The Compound and Friends – "The Case for a Year-End Melt-Up"

November 21, 2025
Guests: Josh Brown (Host), Michael Batnick (Co-Host), Warren Pies (Chief Strategist, 314 Research)

Episode Overview

In this episode, Josh Brown and Michael Batnick welcome back Warren Pies, Chief Strategist at 314 Research, to discuss the state of the market following Nvidia’s blockbuster earnings report. The conversation dives into AI-driven markets, market narrowness, the "K-shaped" economy, Federal Reserve policy, housing affordability, and predictions for a potential year-end rally (“melt-up”). The trio dissects investor sentiment, capital expenditures, sector rotations, the challenges facing small caps, and the broader macro environment. The discussion is rich with data points, market history, and candid insights on why market leadership has been so concentrated in tech giants.

Key Discussion Points & Insights

1. Nvidia’s Blockbuster Earnings and AI Market Leadership

[01:48–07:19]

• Nvidia’s Historic Quarter:
  Nvidia posted one of the strongest earnings quarters ever seen, with net income up 21% sequentially and 65% year over year. Data center revenue up 66% YoY, with China being a near-non-factor.
• AI Sentiment:
  The market’s recent volatility was described as a "sentiment correction" rather than a fundamental shift.
  • "Sentiment got ahead of itself and so people got nervous and whenever that happens you get a wobble in the market. Nvidia reports, they calm nerves..." – Warren Pies [03:02]
• Guidance and Demand:
  CEO Jensen Huang’s commentary, particularly around Blackwell sales and the idea of a “virtuous cycle of AI,” reinforced bullish sentiment.
  • “Cloud GPUs are sold out. Compute demand keeps accelerating and compounding…” – Jensen Huang, summarized by Josh [06:21]

Notable Quote:

“We’ve entered the virtuous cycle of AI and you’re bearish?” – Josh Brown [06:21]

2. Addressing Bearish Concerns: Valuation and Execution Risks

[07:19–10:41]

• Concerns about Nvidia’s valuation and ROI of massive CapEx are present but are dismissed as mostly sentiment-driven, not fundamental.
• The "useful life" of GPUs (suggesting obsolescence) has been a key debate, but evidence suggests continued strong demand for older chips thanks to Nvidia’s CUDA platform.
  • “The A100 GPUs we shipped six years ago are still running at full utilization today.” – Nvidia CFO, quoted by Michael Batnick [10:15]

3. The Market’s Narrow Breadth and “Wishcasting”

[11:37–13:59]

• Only 23–24% of S&P 500 stocks are beating the index over a trailing three-year basis, surpassing even the tech bubble era in narrowness.
• Many investors feel "left behind" by the rally in a handful of mega-cap tech names, fueling skepticism and pessimism.
  • “If we go back on a trailing three year basis, we're at the point right now we have the fewest stocks beating the index...ever.” – Warren Pies [12:04]

4. Mega-Cap Techs: From Asset-Light to Industrial Giants

[15:22–18:22]

• Today’s tech mega-caps are now the "heavy industrials" of the market, given gigantic CapEx cycles—not just high-margin, asset-light business models anymore.
• Ongoing debate: Are we in an “earnings bubble,” not just a valuation bubble, if AI-driven growth falters?

5. AI CapEx, Jevons Paradox, and the Bull Run's Fragility

[20:27–22:11]

• The Jevons Paradox: as tech becomes more efficient, total compute demand (and spending) continues to grow, not shrink.
  • “If you all of a sudden free up all of this compute…we just use that compute somewhere else and we invent even more unbelievable things.” – Josh Brown [20:27]
• Macro risks: If AI uptake pauses or hardware needs shrink faster than expected, it could hit earnings and valuations.

6. Market Leadership and Reluctance to Overweight Tech

[23:00–25:59]

• Market leadership remains extremely concentrated in mega-cap tech; even allocation professionals resist overweighting these names for fear of “top-ticking” and career risk.

Notable Quote:

“You can't explain being overweight the top five market caps. Like, what were you thinking?” – Josh Brown [24:34]

• Repeated false expectations that market gains will broaden to laggards; instead, leadership persists among the giants.

