that have been left for dead, essentially energy and consumer staples and industrials and such. And obviously these are the, these are the sectors that people have kind of given up on. So it's just kind of a reminder about how these cycles can change and I think people just weren't ready for it. Is that fair?

[Ben Carlson]

Completely.

[Chris Galopo]

Right.

[Ben Carlson]

I'll give you some, I'll give you some more stats. I wrote this this weekend in my market, my market piece. So the equal weight S and P, which I refer to as the average stock, right, is up 6% through last Thursday's close to your point. Then 343s and P 500 stocks are up on the year. That's 68% of the index and 41% of the S and P stocks are up more than 10% year to date. It's just not the names that everybody knows. Right. And so through my lens and based on what we've been saying, we've nailed this. Right. But to your point, it's been a struggle to convince investors that it is possible. Hold on. It's possible that other stocks can work beyond the seven that have worked for the last five years. Right.

[Chris Galopo]

Microsoft is at a. Is it a 52 week low? Not quite, not quite, but it's down. It's in a 27% drawdown. Whatever it is. Do you view the rejection of the bubble? Down 29% of its high. Wow. Do you view the rejection of the bubble? Of course, coming into 2025 it was, oh, strap in because we're going to the moon. And of course it's going to be led by anything exposed to AI. And now it's the opposite. Nobody wants anything to do with it. I guess at Microsoft this is as good a public proxy for OpenAI as any. And the numbers that they came out with over the weekend about how much cash they're gonna burn, it's like laughable. It's unbelievable. And the market is not believing it. The market is saying, we want nothing to do with this. It was like, oh my God, look how much money they're gonna spend. And then, you know, buy these names and it's like, whoa, oh my God, look how much money they're gonna spend. This is, this is not great. All right, so this resetting of expectations, pretty aggressively lower. Meanwhile earnings are at all time highs. Like it's, the PE is getting squeezed bigly. It is, is this, is this healthy? Does this make you, does this make you a little bit like less worried? I mean, obviously forget about the bubble or does this make you more worried? Like, wait a minute, this is a healthy reset would have been good, but down 30% for Microsoft is not exactly healthy. That makes me a little bit worried.

[Ben Carlson]

Yeah, look, I think you're getting the froth squeezed out from a bunch of different places, Michael. Whether that's bitcoin or people super concentrated, you know, in a hint in a dozen stocks or what have you. Right? We've, this, this is not the first time we've seen this. Right. This is my 35th year in the business, all as an analyst in the pm. I ran money through the tech bubble. So no, I don't frankly think this is a bubble comparatively valuation wise, cash flow wise and whatnot. But as you point out now you've Got these companies, hyperscalers, burning through cash at an unbelievable rate. Where if we talked about this a year ago, six months ago, you would have been like, meh, this really isn't gonna problem. There's no way they're gonna blow through this FCF and spend it on capex. And yet here we are. The one thing I can't remember the exact date, I could look at it. But if you pulled up Oracle's chart and you go back to their announcement at OpenAI and the stock gaps up like crazy, I thought to myself, okay, this is getting nuts at this point, right?

[Chris Galopo]

That was September of 2025. And then the market took it all back six months later and then some.

[Ben Carlson]

All right, yeah, well, look, stocks take the staircase up and the elevator down, right?

[Michael Batnik]

So I guess the big worry for a number of years has been, well, what happens when this concentration turns, right? All the gains are concentrated, all the earnings are concentrated in these huge names in the mag 7 or the top 10 or whatever it is. And when those turn, look out below. And obviously to your point, the equal weight is doing better. Small caps have caught up. International stocks are doing much better. Is it really going to be that easy where we're going to have a baton handoff here to these other sectors and the bull market kind of keeps going? Doesn't that almost seem like it's too simple or too easy? I guess I think that we've been

[Ben Carlson]

in a rotational bull tape for 14 months and no one's realized it. Right? I can flip you guys the paper we wrote in January of 25 calling for exactly this and also the setup for when the tape actually broadens. Historically, what factors or variables have to be in place? One of them, Ben, is periods of super concentration like we have now. So I think the combination of lot of money, you know, funneled into those names, right? Consider this. From Jan. 2020 to the middle of 25, right? The MAG7 as a proxy, those names had earnings power or earnings growth of about 650% or 750%. It was 750. And in the time period that five year period, those names were up 650%. S&P is up 125 in that window. Right.

[Chris Galopo]

Not a bubble.

[Ben Carlson]

Well, look, they also had the best earnings growth, Michael, that they had. That was all the earnings growth.

