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Welcome to Stocks in Translation, Yahoo Finance’s video podcast that cuts to the market mayhem and noisy numbers to give you the information you need to make the right trade for your portfolio. I’m your host Ali Cannell in for Jared Blickery, and with me is Yahoo Finance senior reporter Brooke De Palma. Today we’re diving into the world of AI. AI is fueling one of Wall Street’s biggest booms. Hype is sky high and money’s pouring in, but is the AI wave built to last or just another bubble ready toBurst. This all brings us to our phrase of the day, which is AI ecosystem. We’ll explain what it is and how big names like Nvidia, Palantirer, Microsoft, and Meta all play into the fold. And on today’s market show and tell, we’re breaking down all you need to know about PE ratios. And as Nvidia continues to set the pace in AI, we’ll also break down its current and forward ratios alongside Palantirer to see what these numbers reveal and where tech and investors are headed next.Plus our number of the day 3. The current bull market reached its 3 year anniversary in October, which historically suggests this milestone may be a welcome sign for investors. We’ll get into more of this later on in the show, but for now, joining us now to discuss is Henning and Walsh, chief investment officer and friend of the pod, Kevin Monn. Kevin, welcome back to the show. Great to be here. And, and, you know, great week to have you because we’ve seen a lot of volatility this week, particularly in tech, asYou zoom out, look at where we’ve been this entire year, where we’re possibly heading. What’s your bird’s eye view? Boy,

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if every investor isn’t asking me that question this week already, we’re only on Wednesday, right? But if you think about how far we’ve come in the markets already this year, coming into the week, the S&P 500 was up over 17.5%. We had 37 record closes thus far this year on top of 57 record closes for the stock market last year. We have the market trading atEnhanced or elevated valuations talking about PE, which we’ll touch upon later in the show. So that’s led a lot of people to question how much longer can this bull market run? Where can we find growth opportunities? Will there be some more volatility in the near to not distant future? All of that I’m happy to discuss with you here today.

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But we are hearing from some executives, including Morgan Stanley’s CEO, that maybe we’ll see a 10% to 12% pullback in the next few.12 months for this market. What do you make of those sort of suggestions, and do you think that that would be sort of a healthy correction?

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That’s a pretty long dated forecast. I heard that they’re calling for a pullback or a correction over the next 1 to 2 years. Two years? My investors are asking me what can we do to invest and find opportunities for growth and income in the fourth quarter as we position to turn the calendar into 2026. Do I think there’s going to be a pullback? I certainly do.In fact, I think there’ll be more short-term bouts of volatility over the course of the 4th quarter. But each bout of volatility is going to be greeted by more cash coming off the sidelines, and unfortunately likely running into the areas of the market that are really overvalued right now. Those large cap tech plays because investors, as they typically do, try and chase returns. And I think there’s better opportunities for growth for these investors to consider, and I think they’d be wise to build.More of a diversified framework, looking to the entire AI ecosystem as opposed to just trying to pick one or two names. Let’s

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dive right into that because our phrase of the day is AI ecosystem. When we talk about AI ecosystem, we mean everything that makes artificial intelligence possible from the chips that power it to the cloud systems that run it to the software that brings it all to life. So Kevin, you mentioned to us, given the opportunity that you, you know, let’s say that you do a 3-hour show, yoube talking about this AI ecosystem, but we only have about 23 weeks here. I’ll squeeze it all in. Just starting to dive into this world of AI. Where would you suggest that they evenbegin?