7. The K-Shaped Economy: Winners, Losers, and Policy Implications

[28:45–39:39]

• Post-pandemic, the economic divide (“haves” vs “have nots”) has never been starker; housing affordability is the chart Warren flags as most symptomatic.
  • Median home affordability now needs the 60th percentile of income, vs 40th pre-pandemic [31:36]
  • “The middle of the economy…has been priced out of the housing market. That explains why there's so much consternation in that bottom K…” – Warren Pies [31:36]
• Policy consequences: politicians and the Fed are under pressure to respond to the lower-K group with easing (rate cuts, programs, or “stimulus”).
• Discussion about “lifelong renter” mortgages, portable mortgages, and why they're not true solutions—what's really needed is deficit contraction and increased housing supply.

Notable Quotes:

“A deficit is a policy choice. When you run a, a big deficit, it's a policy choice. There are trade offs…” – Warren Pies [39:31]

8. Labor Market Weakening and Its Market Implications

[41:20–46:43]

• Recent jobs reports (September 2025) confirm a cooling in the labor market, with select sectors (healthcare, service) showing gains, others shrinking.
• Challenger survey data show the most negative net hiring intentions since 2009 [44:04].

Takeaway:

• The Fed is unlikely to "teach the upper K a lesson" (by inducing a recession); instead, they're expected to keep supporting the market through easing, aiding the “upper K” asset owners in the process.

9. Sentiment, Flows, and a Year-End Rally ("Melt-Up")

[46:43–51:00]

• Warren’s sentiment models show optimism was stretched throughout the summer, but has now corrected toward pessimism just as buybacks seasonally surge—creating a bullish setup for a year-end rally.
• Typically, it’s the leading stocks (not laggards) that receive year-end flows, as managers “window dress” portfolios and sell losers for tax-loss harvesting.
• Lagging software mega-caps (e.g., Salesforce, Adobe) unlikely to catch up in the immediate rally; further divergence likely into year-end.

Notable Quote:

“When you study it historically, more than likely, as much as it's unsatisfying for the average market participant, we think that the leadership will stay where it's been.” – Warren Pies [49:21]

10. Looking to 2026: Margin Expansion, AI Adoption, and Market Valuation

[53:57–57:12]

• Analyst margin forecasts hinge on continued AI adoption; if margins indeed grow as forecast, market valuations are not stretched.
• “When you get margin expansion, it's very rare to see multiples contract in those calendar years.” – Warren Pies [55:32]
• If AI-generated margin expansion spreads beyond mega-caps to the “493” (non-mega S&P stocks), true broadening could finally occur—but likely a story for next year, not this year.

Memorable Moments & Quotes

• On investor psychology:

  “We invent the narrative to follow the price.” – Warren Pies [22:11]

• On the narrowness of this bull market:

  "There's more stocks trailing the index by 20% than that are beating the index by any amount." – Warren Pies [13:59]

• On policy and economic angst:

  “You see so much anger out there and it will manifest as political pressure… these are the manifestations of what is a real phenomenon. So yes… the K shape is real and we should pay attention.” – Warren Pies [33:05]

Timestamps for Key Segments

• [01:48] – Nvidia’s earnings set up, sentiment reset
• [03:02] – Sentiment correction and market cues from Nvidia
• [07:19] – Valuation and execution risk in AI
• [10:15] – Addressing the “useful life” of GPUs
• [12:04] – Breadth statistics and trailing returns
• [16:56] – Capex-heavy mega caps: new market dynamic
• [20:27] – Jevons Paradox and persistent demand for compute
• [23:49] – S&P equal weight vs. cap weight, ongoing leadership
• [31:36] – Housing affordability: the K-shaped economy in one chart
• [41:20] – September 2025 jobs report and evidence of labor cooling
• [46:43] – Sentiment and the case for a year-end rally
• [49:21] – Why leadership is likely to persist into year-end
• [53:57] – Looking ahead: margin expansion, AI, and market multiples

Closing & What’s Next

Warren Pies shares an update on 314 Research’s forthcoming (2026) AI-powered charting agent, promising to open up efficiency tools to more market professionals.

Final thought:

• The bull market’s narrow breadth may endure through year-end, with AI-driven leadership and robust buyback flows setting up a potent “melt-up.” True broadening and material AI adoption outside the mega caps may be themes for 2026.

For More:
Visit 314research.com for Warren and Fernando’s research.