Talk Your Book: What's Working in the Stock Market?
Episode
39 min
Read time
2 min
Topics
Productivity, Investing, Fundraising & VC
AI-Generated Summary
Key Takeaways
- ✓Market Broadening Signal: When 68% of S&P 500 stocks are outperforming the index — the highest reading in roughly 50 years — it signals a genuine rotation, not a bear market. The equal-weight S&P trades at 17x forward earnings versus 22.5x for the cap-weighted index, offering a concrete valuation entry point for investors willing to look beyond familiar mega-cap names.
- ✓Earnings Power Shift: From 2020 to 2025, Mag Seven EPS grew 750% while the remaining S&P 500 companies grew earnings only 32%, justifying prior concentration. For 2025–2027, earnings growth is projected to broaden significantly across sectors. Investors should rebalance toward sectors with improving EPS trajectories — energy, industrials, consumer staples — rather than chasing the prior five-year winners.
- ✓International Equity Setup: Rest-of-world equities now show earnings growth equal to or better than the U.S. for the first time in 15 years, with Japan's shareholder reform program running five-plus years. European and emerging market valuations remain discounted. Investors with minimal international exposure face a scramble to add positions as currency tailwinds and earnings catalysts simultaneously materialize in 2025.
- ✓Midterm Year Playbook: Midterm years historically produce below-average S&P returns, but 12-month forward returns following midterm weakness have been positive 100% of the time historically. Galipo's tactical signal: wait for VIX above 30 and S&P RSI below 30 before adding equity risk aggressively. Current VIX at 21 suggests the sell-off remains orderly and the optimal entry point has not yet arrived.
- ✓AI Margin Paradox: Walmart reported that customers using its in-store AI tool spent 35% more than non-users, and the company projects equivalent revenue growth over the next five years with zero headcount additions. This pattern — AI expanding margins without proportional labor costs — suggests corporate profitability benefits even as specific software business models face existential repricing from the same technology.
What It Covers
Chris Galipo from Franklin Templeton joins Animal Spirits on February 23 to analyze a market where the equal-weight S&P 500 is up 6% and 68% of S&P stocks are positive year-to-date, while Mag Seven names like Microsoft sit in 29% drawdowns and software ETF IGV hits new lows amid AI disruption fears.
Key Questions Answered
- •Market Broadening Signal: When 68% of S&P 500 stocks are outperforming the index — the highest reading in roughly 50 years — it signals a genuine rotation, not a bear market. The equal-weight S&P trades at 17x forward earnings versus 22.5x for the cap-weighted index, offering a concrete valuation entry point for investors willing to look beyond familiar mega-cap names.
- •Earnings Power Shift: From 2020 to 2025, Mag Seven EPS grew 750% while the remaining S&P 500 companies grew earnings only 32%, justifying prior concentration. For 2025–2027, earnings growth is projected to broaden significantly across sectors. Investors should rebalance toward sectors with improving EPS trajectories — energy, industrials, consumer staples — rather than chasing the prior five-year winners.
- •International Equity Setup: Rest-of-world equities now show earnings growth equal to or better than the U.S. for the first time in 15 years, with Japan's shareholder reform program running five-plus years. European and emerging market valuations remain discounted. Investors with minimal international exposure face a scramble to add positions as currency tailwinds and earnings catalysts simultaneously materialize in 2025.
- •Midterm Year Playbook: Midterm years historically produce below-average S&P returns, but 12-month forward returns following midterm weakness have been positive 100% of the time historically. Galipo's tactical signal: wait for VIX above 30 and S&P RSI below 30 before adding equity risk aggressively. Current VIX at 21 suggests the sell-off remains orderly and the optimal entry point has not yet arrived.
- •AI Margin Paradox: Walmart reported that customers using its in-store AI tool spent 35% more than non-users, and the company projects equivalent revenue growth over the next five years with zero headcount additions. This pattern — AI expanding margins without proportional labor costs — suggests corporate profitability benefits even as specific software business models face existential repricing from the same technology.
Notable Moment
Galipo pointed out that Microsoft, one of the most widely held stocks globally, has declined roughly 29% from its peak — a drawdown magnitude that historically signals deep bear market conditions — yet the S&P 500 sits within 2% of an all-time high, illustrating how extreme the underlying rotation has become.
Episode Transcript
Today's animal spirits talk your book is brought to you by Franklin Templeton. Go to franklintempleton.com to learn more about all their different funds, research, analysis, tools. Franklintempleton.com to learn more. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnick and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Redholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. Welcome to Animal Spirits with Michael and Ben. Today is February 23. We're recording an intro. Michael is depressed, and we are thinking through the ramifications of AI. We just had a great talk with Chris Gallipo from Franklin Templeton. And we're just we're trying to think through all the different ramifications here. What's going on in the market? Why is this moving? Why is this changing? Why is this overreacting? And, obviously, everything just comes back to AI eventually. It's a Monday. It's snowy. It's gloomy. We we all read Satrina's piece over the weekend about what could come to pass, and I am yeah. I'm not feeling I wasn't feeling too great after reading that. More on the more on the human level. Like, you know, obviously, the stock market, as we get into today, is not ins is not, you know, confidence inspiring, but it's so much bigger than that. Yeah. This has the potential to be a societal shifting type of technology. And you're thinking through the macro ramifications and the market ramifications and the human side of things too. Right? That's that's a whole other thing. Like, hey. Guess what? The market could be fine, but there could be a huge human toll for this. Right? Market could see plenty of profit increases from this. Margins increase. Right? The stock market could be just fine, and millions of people are are out of jobs. That's you're right. That's the human toll that is giving you the, the black cloud. I I think we're gonna be okay. That's that's where I've landed on this. We'll, we'll keep discussing this. But the the stuff with Chris that we talk about, I think that is probably the most surprising of people is just how the stock market is reacting to this. Yeah. If you heard if you heard our conversation and you we we took out the well, the stock market is 2% near and all time high. You would assume that we're in a deep bear market. That that's been that's been, like, you know, years on end. I mean Yeah. There's all these areas of the market right now that are working that really haven't worked in the past. I looked the other day. So, again, this is through, you know, almost February. Dividend …
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“Chris Galipo from Franklin Templeton joins Animal Spirits on February 23 to analyze a market where the equal-weight S&P 500 is up 6% and 68% of S&P stocks are positive year-to-date”
“while Mag Seven names like Microsoft sit in 29% drawdowns and software ETF IGV hits new lows amid AI disruption fears”
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