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Yeah, so when I travel the country, the number one question I get from investors is, can you find us the next Nvidia? And I think that really does the entire AI revolution a disservice. Look, I consider Nvidia to be at the hub of the overall AI ecosystem, and I think they tend to.will continue to spread into all facets of our economy and society. But that doesn’t mean it’s the only investment opportunity. For example, did you know that Nvidia doesn’t make their own chips? The largest seller of chips in the world doesn’t make their own chips. Taiwan Semiconductor does. The largest dedicated chip foundry in the world with nearly a 60% market share. But even Taiwan’s semiconductor doesn’t do their own lithography. That’s outsourced to ASML.ASML’s largest client is Taiwan Semiconductor. Taiwan Semiconductor’s largest client is Nvidia. Nvidia’s largest client right now is Alphabet. But all of these chips need to go into a server farm, which resides in a data center. Those data centers run hot, so they need cooling solutions from the likes of Vertive our Moine Manufacturing, right? And then, of course, you need the power. Thesecenters can’t manufacture their own power, at least as it stands right now. So they often have to turn to the utilities of the states that they operate within, whether it’s for natural gas or nuclear power, it’s all part of the overall ecosystem. So when you look at it under that lens, all of a sudden there’s abundance of investment opportunities beyond just Nvidia. So you’re,

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you’rejust talking about the ripple effect of AI and you were also alluding to the circular invest.that we’re seeing among some of these big players and that’s led to more questions about whether or not we’re in a market bubble, whether or not valuations are too frothy, and that’s been mentioned as one of the reasons why we’ve seen volatility over the past two days. So when, when you look at the, the bubble question, how do you frame that to clients and what are your overall thoughts there?

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I would suggest to clients or anyone who ask me these questions, including you right now, Ali,You’re waiting for the AI bubble to burst, I think you’re gonna spend a long time waiting and likely miss out on some significant returns while you’re waiting. Now that doesn’t mean that there aren’t some lofty evaluations within certain companies within the overall AI ecosystem, but I still contend, if I could use a baseball analogy on the show right now,

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right,

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I contend thatwe’re.Go Yankees, um, that we’re only in batting practice, and this is a doubleheader. Batting practice involves all the AI infrastructure buildouts. In fact, Jensenwan has suggested that by the end of this decade, there could be the 3 to $4 trillion in AI infrastructure investment. We’re not even at a billion right now by the end of this decade. Wow. And we haven’t even moved into the games right now. So if you think about the company spending tremendous amount of Cax dollars on AI infrastructure.Right now. The RRA may not come for years to come, right? But the bigger risk to me is not those companies who overspend, it’s those companies who are underspending, or not spending at all. So it’s gonna be very hard to play catch up with all these strategic alliances are now taking place. It seems like, you know, the show Survivor, everyone’s trying to form strategic partnerships to make sure they don’t get voted off the AI island, and that’s what we’re seeing take place. We have

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baseball, we have Survivor. Oh, I got.

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But, but this all contributes to evaluation, which means it’s now time for market show and tell. And today we’re talking about PE ratios. Two companies generating tons of buds have been Nvidia and Palantirer, but how do their current PE ratios compared to their historical averages, and what does that suggest about how the market views their future growth potential? So Kevin, what do they suggest about where valuations stand today, where they’re going, especially when we look back at historical norms? Sure.

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So if we look atJust the market as a whole right now. Right now, the S&P 500 is targeting at about 23 times current earnings. Doesn’t seem too excessive, but it is above its 5 and 10 year average. If you look at Ford Ps, that’s actually a little bit, um, I swapped that around. Forward PEs are traded around 23 times right now. Current PE is nearly 28 times. Now you look at Nvidia. Nvidia, last I checked using Morningstar data, it was trading at about 31 to 32 times forward earnings. Fairly.in relation to the market, right? Above 10 year averages, but still reasonable compared to the market, especially with our growth potential. Pallanttier, on the other hand, you can’t make that same argument. They’re trading over 200 times for earnings and over 400 times current earnings. I believe in Pallanttier’s story. I think it’s a good company with a tremendous amount of growth potential, but the stock price, on the other hand, seems to be priced to perfection and trading a little bit rich right here.

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Well, to remind our viewers, what exactly is the average PE ratio that they should be looking for in this environment.

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So I always go back to the market as a whole. So if you look at where the market is trading right now with a current PE of around 27 and a Ford PE of around 23, even though that’s above their 5 and 10 year averages, both of those figures, I think if you look at a Ford PE in that low 20s range, that suggests to me aReasonable valuation. If you can get below that, that’s even more attractive. That’s where value-oriented investors look. If you want to get some growth your names, then you’re getting into the 30 range, but not 200 or 400 times earnings.

