Stocks to BUY for Trump's new tariffs! | Michael Casper

Summary

Podcast Summary: Full Signal – "Stocks to BUY for Trump’s new tariffs!" with Michael Casper
Date: February 26, 2026
Host: Phil Rosen
Guest: Michael Casper, Senior U.S. Equity Strategist, Bloomberg Intelligence

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Main Theme

This episode centers on the implications of former President Trump’s newly structured tariffs for US equities. Phil Rosen and guest Michael Casper explore which sectors and stocks have benefited from recent changes—including the Supreme Court’s striking down of aspects of Trump’s earlier tariffs—and discuss how investors might think about winners and losers, sector rotations, and the performance gap between the “Mag 7,” small caps, and other market baskets.

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Key Discussion Points and Insights

1. The New Tariff Landscape: Winners & Losers

[00:39–03:47]

• Section 122 Tariffs: Trump’s tariffs are now routed through Section 122, resulting in an effective average tariff rate of about 12% due to exemptions for certain goods (e.g., aircraft, pharmaceuticals, some tech). This is down from ~13.6% pre-Supreme Court ruling and up from 2% before recent policy changes.
  • Michael Casper: “The current effective tariff rate...is expected to fall somewhere around 12% given his 15% flat rate. And there’s exemptions under the surface.” [00:39]
• Relief for S&P 500 Earnings: Lower effective tariffs mean a positive boost (est. 133 bps accretive) to S&P 500 earnings, as about 43% of the S&P 500’s cost of goods sold (COGS) is imported.
• Decreased Uncertainty:
  • Tariffs are no longer being applied unpredictably to specific countries, creating a less volatile investment environment.
  • Casper: “Stocks hate uncertainty and there will be less of it around tariff policy now as a result.” [03:43]

2. Differentiated Regional Exposure

[04:26–07:03]

• Countries Benefiting Most: China, Brazil, and India see the biggest effective tariff rate decrease for 150 days under Section 122. Sectors exposed to these regions—tech, materials, and industrials—stand to benefit.
• Countries Facing Higher Tariffs: Nations that negotiated with Trump earlier, like the EU, UK, and Japan, are now subject to the blanket 10–15% rate, potentially hurting US healthcare, which has significant COGS exposure to Europe and UK.

3. Tariff-Insulated vs. Tariff-Sensitive Stocks: The Titans and the Tulips

[07:03–09:55, 11:03–13:31]

• Methodology: Bloomberg Intelligence sorted stocks into “Titans” (tariff-insulated) and “Tulips” (tariff-sensitive) based on stock price reactions in 2018 and 2025 tariff events and COGS exposure.
  • Titan examples: Dollar General, Dollar Tree, Palantir, Northrop Grumman, First Solar, Lockheed Martin, Kroger, Super Micro, Constellation Brands.
  • Tulip examples: Garmin, Meta, Best Buy, HP, Nike, Merck, Zimmer Biomet, Celanese, Pfizer, Bristol-Myers, etc.
• Performance: Since early 2025, Titans have outperformed Tulips by 2000+ basis points, but Tulips have rebounded strongly since the April 2025 bottom.
  • Casper: “The Titans have really held up well. I believe they’re outperforming the Tulips by over 2000 basis points.” [08:18]

4. Retail and Defense: Specific Stock and Sector Dynamics

[11:35–13:31, 13:31–14:20]

• Consumer Staples & Retail:
  • Tariffs plus high inflation drove consumer trade-down to discounters (Dollar General, Dollar Tree), grocers (Kroger), and big-box retailers (Costco, Walmart).
    • Casper: “…You really saw this trade down effect in the consumer...the consumer did a very good job of shifting their spending patterns...” [11:35]
• Defense Stocks: Northrop Grumman, Lockheed Martin, and Palantir outperformed due to increased geopolitical risk and stable performance during uncertainty.
• Tech Stocks in “Tulips”: Some, like Meta, are tariff-sensitive not due to goods, but global user base and political backlash in other digital markets.
  • Casper on Meta: “...they do have a large global user base. And as these tariffs kind of roil the relationship between the US and whatever country...it significantly hurts the business.” [17:40]

5. Materials, Energy, and the Sector Rotation Theme

[18:50–21:14]

• Materials Sector Strength: Up ~17% YTD, driven by:
  • Rising commodity prices (gold/silver “to the moon”).
  • Stronger earnings inflection after years of contraction.
  • Improving macro (ISM PMI back in expansion).
  • Tariffs contributing by raising commodity prices, aiding metals producers like FCX.
• Chemicals vs. Metals: Chemicals are the largest material sub-sector, starting to recover after weak earnings; metals have led the upturn.

