Downtown Josh Brown (Host, CEO of Ritholtz Wealth Management) [00:06:12]
Michael Batnick (Co-host, Managing Partner at Ritholtz Wealth Management) [00:06:28]
Denise Chisholm (Special Guest, Director of Quantitative Market Strategy within the Quantitative Research and Investments Division at Fidelity Investments; joined Fidelity in 1999) []
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The Payment Ritual: Josh Brown shares a personal critique regarding the inefficiency of paying the bill at traditional sit-down restaurants. He details the multi-step "dance" involving flagging down a server, waiting for the check to arrive, waiting for the credit card collection, the server disappearing to a terminal by the kitchen, and finally returning for the signature [00:00:48].
Tech Preference: Brown states he owns shares in Toast and strongly prefers their pay-at-the-table digital solutions because it returns control to the consumer, allowing them to leave immediately upon finishing a meal [00:01:26].
The "EOJ" Diagnosis: Michael Batnick jokes that Brown is exhibiting an SNL-style diagnosis of "EOJ" (Early Onset Grumpiness) or "onset grumpiness" due to his deteriorating patience with standard service timelines [00:02:23].
Octopus Intelligence: The hosts open with a brief banter on Neil deGrasse Tyson's commentary regarding octopuses as the closest terrestrial equivalent to aliens, highlighting their nine hearts, multiple brains, regenerative limbs, and tentacles that can taste and smell, prompting Brown to state he has stopped eating them out of respect for their intelligence [00:00:00].
Private Capital Flows: Anthropic's Massive Series H
The Deal Terms: Right before recording, details of Anthropic's Series H funding round became public. The company is raising $65 billion at a $965 billion post-money valuation [00:03:34].
Consortium of Lead Investors: The massive private placement is being led by Altimeter Capital, Dragon, Green Oaks, and Sequoia Capital [00:03:50].
Broad Institutional Participation: A vast list of major global asset managers are participating, including Capital Group, CO2, D1 Capital Partners, GIC, Iconic, Taylor, XN, AMP, BBC, Baillie Gifford, Blackstone, Brookfield, D.E. Shaw, DST Global, Fidelity Management and Research Company, General Catalyst, Insight Partners, and Jane Street [00:03:58].
The Avengers Analogy: Josh Brown compares the historic scale of this funding round to an "Avengers" movie where every major financial institution is forced to show up because the industry is trying to engineer $2 trillion to $3 trillion IPOs within a tight six-month window [00:04:24].
S&P 500 Market Targets & The Goldman Sachs 8,000 Chorus
Target Estimates: Denying requests for a specific year-end spot estimate for 2026, Chisholm states her core quantitative outlook is simply "higher" [00:07:24].
Goldman Sachs Adjustments: Goldman Sachs updated its S&P 500 baseline target upwards to 8,000 from 7,600, driven by an exceptionally strong Q1 reporting season [00:07:39].
Earnings Growth Profile: Goldman's forecast models a massive 24% year-over-year earnings growth for this year, accompanied by a bump to a 13% growth projection for subsequent periods [00:08:20].
Valuation Controls: Goldman Sachs argues that this is not a traditional bubble environment because decelerating earnings trajectories combined with ongoing macroeconomic and AI-use case uncertainty act as a natural governor, preventing market multiples from blowing out excessively [00:08:46].
Quantitative Analysis of Capex Waves vs. Historical Bubbles
The Shift from Float Shrink: Brown and Batnick review the post-financial crisis era when corporate America was criticized for "fakeish" earnings driven by float shrink, stock buybacks, and low R&D or capex investment. The market previously punished capital expenditure; it has now pivoted to aggressively rewarding companies building physical infrastructure [00:09:29].
Broadening Capex Acceleration: Chisholm highlights that across all 11 GICS sectors, capital expenditure relative to sales is accelerating, showcasing a broad economic recovery rather than an isolated tech phenomenon [00:10:09].
The Cash Flow Metric: During the peak of the Dot-Com bubble in 2000, corporate America in the aggregate spent 3.5x to 4x their free cash flow on capex. Today, even when factoring in massive spending by technology hyperscalers, the aggregate spending across corporate America remains under 1.0x free cash flow [00:10:26].