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And we just saw Michael Burry take out short bets against Nvidia, against Pallanttier, and you’d have to think part of his reasoning is due to valuation and the frothiness.So what are your thoughts there when you look ahead to the future of AI? You were talking in the break before we went about how the AI revolution is not dead at all. Not at all. So I, I, I guess as an investor, how do you really digest all the different headlines and anticipate what’s to come without falling behind?

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Yeah, I, I think what you need to look at and appreciate is where we are within the overall AI revolution and how transformative it will be.But whether you’re an investor in AI companies or a company investing in AI, you have to be patient because your returns on investment may not come in the very near future. But if you try and play catch up, if you’re trying to time the bursting of the AI bubble, you’re likely to miss out on significant returns. And if you’re waiting to invest in building your own AI factories, your competitors.May race by you. So you have to keep it in its proper perspective. The gentleman who was putting shorts on those two companies, I think they’re two very different companies. And I don’t know if he’s actually betting against the success of these two companies. It’s a valuation concern from him. He thinks they’re gonna have to trade down. Pallantir and Nvidia are very different though. If you look at Nvidia, out of the hub of the AI ecosystem, where they’re trading from a Ford.perspective and the fact as well that 88% of their revenues last quarter didn’t come from chips but came from data centers. So now they’re diversifying their revenue base. I think they’re two very different stories. We own both of the names within SmartTrust in our AI-oriented portfolios, but I think they’re two very different names right now based on valuations and based on what they do and the roles they play in the AI ecosystem. Yeah,

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I think it’sNoting that Michael Burry was the hedge fund manager that called out the 2007 housing crisis, and that’s really why it got so much attention on, uh, Tuesday afternoon or Tuesday morning. Just really quickly on this AI, some people doubt that it’s actually going to end up coming to fruition. Quickly, what do you say to thosedoubters?

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I would say, look to the recent announced partnership between Eli Lilly and Nvidia. They formed a strategic partnership.Build AI factories and super computers for drug discovery and drug development. Talk about using AI for good. It’s coming and it’s going to be transformative in different areas of society, but most notably healthcare.

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We have a lot more to discuss, but for now we need to take a short break. Coming up, we’re looking at the future of our current bull market and whether or not those record highs have the legs to keep climbing higher. Stay tuned.Welcome back to Stocks and Translation. Our number of the day is 3. The current bull market just hit its 3 year anniversary in October, and get this. According to research from Creative Planning, the last 5 bull markets that made it to year 3 all kept going. The shortest lasted 5 years, and on average they ran for 8. Of course, past performance is in.guarantee of what’s next, but it does give investors reason to feel a little more optimistic about where markets could be headed. So Kevin, what are your thoughts on this and how does it feed into your outlook for the rest of the year and into 2026?

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It gives me another reason for optimism, right? I do think there are multiple tailwinds supporting the equity markets right now. One, earnings growth. Right now, we’re tracking at about a10.7% year over year earnings growth rate. If that holds, that would mark the fourth consecutive quarter of double digit earnings growth. I think the AI revolution is alive and well. I think even though Chair Powell signed out slightly more hawkish at his last meeting, they’re more dovish and we’ll see short-term interest rates come down over time, maybe not as quickly as some would hope.And I also know looking at history, that there are better days ahead. And of course, you’re right to point out past performance is an indicative of future results. This time could be different, but if the average duration for a bull market that gets its 3 year anniversary is another 5 years, wow, we have a lot more growth potential ahead. But I don’t think all of that growth is necessarily gonna come where it was over the 1st 3 years. We’re now gonna need to see.The breadth expand, go beyond growth into value. Look at healthcare, look at biotech, look at aerospace and defense, look at some areas of the fixed income market. You’re not gonna be able to just throw a dart at the AIDART board right now and find the next hot semiconductor name. Everyone’s there already. You’re gonna have to look to other areas for growth and investors would be wise to consider different areas without abandoning, of course, the AI names.