[Chris Galopo]

Now, I'm saying that earnestly, like in a bubble, you take it way, way past earnings growth.

[Michael Batnik]

Yeah. The fundamentals match the price, right?

[Ben Carlson]

That's right. That's exactly right, Ben. And so did some of the parabolic nature worry me, yeah, a little bit. But the fact of the matter is that's where all the earnings power was. So if, if that five year window, right, 2020 to 2025, Mag 7 EPS up 750, 750%. If you take those names out of the S and P, you know what, the S and P earnings growth was over the same window, not a lot, 32%. So you know, it makes sense. Stocks follow earnings over time. Right. So now then the paradigm has shifted a little bit. EPS growth is much broader calendar 25, 26 and 27 than it has been in the prior five years. And the tape is responding to that. And it started to sniff that out frankly in the fourth quarter of third quarter of 2024.

[Chris Galopo]

All investors loved, loved the broadening like it was enough of the mag seven let us have a turn us mean the 493. And the economy's doing fine. Consumers are still spending, inflation is relatively benign. So I was all about it. But I really, I don't love to see the financial sector down 3.3% on not no news, there's news. But American Express again like down 8%. That's a big, big move.

[Ben Carlson]

Huge.

[Chris Galopo]

I also don't love to see the consumer staples breaking out against the discretionary. Not just the, not just the select spider ETFs which are obviously, you know, that's 40% test on Amazon. If you look at the equal weight versions of them. If you look at the equal weight staples versus the equal weight defensive, that is having a meaningful breakout today. So on the one hand, on the one hand, I do like expectations being reset. I do like that there's fear in the market, the reintroduction of the wall of worry. But this, the speed at which this is happening is definitely a little bit more than a little concerning.

[Ben Carlson]

Agree. Yeah, I don't disagree with that. Full disclosure, I'm long the xlf, so I'm sharing and I feel your pain here. Right?

[Chris Galopo]

Oh yeah. Oh yeah, Chris, I bought Blackstone on Friday.

[Ben Carlson]

Look, at least, at least we're honest, bud. At least we're honest. The speed at which the market operates now is so much greater than it's ever been. And I feel like what can happen in two or three weeks used to take a year and now it's like boom, boom, boom. Bids are hit or offers are swept and the tape changes its colors immediately, it's harder. And so one of the things about, you know, talking to our clients about expecting a broadening tape and giving the empirical evidence for why that is. Right. We can show them the, the earnings power for this year and next year. Right. It's, it's much broader than it has been. And even showing them the empirical data to support that and convincing them or helping them understand that stock prices follow earnings over time, people are still very, very hesitant to get away from what has worked right in the past couple years and where they made all their money. So I think, Ben, you asked this earlier, is it okay, this rotation? Think about, ask yourself this. Who's left to buy the Mag 7? Who's left? Right? And so now you've got all these other companies that have good, good business models and they've just kind of been thrown in the ditch by the side of the road. Now investors are like, okay, there's some other names out there. And oh by the way, look, the multiple on the equal weight S and P is about 17, 17 times forward. Sign me up.

[Chris Galopo]

Great. Yeah, exactly. Me too.

[Michael Batnik]

Michael and I have been talking about that, the speed of the markets for a while now. And you're right, it's. Everything's happening way faster. The downturns, the repricings, the upturns. How do you think about something like the software sector that is being repriced feels like immediately it's happening in the blink of an eye. People are trying to figure out what the AI impact is going to be. And obviously there's maybe some babies being thrown out with the bathwater. But how do you even try to consider something like this when everything is happening so fast? Do you say like, all right, I'm not even gonna play these games or do you say, no, no, no, now is the time to really get my hands dirty and get in there?

[Ben Carlson]

I think it's a little bit of both. Right. You gotta separate the wheat from the chaff. Right. And so this is where. So I was a software analyst for a long time and what did we know about that space? Right. Strong reoccurring revenues. We could.

[Podcast Disclaimer/Franklin Templeton Representative]

Right.

[Ben Carlson]

And because the businesses were like recession not agnostic, but were resistant, semi impervious to recessions resistant. Yeah. We could model off those cash flows, assign some terminal value and probably award a higher multiple. Because we were super confident in Microsoft's sales of Office365, so on and so forth. Now AI rolls along and a lot of that is being, you know, called into question. Look, valuation is not going to help you.

[Michael Batnik]

Right.

