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- [00:00]
A
All right guys, today we are talking to Jason Ware, Chief Investment Officer of Albion Financial. Jason, thanks so much for hopping on today.
- [00:08]
B
Yeah, it's good to be with you and Merry Christmas Eve.
- [00:12]
A
Yes, Merry Christmas Eve to you as well. You're joining us on a great day though. The market's hitting all time highs and we're on track to have our third straight year of double digit gains, which just sounds crazy especially this year given all of like the volatility and turmoil with tariffs and geopolitical risk. Why do you think the markets have been so resilient especially this year?
- [00:36]
B
Yeah, I mean I think it really boils down to the economy and earnings. You know, there's so much noise out there, there's so much information and there's all of these narratives floating around about what's working and what isn't and what's driving stocks. But I think at the end of the day it's just that simple. We've had an economy that's been resilient. I mean we just got, you know, Q3, GDP was 4.3%, Q2 is, I think 3.8. Yeah, Q1 was a bit rough but we know why that was short lived. And so the economy's been good, earnings have been good. We're going to see probably when all is said and done, 13ish percent earnings growth, which is the best growth rate for earnings in a few years I think going back to 2021 if I'm not mistaking. So you know, those are the underpinnings of the stock market. Oh, and by the way, we have inflation that's behaving, hasn't gone out of control, especially given what's going on with tariffs. We had, everyone was worried about tariffs re accelerating inflation. We haven't seen that. And then we have the Fed that's back in easing mode. So it was the right cocktail for the stock market to do well despite the headline risks and the volatility.
- [01:35]
A
You mentioned tariffs. I mean that was the dominating headline at least the first four or five months of the, of the year. And then though the AI trade kind of really took over, the AI storyline kind of overpowered it with the AI stocks just kind of AI companies kind of carrying the markets. Do you, do you feel like a narrative shift might be happening though with AI? You're seeing some softening in rotation from AI to the broader market in the latter half, in the latter half of the month or the latter half of the of Q4. Do you see that continuing into 2026?
- [02:06]
B
No, I don't think so. I think we're going to have pockets where there's skepticism and disbelief around AI and we've seen that a couple of times this year. Obviously the most acute version was Deep Seq, what I call deep seek Monday back, I think it was January 27th where we saw a massive correction in US AI and tech to be measured in trillions. It was a big move and I think we're going to have those gut check moments along the way. Right now it's Oracle, it's debt, it's are we overspending? So it's not going to be linear, it's not going to be straight up and to the right. But when we look at what's happening in AI, it's hard to argue against this being a multi year secular theme. I mean, not only is it clearly transformative, but the build out is still probably sort of early innings. I know that sounds weird to describe it that way because we're talking about 400 billion in capex this year from the big mega cat mega cap techies and we're talking about probably 450 or 500 next year. So it's like how can this continue? How can we be in the second or third inning? But I think the reality is, is that there is just such a lack of compute out there relative to demand. If you listen to people like Dan Ives and Gene Munster, who I greatly respect in the tech and AI space, I mean they're talking about demand being like 10 to 1 still. And so I think there's some legs here. I think we probably continue to see a massive build out of AI infrastructure into end of decade. You know, look at, listen to what Jensen Huang is saying. He's talking about 3 to 4 trillion by end of decade. So we're still early innings, but it's not going to be a smooth ride.
- [03:40]
A
You don't think that the big tech companies will pull back on spending at all if there's a bumpiness from investors, investors start expecting returns on revenue sooner than later. These companies might pull back on on some of the CapEx spending.
- [03:55]
B
Well, it's a great question, but I think Mark Zuckerberg answered that question last quarter, right. They're doing more capex and sure it hurt the stock for a time and we're starting to see that recover. But I think the way that these tech CEOs are thinking about it and then Sundar Pichai, the CEO of Alphabet I think about a year ago articulated it well when he essentially said and I'm Paraphrasing, you know, we'd rather overspend and make sure we're positioned the way we need to be for this next generation of AI than not spend enough and become irrelevant. And so I think that's the tone in the boardrooms of these tech companies and leadership teams of CEOs. They'd rather keep spending and make sure that they're positioned. I mean, look at the way that these models are evolving. You know, all of the talk around Gemini 3, I'm sure you remember six months ago, Google was left for dead. All of the smartest people in the room, the smartest people in the room were saying the 10 blue links are dead and they're getting their lunch eaten by OpenAI. Well, turns out that Google just kept their foot on the accelerator. They're spending a ton of money, they're trying to innovate. And I think that's the tone coming from Amazon and Google and all the mega cap tech companies that are building out cloud infrastructure and the like to support AI is the computer. We still need a ton of compute and their goal is to support that. And I think they're going to continue to keep the foot on the gas.