6. Small Cap Revival & Structural Change

[23:24–26:24, 26:34–29:07]

• Small Caps Outperforming: Early 2026 has seen strong performance, driven by:
  • Improved macro tailwinds.
  • Anticipation of increased IPO and M&A activity, which historically drove small cap outperformance.
  • Casper: “Our biggest theses for 2026 is that the IPO stream and MA activity should pick up.” [23:24]
• Profitables vs. Unprofitables: Russell 2000’s return historically comes from profitables. Recently, unprofitable small caps have rallied, but valuation spread is not concerning.

7. The Mag 7, AI, and Valuation Bubbles

[29:07–32:48]

• No Mag 7 Bubble: Contrary to “bubble” fears, today’s Mag 7 PE ratios (mid-30s) are far below the dot-com era (80x). Their forward EPS growth is strong (~20% through late 2020s), and the recent multiple compression is not outsized.

  • Casper: “If you aggregate up their PE around 1999, they were trading at an aggregated 80 times PE. You look at the MAG7 today, mid 30s…” [30:15-30:30]

• Rotation: Tech’s growth is no longer uniquely attractive as “the 493” (rest of S&P) picks up steam, so investors are considering lower-multiple sectors with rising growth.

• Valuations & Psychology: Market psychology and fears—rather than any fundamental change—are driving software/tech repricing. Terminal growth rates (long-term DCF) are being questioned, not near-term earnings.

  Casper: “What instead is happening is a repricing of the terminal growth rates for software companies. ...If you think the company is going to exist, it’s starting to look like this is very washed out, especially in software.” [33:12–34:00]

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Memorable Quotes & Moments

• On Tariff Certainty:
  • “Stocks hate uncertainty and there will be less of it around tariff policy now as a result.” – Michael Casper [03:43]
• On Defensive Outperformance:
  • “Defense stocks tend to hold up very well when there’s overall market disruption, periods of geopolitical risk…” – Michael Casper [13:39]
• On Retail Resilience:
  • “…the consumer did a very good job of shifting their spending patterns… to going to a Kroger or going to a Dollar Tree or Dollar General…” – Michael Casper [11:35]
• On Small Cap IPO Dynamics:
  • “If our thesis plays out and there’s more IPO activity happening, that’s a huge benefit [for small caps].” – Michael Casper [23:54]
• On Mag 7 Bubble Risk:
  • “I actually argue that AI and the Mag 7 trade is not in a bubble now.…The issue more is the opportunities outside the Mag 7.” – Michael Casper [29:10]

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Important Timestamps

• 00:39–03:47: Overview of the Section 122 tariffs, effective rates, and winners/losers
• 07:03–09:55: Explanation of Titans & Tulips baskets methodology and performance
• 11:35–13:31: Review of key stocks (Dollar General, defense, etc.) and category reasoning
• 14:20–16:24: Deeper look at Tulip stocks, input costs, and why Meta is included
• 18:50–21:14: Materials and energy sector strength; impact of policy and macro
• 23:24–26:24: Small cap sector outlook and the role of IPO/M&A dynamics
• 29:07–32:48: Mag 7, valuation, and AI bubble discussion

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Conclusion & Takeaways

• Tariff Policy Now More Predictable: Investors should expect less volatility from tariff announcements, lower effective rates, and clearer impact calculations.
• Sector Rotation Underway: Tech’s dominance is being challenged by outperforming materials, energy, and small caps (the “493”).
• Stay Alert for Small Cap, Materials, and Select Defensive Plays: Titans continue to outperform, but some Tulips may claw back ground as the market adjusts.
• Long-term Tech Growth Intact: Mag 7 is not in a bubble by historical standards; market recalibrations are driven by psychology and expectations, not collapse in fundamentals.
• Tools & Resources: Michael Casper’s research is available for Bloomberg Terminal subscribers via BI STOKS GO.

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For those who missed the episode, this summary outlines the major policy shift affecting tariffs, which sectors and stocks to watch, and why a more predictable policy environment is (mostly) good news for equities.

Transcript

[Host]

On this episode of Full Signal. I'm very excited to share. We have Michael Casper, a senior U.S. equity strategist from Bloomberg Intelligence, joining me today. We talk about the small cap revival, the stocks that are going up, the stocks that are going down due to tariffs and the ones that could win out this year and the sectors that are outperforming Tech and the Mag 7

[Co-host]

all ready to start the year.

[Host]

This is a fantastic conversation. I learned a ton and I think you will, too.

[Co-host]

Michael, it's great to see you. You've been doing a lot of work around tariffs and the implication for the stock market. We just had the Supreme Court strike down Trump's first bout of tariffs. Can you walk us through how you're thinking about this?