[Ben Carlson]

The reality is you don't know what the terminal value is of those cash flows. And if you reverse it, how can you figure out the implied growth rates? That's what's happening here in software. You know, Are there good names being thrown out with this? Definitely. But is it, is it a concern? Yeah, sure. Look, people, people forget. If you go back to 2000, Nortel and Lucent and JDs uniface, they're not around anymore, right?

[Michael Batnik]

Yeah, I think the overreaction makes sense to me. I keep saying that I think it's okay. People are hitting the sell button first and asking questions later and letting other people sort it out. I totally understand that it's an overreaction.

[Chris Galopo]

Everybody, nobody's like, this makes no sense. No, it makes total sense now. We'll find out. We'll find out. And I don't know how long it's going to take, if it's going to take six months or two years or three years, whether or not this is an overreaction. But I think everybody says yeah, because nobody knows how bad this gets.

[Ben Carlson]

And that's, I think that's really it, Michael. Right? You just don't know. Or, or you can say if you don't own the names, right? If you're not long the names, you'd say, okay, this is just too hard for me to figure out here. We can do all the analysis we want, make all the assumptions and build the pro forma income statement, but you really don't know. And so if you don't know the answers to that, how can you put some multiple on it and a future price target? Right. You're kind of in no man's land.

[Chris Galopo]

That is like the scary part. It's like, yeah, these might be great businesses today, they might be great business in two years, but what about four years? And obviously the moat, the pricing pressure, the recurring nature of the revenue, the margins, all of that is in question now and it's bleeding everywhere. So you see like in our industry, Altruist, a company that we work with but a very relatively small custodian announces an AI tool that is not, you know, we knew he was coming. And Schwab Falls 10 LPL. Raymond James I mean the market is the mark. It is weird because I'm saying like how the market is very fearful right now. The meanwhile the S p is within 2% of an all time high. But it does, it does feel and maybe I'm, maybe this is how I feel. I feel like the, the virus of fear is spreading rapidly right now.

[Ben Carlson]

Agree.

[Chris Galopo]

And I, and I'm scared.

[Ben Carlson]

You can feel it today, right? You can feel it today. And every bounce for the last couple weeks, definitely today is getting sold right into and all the names we just talked about there. The igv. Good luck with that. Right. No bid. And it is spreading right in your own business, as you just talked about. It hit all the banks, it hit the legal firms, look at the accentures of the world, so on and so forth, and probably going to continue to spread. Right.

[Chris Galopo]

Let's talk about an area of the market that is not impervious, but it's different. International stocks. Obviously, Franklin Templeton has its roots in global stocks. And not only no problems there, but it's just such a fascinating turn of events for international stocks that really and truly in December 2024 it was like, are we really going to another year saying the same thing we've been saying for the last seven years and now they're, they're working. It's like the only thing working in terms of equities.

[Ben Carlson]

Yeah. So I can tell you from my seat, when we, when we rolled into 25, we're bullish row equities. Right. Rest of the world equities. I mean, I got hate mail for that call. Hate mail for it. And despite the fact that we could show the earnings power and you know, equal to or better than the U.S. for the first time in 15 years, nobody wanted to touch it. Same can be said, by the way, for small cap right. In the US but once bitten, twice shy, investors didn't want to have anything to do with it. And people assume, and wrongfully assume this, that you need some big currency devaluation to drive those names. Now you had that tailwind in 25. It accounted for almost all the alpha versus the S and P. But the foundational pieces that make any stock work or any index work or any country work, the foundational piece that is earnings power forward earnings growth is present in em. It's present in India. It's present in Japan. Right. It's present to a lesser extent in Europe. And so we started that call last year and maintained that call coming into this year. But you're right, right. And I don't think you need currency debasement necessarily. Is it a nice tailwind? Yeah, but the earnings power is there and the valuation's there. And like for the prior 15 years, right from 09 guys to 2025, S&P is up like 600% because Spoo's earnings are up 250%. And in that same window, right. Em, earnings are up like 30%. And European earnings. Yeah, European earnings are up a little More than that, you want to know why those markets were cheap. That's why there was no earnings power, right? So things can stay cheap forever until there's a catalyst to unlock it. Now in the last two years you've got the catalyst to unlock it. But you know, Ben, it's probably not different than I think it's similar to the rotation in the U.S. right, where you've got very few people with any significant or substantial row equity exposure in portfolios. Now there, now there's a scramble on. They fought it all last year. Oh, it's all currency. It's all currency. And we were saying that it is, that's helping. But you've got earnings power here folks, and you got to recognize that. But yeah, it's worked well.