- [05:12]
A
I think the companies like Google Meta, you know, Amazon, all of them are using, you know, kind of their existing business and cash flows to kind of pay for it. But then you have companies like Oracle, which is, which is using, which is taking on a lot of debt to kind of finance the AI build out. And I think that's what really spooked investors recently. Oracle stocks saw a massive sell off over the last couple of months. Do you see that potentially spooking investors further? Like Core Weave is also another company that's seeing a big sell off because of the, the concerns around too much debt.
- [05:43]
B
Yeah, yeah, it makes sense. I understand why we're going to have these air pockets and these in these bumps in the road on AI as it relates to debt. Because to your point, I mean the first couple of years of build out was all completely financed and underwritten by operating cash flow. And we're starting to see that change at some level, not, not dramatically. So I think if you look at the total debt load that's being raised to, to underwrite this AI infrastructure, it's still relatively small in terms of the overall balance sheet. Sure there are some companies where it's a bigger piece like Oracle and certainly these like Neo clouds like Cor Weave and so they're taking on a fair amount of debt in their businesses, but for the most part the overall AI build out still remains pretty dang healthy if you look at it from the perspective of the cash on the balance sheets, the biggest players, the operating cash flow right now it's something like it's like 40 of operating cash flow. There's. So there's still a fair amount of headroom for these companies to continue to spend and not dent their financial positions. But, but your points, you know, well taken. There are the Oracles and the core weaves and the nebbyuses of the world that are doing it in a way that's perhaps a little bit more risky. But look, everyone's pointing to Oracle cds. They're blowing out, they've been going up and you can almost draw a, you know, a mirror image of CDS versus Oracle stock over the last couple of months. But we have to remember this isn't the first time that Oracle CDs have blown out. This happened in 21 and 22 and it was a, you know, it was nothing then and we think it's likely to be nothing now. And why? Because the build out is still happening. It's a secular growth story. Oracle's got half a trillion in backlog. Even if 70% of that gets turned into revenue or 50% of that gets turned into revenue, that looks pretty good. I think the market is actually basically discounting that very little of it gets turned into revenue. And we think that's probably an over exaggeration. So right now there's a fair amount of fear around that, but it's probably misplaced. And I think this too shall pass.
- [07:35]
A
I tend to agree with you as well. But what I think a lot of people aren't talking about, and I think it's going to be a big story in 2026 is the political angle of all of this, right? The political pushback. Both parties, both parties are kind of, you know, raising concerns about AI, whether it leads to displacement of jobs, all that stuff. Do you see that as a potential serious roadblock next year?
- [07:59]
B
No, I don't think so. I think it's still going to be part of the conversation. But at the end of the day progress in technology is, you know, whether it's AI or whether it's cloud or whether it's mobile or whether it's, you know, the personal computer or whether it's the semi semiconductors or there's railroads going back, you know, 100 plus years ago, you know, progress is essentially unstoppable regardless of the narrative of the moment. And certainly there are going to be areas where we're going to see an impact in the labor market and that's consistent with every other technology innovation and technology cycle that we've seen going back 100 plus years. And those people get retrained and new jobs are creative. It's the whole idea of creative destruction. So I think that's going to be the path for AI as well. I think the idea that we're going to see 10% unemployment or 15% unemployment is certainly overblown. I think it's an, it's unlikely to occur again. You can go back and read newspapers. At every technological transformation the same thing is talked about, same thing talked about in the late 90s with Internet, you know and so I don't think this time is going to be any different but that discourse is still out there and I think, you know, just sort of like the affordability crisis that we're hearing talked about a lot. There are going to be some real impacts politically but I don't think that's going to stop the AI train and I certainly don't think that's going to upend the stock market.