[Michael Casper]

Yeah. So there's going to be winners and losers from this. Of course, the current effective tariff rate under section 122, which is the way Trump's reimplementing these tariffs, is expected to fall somewhere around 12% given his 15% flat rate. And there's a exemptions under the surface. Right stuff for like aircraft, pharmaceuticals, some tech is exempt. So those exemptions actually bring the effective rate down from that flat 15 down to 12 pre the Supreme Court, we were looking at about 13.6% was the effective rate. This is all, of course, up from about the 2% pre liberation day we're looking at. So overall, it's a nice relief for US Companies, but there's going to be winners and losers.

[Co-host]

Is that 1 or 2% difference? Is that really that meaningful for, let's say, the earnings story?

[Michael Casper]

Yeah. So if you do the work like we did, right. We, we look at what cogs are, are exposed to overseas. Across all the S&P 500 companies, about 43% of the S&P 500's entire COGS are coming from overseas. Now, if you just use that as a blanket assumption for the costs that are coming from outside the US and you apply those new effective tariff rates versus the old effective tariff rates, you're looking at about 133 basis points accretive to S&P 500 earnings here just from the relief from the Supreme Court ruling and where Trump's going with the Section 122 tariffs, up to that 15%. Now, if we actually had settled closer to 10%, the effective tariff rate would have been a little bit north of that, around 10.2%, 10.3% based on the Bloomberg Economics estimates. So, of course, more relief to S&P 500 earnings if that were what actually is Materializing, but looks like Trump's going

[Co-host]

to go for the 15, the section 122. I had never heard of this, frankly, until it started making its rounds in the news and Trump started talking about it. Is this a realistic path for, let's say, trade policy to move through? Should you think investors really be paying attention to it that closely or will we get another pivot at some point?

[Michael Casper]

Well, I think what's really important here is twofold, right? The effective tariff rates coming down as a result of this Supreme Court ruling, that's good for S&P 500 companies. But if you also think about the uncertainty that tariffs bring to the market, that's another positive to just S&P 500 companies. Stocks hate uncertainty. Now, Trump is kind of handcuffed with his tariffs. He can only go between 10 to 15% on section 122. If he wanted to implement specific country level tariffs, he would have to go via section 301 and, and he would need to launch investigations on each of the countries that he would like to implement additional tariffs on. We already have a Section 301 investigation going on against China, for example. But it really handcuffs him from doing what he did last year where he doesn't like China for whatever reason. We're going to go with 135% tariff this week. We're going to raise it next week to 150%. It really handcuffs his ability to do that. And so that's a good thing for stocks. Stocks hate uncertainty and there will be less of it around tariff policy now as a result.

[Co-host]

So just so I make sure I'm understanding what you're saying, compared to, let's say a few weeks ago, the new set of tariffs or the new approach for tariffs is actually less of a concern for investors, is that right?

[Michael Casper]

I would, I would definitely say it's less of a concern for investors. Effective tariff rates coming down, less shooting from the hip around this, the tariffs become non discriminatory. Right. So under section 122, it's a 15 or 10% blanket, depending on where we, where we land, across all countries, rather than just shooting from the hip at specific countries that are out of favor on a given day. So less uncertainty, lower effective rates is the main takeaway here.

[Co-host]

Okay, I think that makes sense. So you have been writing a lot about the tariffs and sort of the different regional exposures to S&P 500 companies, and you've called out specifically China, Brazil and India. Can you walk us through that?

[Michael Casper]

Yeah. So we already talked a Little bit about China, right? There was a 10% reciprocal tariff for the fentanyl crisis, for example. That's off the board now. So if you think about countries like China and Brazil and India fall into this group of the countries with the biggest benefit from this ruling of the Supreme Court. If you think about other countries, China, Brazil, India have the expected largest decrease in their effective tariff rates overall. So any country where they were above this 15% threshold, that's now the blanket. Those countries, at least for the next 150 days while we're locked into the section 122. By the way, section 122 can only last 150 days before you have to start implementing some of these workarounds. But at least for the next roughly half a year, these effective tariff rates are rolling back significantly for those three regions. Now, that will, of course, raise some winners and losers in the S&P 500. I think mainly if you look at the overlap of the sectors, tech is a big winner. Materials and industrials are the other ones that have significant exposure to those three regions where the effective rate is falling the most.

[Co-host]

So I assume the flip side of that, where the effective rate is actually higher than maybe the first round of tariffs. What's the regional exposure for that?