[Michael Batnik]

So you're a believer in the shareholder reforms too. Just the fact that, you know, the stock market is almost like ingrained in us now and it's not, that's not so much the same thing overseas in many places. Is that, do you think that tide is turning to where they're going to finally make it so return money to shareholders or treat, treat shareholders better. Is that, is that going to be, is that going to stick this time?

[Ben Carlson]

I think it has been sticking. Right. That's been, that's been underway in Japan for five plus years. Right. And now I guess I personally have a bigger question mark on European EPS growth and that sort of thing. But yeah, it has. But to me the setup was interesting because you've got the valuation discount. Like I really don't care about that until there's a catalyst to cause it to rerate. And then when we saw that start to crop up going into 25, I'm like, okay, maybe this is it. But boy, investors don't want to believe that. And it probably has not. Probably it has likes.

[Chris Galopo]

Maybe this is my recency bias talking, but I was saying with to Ben last week, it does feel like people are extrapolating the current environment out into a long time and maybe they're right. Like maybe these software names just don't catch a bit because I don't care what you tell me next quarter, I don't care about the next quarter or the next quarter because every, it doesn't matter. There's nothing you could say that's going to make us forget that AI is coming, it's here and it's going to change your business model. And this is an open question like how much time, what, what if, what is, is it six quarters of new all time highs for These for the earnings. If, like, if, if, if, if Adobe is six quarters from now saying like, hey, it's, it's our eighth quarter in a row of all time highs. Like, when are you guys going to respect the fact that we're, we're using it too and we actually have a sustainable business model but nobody knows how long it's going to take.

[Ben Carlson]

I agree with you. I agree. And I think that that's the challenge. And so people get into shoot first, ask questions later sort of thing. Right. And that's clearly where we are here in the last couple weeks big time today. But I think to the extent, right. That we could get some of that. Let's say we get some of that, Michael.

[Michael Batnik]

Right?

[Ben Carlson]

You get, you know, I'm just gonna, I probably shouldn't throw out names, but you guys know the names. And they start reporting our. Reporting earnings, they start to talk about AI in their own business and how it's accretive and all that sort of thing. Maybe we'll start to see some sort of sea change. But that would be, I think Dan Ives, who I've worked with for forever as a pm, Danny was on, on the sell side, obviously. I think he talked about that this week. Right. And he's right. That could be a little bit of, a little bit of an elixir.

[Chris Galopo]

So we've got, we've got Salesforce and Snowflake this week and of course Nvidia, which is, I mean, it's not besides the point. We know they're going to report ridiculous numbers. There's, there's, there's no question that there's a shortage of compute. Um, but man, it's hard to feel good about the market when software, gigantic software names are falling 4% every day.

[Ben Carlson]

No, it's. Right, look it, you guys know this. It's an emotional game, right? And it always is. And when it gets, when we get in periods like this, it's stressful. But I would also fall back on what we hit on earlier, that the S and P is like down 50 basis points on the year and there are an awful lot of stocks that are up. It's just not the names we're used to.

[Chris Galopo]

So I don't know if that's comforting or not. I could, I could, I could credibly make an argument either way. But I think the thing that feels different, at least for me, for this recent sell off, which again, yeah, the S and P, it's, it's Nothing. We're down 2%. Whatever. A, we could, we could be down 11% by next week and who knows, a month, two later.

[Ben Carlson]

Fair.

[Chris Galopo]

But more, but more than that, like every time there's a sell off there, it usually isn't accompanied by fears of, hey, wait a minute, am I taking too much equity risk because I should be hoarding cash because I might not have a job in 18 months, or. And it's hard to reintroduce risk appetite when that black cloud is hanging over every investor.

[Ben Carlson]

It's a good point. That's probably the one thing that I, I started to think about this on while you were buying Blackstone on Friday. I was looking at that basket and I'm thinking, okay, what, what, what is this? What is the message here? Right? And, and moreover, what is the message with the action in the big banks, right? What were to happen if AI becomes so prominent, so powerful that we do start to see people losing jobs, a lot of jobs, right? Then you got the unemployment rate up, then you've got the negative vortex of consumers pulling in their horns and that sort of thing. You can talk yourself, work yourself right into a recession or scenario if that happens.

[Chris Galopo]

Oh, I'm doing it, I'm doing it, Chris. So, so I've been saying for the past couple of months, I'm like, look at, don't tell me about the consumer. Look at Capital One. Yeah, look at Ally, don't tell me about struts in the car market. Look at these stocks. I just don't believe you. Yeah, well, guess what? Capital1 is down 8% today, rototilled again on no news. And it's breaking hard. It hasn't been this low since, since June of 2025. And it's hard to, I'm not hand waving this away.