- [09:17]
A
Yeah, I tend to be AI optimist as well. I'm just going to be watching that closely though as like as the political pressure starts to build and then see what the fallout from that is. So, so if you were to pick whether, if you were to pick the Max 7 versus the S&P493 going into 2026, would you still be choosing the Max 7 over the rest of the index?
- [09:38]
B
You have keyed in on like the central question I feel like everyone's asking themselves last few months, you know, until the whole idea of broadening is this time real. We've seen other periods where it looked like the market was going to broaden out and then of course the Mag 7 came back in and said nope, it's lead. And you know, I'm a little bit out of consensus here but I think it's going to be another strong year for mega cap tech. I don't think that means that the 493 can't work. I don't think that means you shouldn't have exposure to mid caps and small caps and you know, other areas of the market. We're well diversified at Albion. We always have been at central to our investment philosophy. But my guess is that 12 months from now when we're talking again doing a 2026 year end review, we're going to see that tech once again led the way in 26. I will say though, we're Seeing a little bit more dispersion between the Mag 7. I like to call them the Splendid 6, because we at Albion don't own Tesla, so we own six of the seven. Then we own Oracle and Broadcom and a handful of others we have for years. But as we look at those big tech stocks, I mean, they're all individual businesses. I mean, yeah, sure, there's some overlap. Ed Yardini's talking about them competing in AI and that might slow the train a little bit. Maybe he's not wrong there. But they're all unique businesses in very different parts of the market, even though they have a common through line with AI. So probably see some dispersion next year. But Overall, I expect Max7 to have another good year.
- [11:03]
A
We'll record this on Christmas Eve 2026, and then recap what happens. We'll have the same conversation Christmas Eve.
- [11:10]
B
Next year as well.
- [11:11]
A
Yeah, well, let's, let's zoom out a little bit and talk and talk about tariffs again. You know, Jason, no one's talking about terrorists anymore, right? Like, it went from, like, headline every day. My parents were talking about it. And now, besides a couple of economists here or there, no one's really talking about it. Why do you, why do you feel like that is how come the tariffs didn't tank the economy?
- [11:33]
B
Yeah, I mean, you're right. Outside of like the nerds, no one's even focusing on tariffs anymore. But I will say that two things. One, the reason they didn't take the economy is because the administration pulled back on their worst instincts around tariffs. I mean, on Liberation Day, you remember South Lawn holding up the placard. It was like totally absurd levels of terrorists for everybody. And had those been implemented, we would be in recession right now. I think there's very little doubt about that. But the reality is, is that Scott Besant and some of maybe the more sober folks in the room pulled Trump aside and said, or maybe it was the market. It probably was the market. More so than even his 10 year.
- [12:09]
A
Maybe the bond market.
- [12:10]
B
Yeah, the bond market in particular really said, look, you can't do this. Put them on a short leash and they changed course. And I think what happened is that we went from, you know, 3% average tariff rate going into 2025 to something like 15, 16% right now. And while that's higher, that's not enough to upend the global economy. It's not enough to upend the US Economy. And in particular, given what's happening in AI, I just think there's such a powerful Offset that the amount of tariff increase that we saw was marginal enough not to slow down the consumer and AI, which have been the two biggest stories in economic growth this year. Companies adjust, economies adjust, people adjust. And I think that's the story behind tariffs. The second piece is like, you know, are we going to be talking about it again? Is this over? I don't think it's over, but I think certainly the worst of it has passed. I don't envision a world in 26 or 27 where Trump tries to re up in any kind of like earnest or honest way. I mean, we might get little social media bits here and there like we saw in October where he threatened China to go back to 100%. We had a little air pocket in the market, but outside of those moments where he's using them as negotiating leverage, I don't see any world where we're going to go back to true threats of tariffs being much higher than they are now. So I think everyone's adjusted to that. I think the big question in 26 is going to be the Supreme Court ruling on IEBA.