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And pharmaceutical healthcare, those are some companies that have not performed well over the past year, especially when given tariffs in a certain environment that we’re seeing. What do you think is the momentum that’s happening right now within thatsector?

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Sure. So we saw in the month of October, healthcare was actually the 2nd best performing sector behind only information technology, but I don’t know if large cap former was leading the way there. I think small cap biotech was also contributing to that performance, and that’s where I see the investment opportunity.Because large cap pharmaceuticals continue to be pressured by Congress, and perhaps rightly so, to lower drug prices. They also have several of their large revenue producing drugs coming off a patent or scheduled to come off patent, and be subject to generic pricing.And most of these large pharmaceutical companies don’t have their own R&D divisions anymore. They sold them off. It takes too long, it’s too litigious, it’s too costly, right? So where are they gonna turn to replace all this lost revenue potential? They’re gonna have to be acquisitive, and they’re gonna acquire the innovative healthcare solutions that these small cap biotech companies are trying to get across the FDA finish line. Whether it’s areas such as obesity, gene editing, gene splicing, CAT technology ontreatments, that’s where they’re going to focus in on. So that’s where I see the opportunities for growth in healthcare.

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So a lot of what you’re talking about when we look at market breadth is the concentration risk that’s in this market. I mean, we have 30-something record highs for the S&P and that’s driven by the top 6 performers, and it’s been that way for, for a bit of time. And when I look at pullbacks like we saw on Tuesday, it, it points to how fragile this market is. And when we want to climb out of that.The market, it just feels like it’s not there at this point. So when we talk about the sustainability of the bull market, the sustainability of market rallies moving ahead, how does the market breast story fit into this for the other 493?

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It’s really important because as portfolio, look, I’ve been doing this for over 30 years, right? So I come on to your show and I say we need market breadth to expand for the sustainability of this bull market run. But we don’t need to expand at the expense of the technology sector, right? The technology sector.Accounts for over a third of the weight of the indexes right now, and almost every retail investor has exposure to the information technology sector, either directly or indirectly through their 401k plan. So it affects investor psyche and it also affects actual index level performance. But for this to continue, we do need it to expand into areas such as healthcare, and that doesn’t necessarily mean I’m forecasting the economy to slow because healthcare is traditionally a defensive sector.Consumer staples. I love the utility sector right now. Very defensive sector. They pay good dividends, but they’ve also become a backdoor play into the AI revolution. So now you can play defensive and AI both at the same time. So there are different ways that you can navigate this type of environment by considering different sectors.

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And aquick follow-up to that is AI fundamentally changing the rules of the game when it comes to how markets work? You were just talking about utilities. It’s not just aDefensive sector anymore. So how does that change how people will invest movingforward?

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It’s a, it’s a phenomenal question. So I gave the example about a year and a half ago of a company that was leading in terms of performance in our own AI ecosystem portfolio, outperforming Nvidia. So it was like, what is it AMD? Is it Broadcom? No, no, it’s in the industrial sector. The industrial sector. What the heck does that have to do with the AI ecosystem? Well, as I said earlier, data centers run hot.And they need cooling solutions. So this company that we found is a traditional HVAC company who supplied cooling solutions to warehouses and distribution centers, which have now become data centers. The company was Vertive, and now everyone’s talking about Vertive and looking for other Vertive-like companies like Modine Manufacturing Comfort Systems, or even trained technologies. So that’s just another example of ancillary.Benefactors of everything that’s taking place within the AI revolution, and it really is changing the rules, as you say, for areas to find potential growth, but still be cognizant of valuations. Chasing a company that’s trading at 400 times current earnings might be a little rich, regardless of how much they’re gonna take over the world over time.

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And aswe talk about this bull market and the extension.That it could have on this run. Like if we’re investors who are just looking to get in and maybe they have a 5, 10 year, what exactly should their timeline look like for these investments ultimately play out in this environment? Sure.