Availability Bias: Chisholm notes that investors default to bubble fears due to availability bias because the last major capex wave they experienced (the late 1990s fiber/telecom buildout) ended in market destruction, ignoring that most historical capex cycles are inherently virtuous, creating jobs and sustaining economic expansions [00:11:44].
Predictive Metrics: Sentiment, Disbelief, and the Wall of Worry
Equities as a Hedge: From a quantitative perspective, the equity market frequently acts as a hedge against bad times rather than a reflection of visible good times, which explains why the market stands roughly 70% higher over a turbulent five-year trailing window [00:14:54].
The Counter-Intuitive Certainty Metric: Chisholm notes that when you cortile out macroeconomic uncertainty, higher visual uncertainty historically creates a statistically higher probability of future stock market advances, corporate hiring expansion, and capital spending because the risks have already been visibly discounted [00:16:45].
The 1978 Precedent: Between 1976 and 1985, the absolute cyclical low in the equity market occurred in 1978, completely before two back-to-back recessions manifested and before interest rates skyrocketed to 15%. Investors who waited for safe economic data to re-enter in late 1982 missed out on a 40% cumulative nominal return [00:17:35].
Localization of Fear: Chisholm tracks persistent fear in the equity market via valuation spreads and rapid rolling pull-call ratio spikes (such as a brief VIX spike to 30 during recent minor 2% market drawdowns, compared to a spike to 50 during the historical tariff tantrum). This persistent equity panic, coupled with absolute stability in credit markets, provides the classic setup to climb a "wall of worry" [00:19:36].
The Fat Pitch: Technology Valuations & Structural Shifts
The Convergence Signal: Earlier in the year, the forward P/E multiple of the technology sector converged directly with the forward P/E of the overall S&P 500 index. Chisholm calls this a definitive "fat pitch" entry point, which was followed by a subsequent rolling 38-day tech outperformance of +16% relative to the S&P 500 [00:21:59].
Tech as Modern Industrials: The hosts argue that top-tier technology stocks should no longer be valued as asset-light software models trading at 35x earnings, because they are effectively operating as modern heavy industrials investing over 120% of cash flows into physical infrastructure, yet retaining high tech profit margins [00:22:59].
Monetization Case Study (Meta): Josh Brown emphasizes that current capex spending is tied directly to real product monetization, citing Meta's three-year-old product "Reels." Powered by heavily upgraded AI recommendation engines, Reels has scaled to a massive $50 billion in annualized revenue, outperforming Netflix's baseline [00:25:24].
Semiconductor Micro-Caps, Cyclicality, and Valuation Anomalies
The Moving Average Outlier: The PHLX Semiconductor Index (SOX) reached an unprecedented extreme of 69% above its 200-day moving average, signaling vertical momentum [00:26:29].
The Micron Velocity: A year ago, Micron was the 127th largest stock in the S&P 500 with a market cap under $100 billion. It has recently scaled into the 11th largest stock in the index. UBS recently doubled its price target on Micron to $1,625 from $535 [00:26:54].
Industry Performance Probabilities: Quant data looking back to the 1960s shows that when an individual industry scales 70% to 100% in a year (a rare event occurring only 2% of the time historically), it goes on to outperform the broader market the next year 65% of the time. The foundational anomaly supporting this is that semiconductor price performance has actually lagged behind its concurrent explosive earnings growth [00:28:44].
Cycle Length Modification: Chisholm states that semiconductors remain a cyclical business, but the structural nature of the cycle has likely lengthened due to deep infrastructure dependency—potentially extending a traditional 3-year cyclical wave into a 7-to-8-year wave [00:32:55].
The 1996 Contrast: To debunk the 2000 Cisco/fiber optic comparison where oversupplied infrastructure went unused for 5 years until YouTube arrived, Chisholm highlights that the median tech stock saw its earnings peak early in 1996, creating a multi-year fundamental disconnect. Today, median and cap-weighted technology stocks remain highly profitable with expanding operating margins [00:34:53].
Profit Margins, Unit Labor Costs, and Market Diffusion
The Margin Driver: BCA Research and FactSet data show corporate profit margins hitting all-time highs with expectations for more gains. Chisholm notes that the tightest leading mathematical correlary to corporate profit margins is unit labor costs adjusted for productivity [00:37:12].
Labor Cost Advantage: Unit labor costs are currently sitting in the bottom quartile of historical records. Despite a headline 3% inflation environment, subdued wage pressure combined with distinct productivity advancements keeps corporate margins structurally insulated [00:38:14].