- [13:37]
A
Right, right. Yeah, I think, I think that was me. My follow up question is that, I mean, that, that, that's going to be a big moment for the market. Right. I'm not really sure which way they're leaning right now, but if that, if that ruling comes in one way or the other, that could shake a, shake up a lot of things. It could add volatility back to the market. So I'm really curious to see what your take is.
- [13:55]
B
Yeah, well, you know what's weird is like, you know, a year ago, probably not a year ago, but certainly nine months ago, when tariffs were being implemented and talked about the market, hated it. And you know, it was even before Liberation Day in March when we were talking about sectoral tariffs and tariffs on like, you know, Mexico and Canada and autos and steel and the market was, was, was a strong vote no on tariffs. And the interesting thing is, and this maybe just speaks to the fact that we've adjusted and everything is okay and actually we're starting to see federal revenues coming into the coffers, you know, 250, 300 billion. Maybe that helps solve the deficit a little bit, you know, and it's helped keep the bond market a little more quiet when we add up those puts and takes. We're at the point now where like I can make a cogent argument around if iea, if it's knocked down by Supreme Court, we have a market rally or a market sell off. And I could make the same argument on the other side that if they're upheld, we have a market rally in the market. So I don't really know which way it goes. I think at some level, certainly the bond market likes the additional tax revenue. The stock market is saying things are okay without, with tariffs, obviously, I think they'd be okay without terrorists. But it just, it feels like it, it introduces a new level of uncertainty that we just don't need. So I think my base case is that if the Supreme Court just says this is fine, that's probably the best outcome. It almost feels like it's the middle of the road now where tariffs aren't bad enough to hurt the economy. It's providing some additional revenue to the fiscal situation. And we just don't need Trump being upset about this and having to find new ways to terrify our allies in the global economy. So probably the path of least resistance is if they just say they're fine. But honestly, if you look at betting markets and if you listen to the oral arguments by some of the conservative judges that you think would have been sympathetic to Trump, I don't know, I think they might knock him down. So I guess we'll see. That'll be the first half of next year, so probably, it'll probably create some level of volatility regardless.
- [15:49]
A
Yeah, I keep hearing we're going to get result, we're going to get a ruling soon. And so I'm really curious to see what happens. Like, we're, we're kind of in the stage where it's like, nobody move, everything's fine. Markets are at highs. Like, let's not touch anything. And if there's a ruling against these tariffs, they could just add some chaos into the market. So we'll have to see now, zooming, zoom, zooming out again. Let's talk about the Fed, because that's another Trump favorite topic to talk about, the Fed. I feel like that's going to be a dominating storyline into 2026, because Trump is obviously going to be replacing Jerome Powell in May, I believe is when his term ends. How much is that? How much of the Fed losing their independence worries you once Jerome Powell leaves?
- [16:30]
B
It doesn't worry me because I don't think it's likely to occur. I think if it did happen, that would be a major concern for the stock market, for financial markets writ large. The bond market would have an instant revolt. So I think if we kind of spin it forward and say, hey, we have tomorrow's news today, and we know that the Fed goes down this path of losing independence. I think that would be, you know, without question, a negative, a negative for financial markets. But I just think the likelihood of that actually happening is very, very low. As I look at the short list of people that are likely to take over Jerome Powell's job in May, there's some I like better than others, but I think all four of the folks left will do a pretty good job. I think arguably the one that's closest to the White House is Kevin Hassett. But, you know, by and large, he's a classically trained economist who I think, you know, if push comes to shove, will probably do the right thing. And we have to remember the Fed is bigger than just the chairperson. The Fed is a committee of regional bank presidents. We just had a recent ruling that I think kind of helps keep those federal bank presidents, like, in their seats and independent. It's also a Board of governors, which Trump doesn't fully control. Sure, maybe the, the Fed chairperson is going to be, you know, somewhat sympathetic to the White House, but there are a lot of other people on the committee that are going to do what the data tells them they should do. So I just don't think it's. I think it gets a lot of focus and a lot of press because it's somewhat salacious, if I can use that term, this idea of like, oh, the Fed is going to become like this extension of the White House. And I just, I just don't think that's likely to happen. I think there's a lot of natural limiters to that becoming a reality.