[Michael Casper]

Yeah, so think about countries that made trade deals with Trump. That would be the eu, uk, Japan, countries that kind of cooperated with the whole tariff thing, came to the table, negotiated a lower rate than they had previously. Those rates are now set to go to the 10 or the 15%. And that's kind of where the losers come from. Now, the big overlap there. Of course, a lot of cogs exposure for the healthcare sector comes from the EU and uk.

[Co-host]

There's big cogs is cost.

[Michael Casper]

Cost of goods sold.

[Co-host]

Cost of goods sold.

[Michael Casper]

Yeah. So input costs for these companies, a lot of healthcare, US Healthcare's exposure for the cost of goods sold comes from the Europe and uk so that could be one of the groups that's hit a little bit more than others.

[Co-host]

When you're thinking about these different countries and the regional impacts, you're specifically talking about The S&P 500 companies with exposure to those countries. Right. It's not so much like the Japanese stock market will react differently because of the US Tariffs.

[Michael Casper]

No, my focus is solely on the US and where the US Company's exposure lies.

[Co-host]

Okay, that. I think that makes sense. You've done two things with your team. You have these baskets of stocks that are the titans and the tulips, which, as far as I understand Companies that are insulated from tariffs and ones that are more sensitive to tariffs. Yeah. Can you talk through the parameters used to how you categorized the stocks into each basket?

[Michael Casper]

Yeah, so we're strategists, so it's a very systematized result. Right. So what we did is we looked at the first round of tariffs that Trump instituted back in his first term. Even so back in 2018, what were the price reactions around those tariff announcements? And then in 2025, as we got closer to Liberation Day and as more announcements were being made, the price reactions around the 2025 tariffs as well as again, those companies that have significant cost of good exposure outside the US So you combine those three things in kind of an equal weighted, systematized way and you end up with what we call the tulips and the titans. Now, the tulips are the companies that we wilt under the pressure of tariffs. Titans are the ones that would hold up the best based on these criteria that we identified.

[Co-host]

And are you back testing these baskets? How's the performance been?

[Michael Casper]

Yeah, so if you look at the performance, we've been tracking it since the beginning of 2025. So right before Liberation Day, the Titans have really held up well. I believe they're outperforming the tulips by over 2000 basis points. So very significant outperformance. The tulips though have recovered pretty steadily since that Liberation day. So I think it was on April 8 or so, the whole market bottomed. Since that market bottom, the tulips have recovered and achieved their pre Liberation Day peak. So I believe that came in February of 2025. They're back above that peak, but they're still trailing the titans pretty significantly.

[Co-host]

How much of this is just the initial scare or maybe the, let's say political geopolitical impact on the market and then just everything rebounded. Like maybe it's less about exposure to tariffs and more just knee jerk reaction in the market and then everything just roars back anyway.

[Michael Casper]

Well, it's partly that, right? Beta works in an uptrending market and stocks are beta assets. It is part that where the whole market's recovering and that's driving the tulips to do a little bit better. But I think the outperformance of the Titans really does speak for itself. The fact that they are outperforming this highly exposed bin by over 2000 basis points suggests there is something else at play. And we're seeing it in the multiple as well over 23 times forward PE. Whereas if you look at the tulips, those are trading a little bit south of 20 times currently. So there is a lot of different ways that this is shaken out. And it all does suggest that the tariff effects are playing through these baskets of stocks.

[Host]

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[Co-host]

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[Co-host]

Wow. So it sounds like there's a, it's not just a, let's say market psychology. There's a fundamental case for these categories. Okay, so I want to call out some of these stocks. In the Titans category, you have Dollar General, Dollar Tree, Palantir, Northrop, Grumman, First Solar, Lockheed Martin, Kroger, Super Micro, Constellation brands. Looks like defense and sort of consumer staples adjacent. Is that right?

[Michael Casper]

Yeah, some staples. If you think about really what happened as tariffs worked through, you saw pretty decent results still from a select few of retailers. And I bring that up because I think Dollar General and Dollar Tree are some of the more fascinating names there. Killer stock popping up. You really saw this trade down effect in the consumer. Prices were high. We already went through a period of high inflation. The consumer's suffering from these higher prices. And then you get tariffs on top of that. The consumer did a very good job of shifting their spending patterns from let's call it more luxury spending or spending at a local grocery store to going to a Kroger or going to a Dollar Tree or Dollar General where you can get pretty much the same goods for a cheaper price. You saw this across Walmart. You saw this Costco stock was running for quite a While TJ Maxx is another one that was kind of popping up in there. And this was a consistent pattern for the. For the consumer throughout 2025. And it really did play through some of the. The tool, the Titans. Excuse me.