The S&P 493 & Equal-Weight Recovery: While the Magnificent 7 dominated historical corporate earnings, equal-weighted earnings growth went through a prolonged contractionary malaise that lasted a full 3 years (2022–2024). This equal-weighted profile is only 4 months into an active cyclical recovery [00:40:32].
Market Breadth Evidence: Year-to-date, the Magnificent 7 has underperformed the broader market, up 6.6%, while the S&P 500 excluding the Mag 7 has risen 10.25% [00:41:47]. Google is the number one contributor to index returns year-to-date, while Micron occupies the number two position [00:42:02].
Small Cap Rebound & Manufacturing Inflection: The forward earnings spread between the Russell 2000 and the S&P 500 is widening significantly. Small-cap financials are projecting a massive 66% earnings growth over the next four quarters versus just 7% for large caps. This expansion is fundamentally linked to a manufacturing rebound, as the ISM New Orders index inflected positive for the first time in 3 years [00:43:48].
The Inflation Sweet Spot & Fed Rate Hike Probabilities
The Inflation Illusion: Chisholm delivers a major insight: the quantitative "sweet spot" for equity performance is when headline inflation stays between 3% and 4%. Equities function as an exceptional inflation hedge in this environment; they are historical underperformers only when core CPI breaches the top quartile (above 4.5%) and accelerates [00:46:34].
Core CPI Stripped of Shelter: Core CPI excluding shelter costs stands at just 2.3%. Chisholm views the sticky shelter component as an artificial supply shock created directly by high interest rates, which lock in existing homeowners and crush active real estate transaction supply [00:47:39].
The Crude Oil Paradox: Market futures recently priced out 2026 interest rate cuts into December due to sticky energy input costs. However, quantitative data since the 1980s reveals that the larger a trailing 6-month crude oil price spike is, the less likely the Federal Reserve is to hike rates. When oil spikes over 60%, there is historically only a 25% chance of a Fed rate hike because the central bank treats energy spikes as a consumer tax that naturally cools aggregate demand [00:48:44].
Growth and Small Hikes: Durable capital goods orders currently reside in the top quartile of their historical range. Historically, when the Fed implements a minor interest rate hike sequence (e.g., 25 to 100 basis points over a year) backed by strong underlying economic demand, the market advance rate is a strong 75%—outperforming its baseline average because the hikes validate cyclical growth rather than choking it off [00:50:01].
Public Equity Supply: The Upcoming $170B Liquidity Test
The Impending Capital Calls: Michael Batnick details that an imminent wave of generational private asset listings—specifically SpaceX (expected around June), OpenAI, and Anthropic—could dump a massive $170 billion in new equity supply into public markets [00:55:39].
The Bubble Era Contrast: Between 1998 and 2000, public markets absorbed an unadjusted $164 billion in new equity supply ($34B in '98, $65B in '99, $65B in '00) across hundreds of lower-quality companies. While the upcoming $170 billion across just three mega-firms sounds high, it represents a significantly smaller proportion of total market capitalization than the late '90s wave [00:56:02].
Absorption and Volatility Realities: Portfolio managers benchmarked to growth indices will face an immediate rebalancing challenge, forcing them to sell existing technology names to fund allocations into these listings. Chisholm concludes that while this dynamic will prompt localized, short-term idiosyncratic volatility, structural corporate earnings growth will easily absorb the new supply over a standard 12-month time horizon [00:58:05].
The "Junk Tech" Side Show: Speculative high-beta names, tracked by the Round Hill Meme ETF (issued in October 2025), are currently trading at all-time highs via names like Redwire, Space Mobile, Applied Optoelectronics, Rocket Lab, and Applied Digital. Chisholm reviews the quantitative data for high-beta tech vs. baseline tech, noting it has been in a structural relative downtrend since the 1990s. The current speculative rally represents a normal, non-anomalous junk rally typical of early-stage corporate earnings recoveries, which investors should avoid chasing [01:00:25].
"The game is not over until I win." Kunal Sabnis 00:08:10 http://www.youtube.com/watch?v=oVODogtstTA&t=00m08s "Any mishap cannot happen unless you are debt levered." Kunal Sabnis 00:11:14 http://www.youtube.com/watch?v=oVODogtstTA&t=11m14s…