- [18:24]
A
Yeah, I mean, there's a board of governors that votes on these. It's not just one person making the decision now. We do have a divided Fed right now. Even with this latest meeting. There was some people that, that voted against a rate cut. Two people, and then one that voted for a 50 basis point cut. Do you expect a divided Fed kind of pretty much the entire year in 2026, given that we. There's not a consensus on what to do right now?
- [18:48]
B
Yeah, I mean, it's a, it's a keen observation. I agree with it. I, we have seen the discord on the Fed go up a bit in terms of rising descents. I think that probably continues into 26. And, and the reason that's happening has less to do with politics and more to do with just kind of this tension between the dual mandate we have. You know, the Fed. As you know, the Fed's dual mandate is price stability and maximum Employment, price stability. We're still, I think we're 55 months straight not being at the Fed's target. You know, I think inflation is in a place where it's not problematic, it's benign. We're somewhere between 2 and a half, 3%. It's where we've kind of expected it would land since it hit 9% in June of 22. I've been out in the press writing and doing all sorts of shows and stuff, talking about this, and our view was like, we're going to settle into 2% plus in the 2010s, not 2% minus like we saw in the, I'm sorry, 2% plus in the 2020s, not 2% minus like we saw in the 2010s for a variety of reasons. And that's where we are. So, like, I'm not surprised, nor am I concerned about inflation, but it is above target. And so you would. There are some on the committee that say, hey, you know what, we're getting closer to neutral. We're in the neighborhood of neutral. We probably don't need to cut any further. We need to make sure we snuff out inflation and get it back to target. And there are others that say we're good enough, but the labor market has softened in a way that I'm concerned. And so right now we have inflation that's above target, but a labor market that is clearly cooled. And so there's a fair amount of differing views on the committee about which one they should focus more on. Continue to get inflation down, which means you cut less, or supporting the labor market, which means you cut more. So I think that's really the, the core element of why we're seeing rising disagreement on, on the FOMC that probably continues next year, because I don't think those two elements, those structural elements of the economy are going to change. I still think we're in a 2% plus inflation environment next year. And I still think we're in a somewhat of a softening labor market next year, though. I don't think it's going to roll over and create a recession.
- [20:50]
A
I think, you know, I wonder if whenever the new Fed president comes in, Fed chair, I mean, if they're going to drop the whole 2% narrative. Right? Because I think one of the things that Jerome Powell always says in all of his meetings is that our target is 2%. That's our go. I think he starts every meeting with by saying the 2% number and saying that's his goal. I feel like secretly behind doors. And most of the Fed governors are kind of like, as long as we're under three, I think we're good. You know, I think that's what, what they're feeling and that allows them to kind of focus on the labor market which, you know, like you said, not, not, not a hair on fire situation, but we're seeing softening and so I think they might, they might just focus on that moving forward in 2026. I think the markets are pricing in two rate cuts for 2026. So I wonder, I wonder, do you feel like this can be more or less than two?
- [21:37]
B
Yeah, good question. So going into 2025, my call was for, in these calls at Albion, we're, you know, a buy side holistic wealth management shop. I don't put out price targets, I don't put out like this is all like internal macro information that I share with my team of advisors and Albion writ large and our clients. So, you know, we don't take ourselves too seriously on this. But I will say going into the year I expected two cuts. This year I actually called it the year of three twos. It was two Fed cuts, 2% GDP and 2% plus inflation. So yeah, and I was wrong. It was three cuts. I was almost right.
- [22:15]
A
That's right, that's right, that's right.
- [22:16]
B
The December, yeah, they did three cuts. So, so I got two. I guess it was meatloaf. That said two out of three ain't bad. So we'll go with that. And, and so as I look at 26 and think about what the Fed is likely to do, I feel a little bit less confident in the path because, because I think the economic data suggests we should probably do less. Because again, I think the, the economy's fine. I don't think the labor market's going to roll over. So I don't think we need like, you know, I don't think we need to get down to, we don't get, need to get below neutral. We don't need to be accommodative because I think the labor market's okay. AI spending is in here to support growth, the consumer's strong. I mean look at holiday spending. Look at what Visa and MasterCard are saying, what the banks are saying. So the economy is okay. I don't think we need dramatic cuts. But at the same time I'm not worried about inflation. And then also we have a Fed chair coming in and no matter who it is, they're going to be more dovish than Jerome Powell. And so there's this part of me that's like, well, if I'm wearing my economist hat, I don't think we need to cut more than two certainly, but maybe even no cuts. And if I'm looking at what the reality is though, and that is we have probably a more dovish Fed chair coming in and people seem to be a little bit more concerned about what's happening in the job market. I think we could see two or three cuts. So I don't know, it's. I mean if I had to guess, I'd say we're probably. I'd take the under on two.