[Co-host]

So I know you can't make recommendations, right? That's not what we're here for. Is it fair to say that the Titans, from the outside, it seems like something that we could expect to outperform against the tulips. Is that a fair way to think about it?

[Michael Casper]

So the way I'm thinking about it is that the tulips, I think, could claw back some of those relative losses to the Titans. Right. So I brought up that 2000 basis points or so of outperformance for the Titans over the past year. We're now getting some tariff relief, so maybe some of that gets walked back. Right. It doesn't necessarily mean that the Titan basket is going to collapse or the tulips are going to rip ahead of the Titans. It just means that the relative performance gap, probably a little overdue to close a little bit. But still, you do have an effective tariff rate of 12%. And if you're looking pre Trump's election, we were talking about 2%. So the Titans should, over the long run, still do relatively better than the Titans, I think.

[Co-host]

Wow. Can you explain why let's say Palantir, Northrop Grumman and Lockheed Martin are in the Titans basket?

[Michael Casper]

Yeah. So, again, the systematized procedure, their price reactions, defense stocks tend to hold up very, very well when there's overall market disruption, periods of geopolitical risk, which, of course, some of these tariffs do bring up. We've had Trump talking about going out and acquiring Greenland and using tariffs as a blunt tool against the EU to make his acquisition of Greenland. Right. So it also raises geopolitical risk, and that helps some of those defense stocks. And Palantir, of course, is in tech by the official GICS classification, but it has a significant defense linkage. And these are the stocks that have generally held up both throughout that 2018 period of geopolitical tensions and the 2025 period.

[Co-host]

Wow. I was listening to the State of the Union address from Trump, and he was mentioning how, because of the tariffs, even though they've since been shot down by the Supreme Court, he was able to make some of the trade deals based on the threat of potential tariffs, and now some of these starts to get walked back. My guess is that that uncertainty will bring a whole nother bout of volatility into the market, almost separate from any actual country specific tariffs. Just the uncertainty of. Well, that previous trade deal maybe is moot.

[Michael Casper]

No, it certainly could. But I think the important thing to remember overall is we don't have him shooting from the hip again, which was really the big disruptor. If you think back to Liberation Day and when stocks briefly hit a correct, the S&P 500 down 19.9% from the peak back in Liberation Day. If you think about really what that was driven by, it was the market kind of freaking out about how volatile this tariff situation was getting. And now Trump is really handcuffed in his ability to shoot from the hip and launch even greater tariffs than this 10 to 15% without an investigation. And these investigations do take some time. Like I mentioned, we're already investigating China and have been investigating China under section 301. So he's really handcuffed here. What the market really hated in 2025 was that uncertainty and his ability to. Today the tariff rate is 15%. Tomorrow I'm going to raise it to 150%. So that really limits the uncertainty, I think, even though there are some trade deals currently that might collapse, if you will.

[Co-host]

Right. It's an amazing time to be studying the market right now. So let me ask you about these tulip stocks in the basket. You have Garmin, Meta, Best Buy, hp, Nike, Merc, Zimmer, Biomet, Celanese, Pfizer, Bristol Myers, and there's a few more. How did you, like, how did these names get into the basket?

[Michael Casper]

Yeah, so if you, if you think across those names, it's a lot of discretionary stocks. You mentioned Best Buy, Nike, those. Actually, if you talk to some of our BI discretionary analysts, those could be some of the bigger stocks to benefit from this tariff reversal. Just as a side note, but how they got there really is their input costs, especially those discretionary companies. Their input costs are coming very dramatically from Southeast Asia. China specifically. Nike has a significant exposure there. Some of the discretionary stocks have significant cogs exposure. Then of course, as these tariffs are getting announced, these stocks, these are the first ones that people generally look to to get hit by tariffs. And they were some of the first to sell off. And some of the more violent sell offs in the S&P 500 last year during Liberation Day and that whole ordeal. So that's kind of how they landed in that tulips basket.

[Co-host]

Okay. I have to ask you, I saw Meta in this basket. I didn't really understand why that would be considered a tulip stock for tariffs here. Because isn't it all digital infrastructure, I mean, there's no goods changing hands, really, from my understanding.

[Michael Casper]

Yeah. I think it's partly because of the user base.

[Co-host]

Right.

[Michael Casper]

So they have a very global user base, some of the users in those areas. There's big fights now between US Tech and China Tech, specifically China doesn't like using some US products and so on. That kind of curbs demand a little bit for some of these tech stocks that at first seem like they don't have a large input cost base, but they do have a large global user base. And as these tariffs kind of roil the relationship between the US and whatever country that, you know you're using that app. And it does significantly hurt the business.