[Ben Carlson]

Listen, there is information in stock price movement, period, end of story. And if people don't believe that at some point in their career, they will come to realize that that's probably the most important source of information. Right? We can talk about all the, you know, what the companies say on earnings calls and all that sort of thing, but there's always different and probably better information out there. And you're right, I mean this, it is a little bit scary to watch these things come unglued. I mean, American Express, not a small company.

[Chris Galopo]

Is there any like, what's more, blue chip? And American Express in particular, that's like exposed to the luxury segment of the market. That's white collar unemployment. That's right, that's. That, that's a perfect example of the fears over the weekend all the doom scrolling, the, the doom, the bear porn articles people are reading, myself included. Not fun, not having a good time.

[Michael Batnik]

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

[Ben Carlson]

Let's look at what, what Walmart said on their call Friday.

[Michael Batnik]

Right?

[Ben Carlson]

So Walmart comes out, reports good earnings. They've already told us, they've already told us that they expect to grow revenues for the next five years at the same rate they grew them for the past five years with zero headcount.

[Podcast Disclaimer/Franklin Templeton Representative]

Right.

[Ben Carlson]

Adding zero headcount. And so using AI, whether it's in procurement or supply chain or it's on the floor, they believe will be incrementally accretive to revenue margins and ultimately net income and earnings. Right. In their call, they said, we noticed that shoppers that were using their AI tool while they're in the store spent 35% more than the shoppers that were in the store that didn't use it. So if you and Michael are in the store, Michael's on it and you're not. He's going around buying all kinds of things because it's telling him he might, he might like, you know, product abc. That's accretive, right? That's, that's good news. And that's the good, that's the good part of AI. And by the way, what have we heard from big name companies in the last two to three quarters? J.P. morgan, Home Depot, Citibank, a bunch of the logistic companies have talked about it. The benefits of AI right now, whether it starts taking everybody's jobs. I mean, I'm not really in that camp. I think it'll probably take some. But I think the Walmart example Friday, that's probably how I'm thinking about it mostly. Ben, to be honest, Chris, if you

[Chris Galopo]

could fast forward to the end of the year other than like stock prices. Is there anything that you would want to see in order to tell us today what happened for the rest of the year? Would it be unemployment rate? Would it be fed funds rate? What would you look to?

[Ben Carlson]

You know what I'm hoping for here, to be honest, and this is, you know, it's always tough to go through these things. We're in a midterm year, right? We know that midterm years are rough years. Average returns well below long term returns. What most people don't know is that 12 month forward returns a hundred percent. Right? And I think you guys even put something out about this in the last couple weeks. We've done the same analysis. We'll publish it soon. It is an absolute home run to be using weakness in a midterm year to take risk right? Now I'm not saying you gotta go up my software stocks necessarily, but S and P behaves well. So what I hope for, and I'm hoping for and we're getting it right. I think we get this moderate volume chop, maybe we get, give me Vix over 30, give me the RSI on the S&P under 30 and it's go time. You want to take it to 40, you want to take it to 50, it's margin time.

[Chris Galopo]

Let's do it.

[Ben Carlson]

That's right, let's do it.

[Chris Galopo]

You know Chris, the Vix at 21, I know it's not, it's like on the floor like that worries me too. I know, it's like this is like a very, very orderly panic. It's not a panic, it's just, it's just a bleed.

[Ben Carlson]

It's weird, but the paper cuts are now becoming like hatchet cuts and things like XP and some of the other names that we've talked about, right? Certainly in software. And look, you guys know it doesn't take much for VIX to go from 21 to 32. It could be two days, could be three days, right? Could be this week. But I think we get that then the risk reward starts to improve, right? Because people forget this, that as stock prices come down. You know what else is coming down? The risk in owning risk.

[Chris Galopo]

Right? So that's the thing that I always take comfort in. You want to give me all this bad news, all the what could could happen. Hey, guess what, asshole. Excuse my language. Yeah. The market is pricing in bad news. What do you think? What do you think? Microsoft being down 30% means that's risk.

[Ben Carlson]

We know markets bottom on bad news. Guys got to remember that to leave

[Michael Batnik]

people with Like a positive sense because I feel like so much of the AI stuff is just, it's very, it's easy to get to the negative doom loop. I agree and I'm a very optimistic person.