- [23:34]
A
Interesting.
- [23:34]
B
Okay. But I think it'll also depend on who they put in the sped chair. So let's talk about it in May. Maybe I'll take the over depending on who gets in there.
- [23:45]
A
We'll have you back on in May. We got a couple more minutes left. I want to talk. Just looking ahead to 2026. There's been a lot of hype around potential IPOs in 2026. We're talking SpaceX has been one of the one that's rumored ant maybe OpenAI if they really need to tap the public markets. Yep. I think 2025 though has been a relatively disappointing year for IPOs. When you look at like, you know, there was a recent report out saying that 2/3 of tech IPOs are trading below their listing price. Do you think that the IPO window might be closed for maybe some of these mid tier companies and. Or do you think that we're going to still see a healthy IPO market next year?
- [24:25]
B
Yeah, it's a great question. I think we're going to see a healthy IPO market. I think we're seeing momentum building in the IPO market. I think part of the reason why we've seen so many tech IPOs disappoint this year is because they've just kind of been in the wrong part of the tech market. You know, everybody wants to own AI stocks but AI stocks in a specific area like AI infrastructure, cloud, the mega caps. So they're taking up so much of the oxygen in the conversation around how to invest in tech that I think outside of like core weave, which I think has done it's had a lot of volatility and it's certainly well off its highs but it's higher than its IPO price. Outside of those like you get something like a FIGMA that comes to market which has done terrible figma's in like the software space and we know how software stocks have done Poorly. And so look at Salesforce, look at Adobe. And so I just think some of them were, went to market but came in, ran headlong into this AI trend, this AI excitement that really just didn't fit the business model. So I don't think that's going to stop people from going public next year. In fact, I think we have a pretty healthy environment for IPOs, M&A. I'll give you an interesting statistic that I was going to share at some point. I'm going to try to fit it in here even though it doesn't perfectly align with the conversation. But like as I look at 2025, there are two data points that I find to be kind of funny. We had gold that hit a record high. Meanwhile we had like almost record M, A and a resurgence of IPOs. So I'm tying it into an IPO conversation. Gold is a classic like doomsday asset. Right. While M and A and IPOs tend to rise when executives and people feel good about the world, like they shouldn't travel together and certainly not when interest rates are high. And yeah, sure, the Fed's been cutting second half of the year, but rates are still like before they were cutting, rates were arguably still restrictive. So that's really kind of an interesting way to think about 25. Like we had this strange like dichotomy where we had things like gold that were hitting record highs, but we've also had a pretty strong like M and A and IPO type of environment. So kind of an odd year in some ways.
- [26:33]
A
Yeah, the gold rally to me is the most confusing part of 2025. The fact that it's just, it's, I mean it's outperforming everything. The silver stuff I think, I think has a lot to do with supply side stuff. But gold, I mean it's just, it's just being bought up, especially with central bankers all over the world. We'll have to, we'll have to revisit.
- [26:49]
B
The size between Bitcoin and gold. That's been the weird thing. It's like portfolio managers per trading, those two so.
- [26:54]
A
Exactly. It's just been so fascinating. We have, there's a lot more stuff that we could have talked about. Jason, we'll have to have you on, we'll have to have you on before the day that's not Christmas Eve. We'll have to have a longer conversation. So thank you again for, for, for coming on today. Really appreciate it. Merry Christmas to you and your family and hopefully we'll talk again soon.
- [27:11]
B
Yeah, I appreciate it, Zade. Merry Christmas to you guys as well. Merry Christmas to you and your two youngers at home.
- [27:17]
A
Appreciate it.
- [27:18]
B
All right, take care. Thanks again.