[Co-host]

Wow, that's. Yeah, it's an amazing way to think about it. What about these biotech angles in the tulips basket?

[Michael Casper]

Yeah, and that's a lot of that Europe UK exposure that we were talking about a little bit earlier. They have a significant cost base outside the U.S. lilly is another one that comes to mind. They have a lot of production overseas. Same thing with some of those other healthcare stocks that you mentioned. I think with the rates going against the UK and eu, those are some of the stocks that might also suffer some volatility here.

[Co-host]

Okay. All right. Let me ask you about the materials sector, which is another component you've been watching. It's the second best sector of the year so far, right behind energy. It's up about 17%. What's going on here? Why is this the winning play right now?

[Michael Casper]

Yeah, so one of our biggest kind of opinions that we put out to start the year was that The S&P 500 was due for the 493 to start to catch up to the Mag 7. And that includes a whole host of cyclical sectors underneath the surface that really haven't been loved for years now. So there's a couple tailwinds, I think, that are supporting this energy and the materials trade. The first is commodity prices through the roof. You think about precious metals, gold, silver, all going to the moon, basically in retail parlance, that's a big support to energy and materials. Now you've got oil prices kind of starting to hook up with the Iran, possible strike coming down the pike. On the other end, you've got these companies just were in an earnings recession for the better part of the last two to three years. Energy and materials specifically, their earnings had been contracting since about 2022. They're just starting to pull out of that earnings contraction. Investors love inflection points going from near unprofitability to profitability is a huge inflection point for investors that they love to pick up on. And Consensys is really starting to see these companies earnings growth pick up. If you look at materials specifically, it's actually got the second highest expected EPS growth rate for the S&P 500 in 2026 to tech, that's the second point. The third point, and I think it gets lost under the radar a little bit, is the macro conditions. In the US We've been in essentially an industrial recession for the better part of two years and that was evident in those earnings growth rates. But if you look at something like ISM, PMIs, those have been contracting again since 2022. It's the longest stretch on record that ISM has been in contraction. We just finally hit an expansion number with the latest reading, a reading of 52, hugely supportive of some of these cyclicals. So they're cheap, they've got commodities at their back, they've got some macro at the back. Really kind of a favorable backdrop for some of these unloved sectors to catch up to tech.

[Co-host]

Is there a tariff or policy component that's driving materials or is that a separate issue?

[Michael Casper]

Materials is an interesting case. If you look at the metals part and specifically I would say copper, there are some tariff issues kind of actually helping out. So as the tariffs mounted last year, we saw Trump proposing significantly higher tariffs on copper specifically over a series of a few weeks. And you actually saw copper prices rise with those tariffs getting added on. So it was actually benefiting the materials companies that mined for copper. Think about like an FCX for example. So tariffs are helping a little bit there. They're also a very globally exposed sector. So if you think about materials, where a lot of the mining operations are, they're in Latin America, they're in China, they're outside the US So with tariff rates coming down, those materials that are now being exported back to the US for refining and so on actually do tend to get a little bit cheaper, which kind of aids some of these companies.

[Co-host]

So how much of the materials rally could we chalk up to? Just the craziness we've seen with silver

[Michael Casper]

and gold, a decent portion, but that again is mostly centered in the metals component. Now if you think about S&P 500 materials as a whole sector, chemicals is actually the biggest part. And chemicals was the group that was actually driving a lot of the earnings downturn. They were in complete earnings doldrums for the last two to three years, starting to come out of that. Finally, metals were starting to pull out actually a little bit earlier. They were leading the rest of materials earnings growth higher over the last couple quarters. You've got more components than just metals in materials. But it does look to be, and especially if consensus is right, a very broadening of the earnings growth stream for materials as a whole.

[Co-host]

Wow. It's. It's something that I think is not talked about enough. The equities impact of this like crazy metals movement we've seen. So with this rotation trade, what are you seeing in small caps right now?

[Michael Casper]