[Ben Carlson]

Michael needs a support group, Ben.

[Chris Galopo]

I really do. I was feeling very upset.

[Michael Batnik]

I guess my, my thought process is though, like, margins continue to climb higher slowly but surely through everything that's happened this, this decade, right? Everything corporations have gotten thrown at it, supply chain problems, high inflation, tariffs, all this stuff. Margins just keep moving higher. What could cause margins to fall when AI the most is potentially the. One of the most productive efficiency generating machines that we've ever created? Isn't that at the end of the day, isn't this good for profits?

[Ben Carlson]

Agree, agree. Isn't that what Walmart told us on Friday? It is.

[Chris Galopo]

I guess the market is just sorting through whose profits.

[Ben Carlson]

I think that's right. I think that's right, Michael, but I think that's right. Look, in my entire career, you know what I've been told? Operating margins are a peak here. Margins can't get any better. They've gone up for 35 years.

[Chris Galopo]

Right, right, exactly. Maybe I'm just telling this to myself to feel better today. The macro backdrop is pretty okay.

[Ben Carlson]

Yeah, agree, agree.

[Chris Galopo]

Unless like not the worst comes to pass, but I think unless unemployment really is on its way to 6%, hard to get too bearish, right? Michael? Don't get too bearish. Don't get too bearish, Michael. Come on, don't do it.

[Ben Carlson]

Hang in there, Michael.

[Michael Batnik]

The thing is, the unemployment rate is still at 4.3%. The prime age labor force participation rate is essentially at the highs of all time, going back to matching the late 1990s run. Maybe you could say, well, this is the peak, it's going to get worse from here. And that's possible, but we haven't seen a huge impact yet. And I really do think that corporations are going to think very hard about the political ramifications of mass layoffs because of this technology. I just don't. I think you can't take out the human element of these decisions. And I think that's something that we have to consider as well.

[Ben Carlson]

Right now we're in the eye of the storm, right? And we need to remember, investors need to remember that the storm always passes. The landscape may look a little different on the other side, but the storm always passes. Right? And this, this one will pass too. The landscape might look different, but it's not the end of the world. Right? And let's remember the S and P is barely off its all time high. The biggest risk to equity markets and to earnings and profitability are recessions. Right. Median earnings degradation for the S and P during recessions like 15, 18%. Right. MA median max drawdowns 28, 30. Those are almost always caused by one or two things. The Fed breaking it. Right. Over tightening, staying tight too long, causing a liquidity crisis and. Or a credit crisis. That's what we're used to. Or we get a black swan like Covid. We're certainly not in the, in the first part of that. Over tightening, breaking, breaking something. Right. I don't know about black swans, but

[Chris Galopo]

top line revenue growth has been the highest since, since 2022.

[Ben Carlson]

Yeah.

[Chris Galopo]

Like amidst all the fear, companies are killing it.

[Michael Batnik]

Right.

[Ben Carlson]

Earnings growth in Q4 is like plus 13% year on year. Probably going to be similar this year.

[Chris Galopo]

Interesting environment.

[Ben Carlson]

Right. Never a dull moment in this business. Right. But to Ben's point, if you can improve what might be good for Main street. Sorry, Wall street in this case, I. E. Right. Lower, higher EBIT margins potentially because they can be just as productive without adding headcount and, or reducing fixed cost is accretive to margins and accretive to earnings. Right. It might be, you know, we don't want to see the unemployment rate spiral out of control. That's for darn sure. But that has, that hasn't happened yet.

[Chris Galopo]

Chris, for people that want to learn more about your thoughts and follow your writings, how do they get a. How do they get that?

[Ben Carlson]

Yeah, so you can track me down on LinkedIn and there's a newsletter that I write every weekend, gets published Sunday afternoon or Monday morning. So you can find me on LinkedIn, Chris Galopo and just subscribe to the newsletter. You'll get the comments in your email every Monday morning. Very straightforward. You know, I'm a no BS guy. I'm not pulling any punches there. I'm going to let you know exactly what we think.

[Chris Galopo]

All right? Chris, this was. I don't know if fun is the right word, but this was a good talk, a sobering talk.

[Ben Carlson]

You're going to be okay, Michael. We're going to be okay.

[Chris Galopo]

All right. I appreciate your time.

[Ben Carlson]

Thanks guys.

[Michael Batnik]

Okay, thanks to Chris. Remember, check out Chris's newsletter on LinkedIn. Check out frankatempton.com to learn more and email us animalspiritscompoundnews.com Important Information this material

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