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And I always encourage investors to stay true to their risk tolerance. In other words, if the market is moving higher, that doesn’t mean you get more aggressive, just as much as if the market’s moving lower, you don’t get less aggressive or try to flee to the sidelines.Again, I’ve been doing this for multiple decades. I’m not gonna tell you my age because multiple decades. And I can’t time the market, right? Because you got to get it right twice when to get out of the market and when to get back into the market. It’s when to get back into the market that’s often most difficult. And here’s another stat that you could use on your next show as well. But we looked at the research and through 2024, over a 20-year time frame,7 of the 10 best days in the market over the last 20 years came within 2 weeks of the 10 worst days. Now, I don’t know when those 10 worst days are gonna be. I don’t have a crystal ball, but I do know if you’re not in the market on those 7 of the 10 best days, you’re likely to miss out on the most significant returns the market has tooffer.

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Well, look what happened February, Liberation Dayt flows and where we are now with the record highs that we’ve seen. I also want to talk a little bit.Of the Fed, right, because for a lot of these companies that are not the Mag 7 players, what the Fed does greatly influences them when it comes to borrowing costs. What are, what’s your outlook for the Fed, especially since we’ve gotten a bit more hawkish commentary about that December rate cut?

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The only way I would.Saying that different. I think they’ve become a little less dovish following those comments because if we go back to September, prior to the government shutting down, we stopped getting updated economic data releases. They forecasted at that time, unemployment to rise to 4.5%, higher than it is right now.Economic growth to slow to 1.6%. Atlanta GDP now just showed third quarter GDP at 3.9%, 3.9% to 1.6%. What does the Fed know? We don’t know right now. And at that time, they were forecasting three rate cuts for the balance of the year. So far we’ve gotten two.We got a pretty good jobs report today, at least above expectations. payrolls. Yes, exactly right. But I don’t think we’ve seen enough that would deviate them from their course of three rate cuts this year. We know their neutral rate is 3%. Right now it’s between 3 and 3/4 and 4%. I think we start 2026 at 3.5 to 3. 3.75%. Of course.If they do open up the, the government again and we start getting some blockbuster inflation reports, I’m going to revise that forecast. But I still think there’s a potential for one more rate cut this year, and that’s important to smaller cap companies who rely upon that funding to help keep their businesses going, particularly small cap biotech companies where interest rates impact their borrowing costs.

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And we are now in the longest government shutdown that we’ve ever had in history. HowSignificant is this for the companies that maybe not only are you investing in, but just in general, how are you thinking about this, especially given that we likely won’t see some new data for a while.

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Ithink it’s going to have an impact on Q4 earnings and Q4 economic growth, right? Because the longer and longer this lasts, the more it limits the amount of disposable income that could be spent out in the economy, and that’s gonna have an impact on both sales and earnings of companies. If inIn fact, we as a society, you know, 70% of economic growth in the US comes from consumer spending. If we spend less over the course of the 4th quarter, the economy’s going to slow. Perhaps that was part of the Fed’s calculus in terms of lowering their forecast for real GDP growth this year. Now, as I understand it, maybe the government opens up next week and maybe you have all this pent up uh optimism. We’re going into the holiday shopping season. Perhaps it’ll be strong and that will outweigh.That, but it’s becoming a concern now for economic growth, um, but not necessarily for the stock market. The stock market seems more focused right now on earnings and the AI potential bubble than they are about what the Fed does or doesn’t do next or the government shutdown. Yeah,

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well, just to recap, we learned quite a lot today. We talked about the AI revolution, the difference in PE ratios, looking at Nvidia versus Pallanter, and also how necessary it is for the markets to continue toExpand beyond just those mega cap companies that are leading stocks higher, AKA market breadth, and then of course ended on a little said uh projection of where we think interest rates could be heading, and Kevin here thinks we could see one more rate cut before the end of the year. So we will have to check back in with him to see if his prediction is right. But for now, we are winding things down here at Stocks and Translation, but make sure you check out other episodes of our video podcast on the Yahoo Finance site and mobile app.