Yeah, so small caps, another kind of similar opinion to the 493 catching up to the Mag 7 was that I think that 2026 could be a decent year for small caps. And we've so far gotten that they're pretty much the second best performing index. If you just kind of segment by emerging markets US and developed ex US, they're beating the S&P 500. They're just barely underperforming emerging market stocks so far year to date. But they have a very similar backdrop to those cyclical S&P 500 stocks that I was mentioning before. Right. So a lot of those same tailwinds benefit small caps. And then on top of it, one of our biggest theses for 2026 is that the IPO stream and MA activity should pick up. If you think about the Russell 2000 and how a stock lands in the Russell 2000, you could either fall out of the S&P 500 and usually those stocks aren't great. They've been underperforming. Their fundamentals are lackluster. That's why they're falling out the other way. Stocks get into the Russell 2000 IPOs throughout the 80s and 90s. And the reason why small caps had such a good reputation of outperforming was that there was a significant flow of IPOs and PE was releasing these companies back into the public markets. Basically over the last 10 years or so, PE has been holding on to companies so long that the good ones all land in the large cap space. So you've got lackluster growth rates for the Russell 2000. Now if our thesis plays out and there's more IPO activity happening, we've already seen a little bit of a pickup in, in the third quarter and fourth quarter. Back to the long term trend. If that picks up, that's a huge benefit. M and A is another one. Right. For small cap companies, M and A is extremely important and it doesn't have to be M and A. Within the small cap space, it just has to be a peer being taken out. So if you think about the Rio Glencore deal that was proposed or the Warner Brothers Discovery deal that's kind of been going back and forth with their shareholders, those things help set the price for some of these less liquid small caps where valuation is a little bit harder because there's less analyst clarity. If a name in the materials space gets taken out at a 50% premium, then all of a sudden all the small cap materials companies, everybody reprices them to adjust for that premium. M and A starting to pick up. And 2025 by the year was expected to be a great year for M and A. We just didn't get it because of all the global uncertainty around tariffs. Now that some of that uncertainty is coming off the board and people are a little bit more comfortable with how tariffs shook out, not causing a recession like everybody thought they would during Liberation Day, now that M and A activity is starting to pick up, that's certainly really aiding small cap companies, plus they're very cheap versus the S&P 500.

[Host]

Real quick, we'll get right back to the interview. Just wanted to pop in and say if you like this content, I write a newsletter every single morning called Opening Bell Daily. I cover macro, the stock market asset prices, why things are going up, why they're going down, and if you want to get that for free, you can sign up at the link in the description.

[Co-host]

Let's get back to the interview. What's the differentiation right now between let's say the profitable small caps and the unprofitable ones?

[Michael Casper]

Yeah, so long term Russell 2000 performance has been driven by the profitable group of small cap companies. I like to say it's a little bit of a dirty little secret in the small cap space that people like to look at the IJR so the S and P small cap index for their ideas. Because S and P has a profitability screen, Russell doesn't. So at any given point in time, 20 to 30 to even in Covid times you got close to 40% of small cap stocks in the Russell 2000 were unprofitable. And those stocks just consistently lag their profitable peers over the longer stretch. Profitable stocks have really driven the returns over longer stretches. What we've seen actually over the past few months is a pickup in the unprofitable names. They've actually started to outperform a little bit and recently profitable's pulled more even year to date. But I'm talking about a six month time Frame, the unprofitable stocks have started to pick up. Really what's behind that is are recovering revenue growth rates for the unprofitable bin. So there's a hope that some of these unprofitable names will soon turn profitable because their revenue growth is picking up to high single digits. That's certainly aiding the Russell 2000 because usually those unprofitable names are a drag on the index.

[Co-host]

In a time where unprofitable names are rising, is there anything like a red flag for the rest of the market as far as what that suggests?

[Michael Casper]

I like to look at the valuation differential between the unprofitable and the profitable names. Now if you think back to the dot com bubble, the unprofitable names on a price to sales basis were trading nearly five times the valuation of the profitable bin. That's how out of whack things got. People don't talk enough about 2021. There was a bubble in small cap healthcare in 2021 that really flies under the radar. If you look at just the chart of healthcare, it's such an evident bubble within the Russell 2000. At that point in time, the unprofitable names traded several turns higher than the profitable cohort. It was actually second to the dot com boom. Right now if you look at the valuation differential, even though unprofitables have had a pretty decent run over the last six months or so, the valuation differential isn't that high between profitable and unprofitable. If you take the standard deviation going back to the mid-1990s or so, you're pretty near normal here. The valuation gap is not really out of whack and they are starting to get a little bit of a fundamental turnaround which might actually decrease the number of unprofitable names. So it's less concerning to me overall.

[Co-host]

How does the Mag 7 fit into all of this?

