The Compound and Friends

Episode: Stocks in Pre-Crisis Mode, Multiple Compression, the Citrini Crash, Halo Goes Viral
Air Date: February 25, 2026
Hosts: Josh Brown ("Downtown Josh Brown"), Michael Batnick
Special Segments: Market analysis, Halo stocks, Private credit/BDC commentary, Listener chat

Episode Overview

This episode dives deeply into several pressing concerns in today’s markets: why stocks appear stuck despite robust earnings, the phenomenon of PE (price-to-earnings) multiple compression, the “Citrini Crash” and its viral doomsday scenario for white-collar AI disruption, and the runaway popularity of the “Halo” trade (heavy assets, low obsolescence risk). Hosts Josh and Michael bring their signature mix of expert analysis and candid banter, breaking down market narratives, emotionally charged responses to viral research, and how investors might navigate what they call "pre-crisis vibes".

Key Discussion Points & Insights

Market in "Pre-Crisis Mode": Valuations and PE Multiple Compression

• Multiples are compressing even as S&P 500 earnings and margins are strong, leading to stagnating or even declining stock prices despite good fundamentals.
• Investor sentiment is cautious: Increasing uncertainty about future cash flows suppresses willingness to pay high multiples (03:00–05:50).
  • Josh: "You have to train yourself mentally to endure it. You have to be okay with that. It's part of the deal that we all make..." ([06:00])
  • Michael: "Valuations are not a catalyst. They're not support..." ([04:43])
• Historical context: Even with earnings growth, 66% of the time since 1900, "really strong earnings" years saw PE multiple compression.
• S&P Equal Weight vs. S&P Market Cap Weight: Equal weights show lower (but still not "cheap") valuations.
• Sector rotation: Tech and growth stocks bearing the brunt of derating; value-oriented “Halo” sectors are in favor.

The Five Reasons for PE Multiple Compression (Reflecting Savita Subramanian's Research)

Josh and Michael summarize Merrill Lynch’s Savita Subramanian’s thesis for why multiples will compress in 2026, walking through each point:

1. Disruption Math – "Cheap tech lags rather than leads" in true disruption cycles; actual downcycles in old leaders take time to play out (10:45).
2. Equity Shrinkage Reverses – IPO and secondary issuance will flood supply. Scarcity-driven multiple expansion (from buybacks/private shrinkage) is ending.
3. Strong EPS = Lower PE – Historically, big earnings years often compress multiples (11:00–11:40).
4. Rising Asset Intensity – Tech giants are now pouring all operating cash flow into capex, making old software profitability models less relevant.
5. Index Risk from Private Market Hiccups – Institutional rebalancing from private equity pain could add public market selling pressure and volatility.
   • Josh: "She notes that pension funds have shifted from active public equity funds to a barbell of passive and private equity. Today's private capital woes could mean raising capital in more liquid investments." ([12:55])

Michael: "Everything was fine until ... if you start to get earnings warnings from not just one of them, but like 10 of them ... that selloff made perfect sense. And probably it shouldn't be over yet." ([22:13])

AI & Software: From "Software Eats the World" to "AI Eats Software"

• Bear market in software: High-multiple software stocks are getting hammered, facing existential threats from AI automation (24:47).
• Workday as case study: Even stocks with strong operational metrics are punished for any miss in guidance. Margin erosion plus high valuation is a lethal combination (21:32).
• Rest in Peace, old software model: The mega-run from 2011–2026 is over. Future multiples may be cut in half if software industry margins are halved by AI (23:40).

Josh: "Can we safely say rest in peace to software is eating the world, 2011-2026. RIP, great run." ([24:16])

The Citrini Crash: The Viral AI-Driven Doomsday Scenario

• Citrini research piece: A speculative, viral blog post modeled the dark side of rapid white-collar AI automation—mass layoffs, surging unemployment, credit shocks, and a domino effect across the economy (30:00–32:00).
• Emotional audience reaction: Michael is "really bummed out" by the personal and social consequences if this scenario plays out ([32:34]).
• Josh’s critique: These scenarios over-index on negative dominoes and ignore positive externalities or gradual adaptation (35:37).
  • Josh: "The general idea was like... domino effect... It never plays out that way. There are positive externalities even in a debt crisis." ([36:24])

Notable Quote

Michael: "The part that bummed me out, the human element... There are people whose lives are going to get blown up... There are people that are white collar workers that live around us who are going to lose a job, lose a spouse, lose a family." ([32:26])

Jobs, AI, and "The Halo Trade"

• Jobs at risk—fast or slow? Jamie Dimon's "truck driver thought experiment": Do technological shocks instantly wipe out jobs, or do professions fade away as new cohorts avoid them? (40:00–42:00)
• Are all “good jobs” worth saving? Josh questions whether well-paying but mindless/rote jobs should be preserved just because they pay well.
• "Halo" stocks viral moment: Josh’s "Heavy Assets, Low Obsolescence" thesis is spreading through Wall Street media (42:13–47:00). These are asset-heavy, non-tech companies with low AI disruption risk:
  • Outperforming sectors: Consumer staples, healthcare, energy, utilities, real estate, and materials; all green in last session vs. struggling tech/communications/growth.