[Michael Casper]

Yeah, so the Mag 7. I have a big note out on bubble risk in AI and Mag 7 specifically. And I actually argue that AI and the Max 7 trade is not in a bubble now. So if you think about what a bubble means, it's a period of rapidly rising asset prices followed by a subsequent significant collapse. So think about your 2000 bubble. Pre great Depression there was a bubble and that popped and of course led to over a decade stretch where we traded below all time highs. So it's these kind of extended periods where after a bubble pops you trade below all time highs. And that really is what defines a bubble to me. And if you look at the valuation of the mag 7 versus say some of the Internet peers. So people like to talk about the four horsemen of the Internet bubble. It was Cisco, Dell, Microsoft and Intel. If you aggregate up their PE around 1999, they were trading at an aggregated 80 times PE. You look at the MAG7 today, mid 30s when I last look at it now, coming down pretty significantly with the whole correction in software and what's going on with Microsoft and so on. But they've actually been growing in their multiple. If you looked a couple years ago, they were trading north of 40, so it's just been trending lower as EPS growth picks up. And that EPS growth that Consensus is projecting for the next couple years north of 20% for the Mag 7 as a whole, coming down towards the mid teens in mid late 2027, that is a very significant earnings growth picture. And you don't actually need to significantly underperform to lose a lot of turns off the multiple. So if tech runs at a 7% annual gain and their earnings are running at let's call a conservative 15%, you're shaving turns off the multiple pretty quick. For those Mag 7 names, I would argue they're not really in a bubble. The issue more is the opportunities outside the Mag 7. There's not a systemic risk, I would say necessarily from the Mag 7, but more so the opportunities outside the Mag 7. We talked about energy materials. As these growth rates for the 493 and the mag 7 start to converge, investors start to question should I be playing this high 20 times multiple for a company that's giving me a similar growth rate as 1 in the mid teens on a PE basis? Right. So that's really the trade off that's happening this year so far.

[Co-host]

So it's not even that Tech is getting less attractive, but relative to the other sectors, it looks like a laggard.

[Michael Casper]

It's looking like everything is picking up. Whereas if you looked even three or four quarters ago at the 493, what I call everything outside the Magic 7 and the S and P, if you look just a few quarters ago, the earnings growth rates were completely sluggish in low single digits. Mag 7 was running 20, 30% growth rates out there for that whole 2022 through 2025 period. And now what you've got is the 493 have finally eclipsed 10% earnings growth. Consensus expects them to slowly pick up towards 15 16% earnings growth over the next couple years. So investors start to think about that trade off a little bit more, especially as the Mag 7 trades at a significantly higher multiple than a lot of these other stocks that are offering similar growth rates.

[Co-host]

How much is this decline in, let's say mag7attractiveness, a psychological thing in the market based on, you know, we had the Citrini bearish outlook, we've had some bubble fears a couple months ago. All these things are kind of weighing on tech, but I don't know if the actual businesses have. It's not like they're losing their moats.

[Michael Casper]

From what I can tell, it's definitely a psychological impact right now. As far as we can tell, consensus isn't really even cutting their EPS forecast for software, which is the most affected group by this whole AI disruption trade. Even if you look a year, year and a half out, those earnings growth estimates are still very robust. What instead is happening is a repricing of the terminal growth rates for software companies. So you think about dcfs, how everybody values stocks on the Street. Pretty much the DCF has a terminal value component. You forecast out about five years. The cash flows, you can do that pretty somewhat reliably and then you set a terminal value for the next 10, 15, whatever years you're forecasting that company out. And that's really what's being called into question. It's being called into question, are these companies going to exist in the next 10 to 15 years? You pretty much lose any valuation argument you have. If somebody says, hey, Microsoft's not going to exist in 10 years. I can't really refute that with data. But what we can see in the near term, those earnings growth rates are holding up. Consensus isn't really paring back. So if you think the company is going to exist, it's starting to look like this is very washed out, especially in software.

[Co-host]

I do know a few investors who have separately told me something like Microsoft down, you know, 20, 30% from its all time highs, they're piling in right now. And a lot of the software negativity seems a bit overblown to me. Like, you know these legacy names, sure they need to play catch up on some of the AI technology, but they make so much money they're not going away anytime soon.

[Michael Casper]

Yeah, and the other thing people lose sight of is the cash positions of these companies. They're only recently really tapping debt markets to drive this AI expansion. It's mostly been funded by the cash that they've hoarded from the COVID period when money was very easy that gets lost in the shuffle. I think that again, generally, if you think that these companies are going to exist. It's Almost a binary 1 or 0. You have to assess each company one by one. And we do have some good work on BI Go, assessing AI risk for all the software companies right now. Some of my colleagues did that just yesterday or the day before. If you can kind of figure out what you're going to stick around and which ones are going to go away, then that's a pretty decent way to isolate probably winners and losers of this whole kind of washout that's been going on.

[Co-host]

It's amazing. Michael, where can people find your work online?

[Michael Casper]

Yeah. So if you're on the Bloomberg terminal, BI Stocks Stox Go is our homepage. All my work is featured there.

[Co-host]

All right. I really appreciate you taking the time to come on the show, walk us through all this data. It's fantastic. And we'll do it again soon.

[Michael Casper]

Yep. Thank you.