Notable Quotes

Josh: "I am the smartest man alive." (in jest; on Halo's media coverage, [42:24])
Josh: "Heavy assets, low obsolescence risk is the theme of the year... All six [of these sectors] are the only sectors green." ([43:06])

• AI’s double-edged sword: Viral TikTok piece: If AI automates the “hard part” of a job (e.g., cabbies’ geographic expertise), wages drop. If it automates the “easy part” (e.g., accountants' data entry), the value of expertise rises ([47:16–49:15]).

Private Credit/BDC Shock – Pre-Crisis Parallels

• Jamie Dimon & Lloyd Blankfein warnings (52:51–56:38):
  • Private credit (esp. software loans) could be the “next shoe to drop”; "pre-crisis vibes" echoing 2005–07.
  • Retail exposure to risky loans via 401k/insurance could bring public anger and regulatory backlash if there’s a blowup.
  • Large asset managers (e.g., Blackstone, Apollo, KKR, Blue Owl) are in significant drawdowns (66:54–69:41).
  • Michael: "There can't be this many good loans available... We're going to find out about [sloppy underwriting], give it a couple of months." ([57:28])
• Market signals: Publicly traded BDCs down 60%; no defaults yet, but market is pricing in something bad before it’s visible ([58:07–58:58]).

Housing Market Weakness

• Pending home sales, pool construction, and home-improvement stocks are all dropping steeply, even as mortgage rates fall ([61:09–63:52]).
• Google searches for "can't sell house" are spiking to decade highs—a sign of seller-buyer disconnect ([64:03]).

International Performance and Diversification

• U.S. stocks lagging EM and international small cap value: Chart review reveals international small cap value outperformance by ~30% over five years; S&P lagging EM since Oct 2022 ([71:28–73:28]).

Notable Quotes & Memorable Moments

• Valuation nerves:
  • "Valuations are not a catalyst. They're not support. People want to sell, there's no floor."
    – Michael Batnick ([04:43])
• Mental resilience:
  • "You have to train yourself mentally to endure it... If the reason is uncertainty about the future because of innovation, like if that's our worst problem, that's really not that big of a problem."
    – Josh Brown ([06:00])
• On software derating:
  • "Can we safely say rest in peace to software is eating the world, 2011–2026. RIP, great run."
    – Josh Brown ([24:16])
• On viral doomsday research:
  • "This is not some perma bear guy you can safely discard... The part that bummed me out the most was the human element."
    – Michael Batnick ([31:34])
• Halo stocks:
  • "Heavy assets, low obsolescence risk is the theme of the year."
    – Josh Brown ([42:13])
• On private credit:
  • "There can't be this many good loans available. There just can't be."
    – Michael Batnick ([57:28])

Timestamps for Key Segments

• PE Multiple compression intro: [03:22] – [07:00]
• Savita Subramanian’s 5 points on PE compression: [08:06] – [13:46]
• AI disruption and software index discussion: [20:44] – [26:44]
• Citrini Crash discussion: [30:00] – [38:37]
• Jamie Dimon/Lloyd Blankfein on private credit: [52:51] – [56:38]
• Halo stocks viral coverage & sector performance: [42:13] – [47:00]
• AI’s impact on jobs (taxi drivers vs. accountants): [47:16] – [50:46]
• Housing market signals/pool and decor drawdown: [61:09] – [63:48]
• EM & International Small Cap Value charts: [71:28] – [73:28]

Conclusion

This episode captures the anxiety and nuance of a market in transition: investors sense risk but are still close to all-time highs. Josh and Michael frame critical questions: Are we headed for a true crisis, a grinding compression of multiples, or just a rotation from growth to value and from U.S. to international? The “Halo” thesis continues to resonate as investors seek AI-proof assets, while fears about private credit, housing, and jobs represent the other side of the innovation coin.

For full details, data visuals, and further disclosures, visit The Compound’s episode page.