2025 Q4 Financial Market Update

Foreign.

Welcome everybody to another episode of the Dental Boardroom podcast. We are doing in this episode our quarterly stock market and economy review. And I have our two esteemed guests and partners of mine here at practice, CFO Brandon Hobson and Paul Lipschiss. Welcome back to the show, guys.

Thanks, Les. Looking forward to it.

Right?

Awesome, Paul, great to have you.

Ready to dive in. Ready to dive in, guys. All right, so we've got four subjects we're going to talk about in this State of the Economy market episode that we do every quarter. The first one is what's going on with the Fed? What's going on with the rates? How does that affect the market? How does that affect our clients investment portfolio? And also the potential swap out of Jerome Powell with a new fed chair in 2026. A lot of really interesting points on that in that area. The second item is AI and tech. Are we in a bubble or are we in a productivity boom? I want to talk with you both about that subject as well. Number three is, is the standard 60 equity 40 fixed income portfolio a very significant stock risk allocation in the American sort of standard portfolio? Is that poised for a comeback amid an AI hype and boom or is this going to struggle going forward? So let's talk about what we think may happen to the average American portfolio going forward and also what is the 2026 game plan based on our conversation in those three preceding subjects and to make sure that we, as we help our clients and for any listeners as they think about their own investments, can prepare for the upcoming year. I do think we're in a really interesting time right now with the stock market, with the economy, with innovation and tech. Politically, I think it's unique in many, many ways. So I'm excited to have this conversation with you guys. Let's go and kick off. Brandon, why don't you kick us off on the Fed rates right now? Where have they come, where are they going? And what do you think is going to happen with the fed chair in 2026? And then Paul, I want you to swing in with your follow up comments after Brandon.

Sure.

Yeah, I'm happy to touch on that. So currently the target Fed fund range is 3.75 to 4%. The last rate decrease was in October and we're looking for another likely another 25 cut, 25 basis point cut next week, which would bring that range down to about three and a half to three, seven five in terms of the next Fed chair. Jerome Powell's term ends February of next year and it's Looking like President Trump has landed on an advisor that he currently has in his administration. Kevin Hassett is going to possibly take the place. It looks like there's about a 70 to 85% chance that this ends up being Kevin Hassett. And that's based on prediction markets. Right. So we don't know exactly what that is. It will be announced January of 2026. At least that's what's expected now. And so all eyes are on that. Kevin Hassett is much different than, than Jerome Powell. He's, he's an economist. That's his background. He's served in the President's first term and the second term. Now his view is much different in terms of how he views supply side economics. He's very focused on growth and less focused on keeping interest rates high in order to restrict the economy and try to reduce inflation through interest rate movements. So he's been a big supporter of deregulation, you know, reducing taxes and things like that. Paul, you want to add on to the HACCP discussion?

Hey, before we jump in on that, if you don't mind me doing a little segue between you two, I want our listeners to understand what a rate decline. Let's first talk about the rate, then I want to talk about the Fed chair.

Person. But a rate decline cut up from 3.7. From 4 to 3.7. You said we're at 3.75 right now, Brandon.

That's right. 3.75 to 4. That's the range.

Just remind our listeners what a rate cut means in the economy and why the Fed would do a rate cut.

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Yeah. So a rate cut is so basically the way that the Fed works with the interest rates. It's a way that they can try to control whether they're trying to stimulate demand or reduce demand in the economy. And when inflation is high like it has been, it's, it's common for the Fed to hike rates, which we're coming out of that period of hiking. And as inflation starts to subside, come down, you're starting to see some cuts. And so that's really the primary metric the Fed uses or the primary tool the Fed uses to control demand in the economy.

Got it. So yeah, the Fed has two sort of primary roles to control inflation and to promote employment. And sometimes there's those two things can be at odds. And when you lower rates, you're generally going to improve unemployment, meaning you're going to get more companies hiring because typically they have access to more capital because interest rates are lower. And the opposite is true. If there's a concern about inflation, they increase the, the rates to sort of slow down the economy and therefore ideally reduce demand and reduce therefore inflation. And those two things have historically been the primary focus of the Fed. Now getting into the Fed chair. This role has as far as I know, going back to the beginning of the Fed, it's typically been independent from political changes. It's Not a politicized position. And I think that most of the market and politics and economists have agreed historically that that's a good thing. You don't want a president who has a, another 2, 3, 4 years as their sort of time horizon to be making decisions that could affect 5, 10, 15 years down the road on the Fed. And so that's typically been insulated from politicization. I think that's maybe starting to change with the Trump administration. That said, let me pass it back over to you, Paul, now to comment on those two things.

Well, I think that's a concern and obviously time will tell. And yeah, the Fed has that dual mandate, full employment, controlling inflation and those are at odds. And so the independence of the Fed, I don't know if it's a matter of opinion, it's just a matter of fact. The, the independence of the Fed is, is very important because there are many times, and you know, depending on who you ask, but Jerome Powell and his team have made some unpopular decisions about being less accommodative, a little more restrictive with their measured approach. And that's not always popular, that's not always going to coincide with the political agenda. But that's the Fed's job, is to maybe do things that aren't typically popular because we need to think about the long term. We need to think about, yes, we want a robust economy, but we don't want runaway inflation, we don't want devaluation of the currency and so forth. So I think the bond market is really trying to get, get their arms around that, you know, is the independence in question and what does it look like for the long term if we do have a Federal Reserve that is more dovish or is more accommodative and that might be a boon in the, in the short term, but some potential long term ramifications I want to call out though that the, the, the head of the Fed is obviously an incredibly important position. But, but it is done by committee. Right. So you know, just, just by appointing one Fed chair doesn't necessarily mean that exactly their agenda will be accomplished. And so it is, it is speculative in nature but, but I do think the bond market and investors at large are really looking at that as an important employment and trying to get a read on what that might indicate for the independents and just the overall objectives of accommodative versus restrictive policies.

And my understanding. So there's 12 voting members on the FOMC, the Federal Open Market Committee, that's what it's formally called. Jerome Powell being kind of the president of the board, so to speak, they have seven full time governors, they have the president of the New York Fed and then they have four of the remaining, four of the remaining 11 regional bank presidents sort of rotate on that voting board. So that's the, that's the constitution of it. But my understanding is typically most members will side with the, with the president, with Jerome of the board, Jerome Powell. That said, I'm not terribly.

Knowledgeable about how that board works with all 12 of those members. Do they really all fall in alignment with what the chairman wants or is there more diversity on that board? And are we seeing a potential threat with Donald Trump and the independents he attempted to fire one of them. That was Lisa Cook. That was a big sort of news episode a few months back and he's been pretty vocal about his complaints with Jerome Powell, sort of threatening to fire him at times if he's able to, to do that. So, Brandon, let's come back to you. Do you think that there should be a concern around Fed independence right now and if so, what are the implications?

I think the concern is valid when you're going through a change like this that, you know, Kevin Hassett is, has been in the administration like I mentioned and there's definitely a close relationship there. So it's all valid. I think the, in terms of whether or not the other committee members are going to follow the chair.

In their viewpoint, I think it's highly dependent on the Fed chair's ability to convince the other Fed members to see things their way. Jerome Powell has been very, very effective at this. And if you look back over the history of the time that he's headed the Fed, I think you'll see that generally speaking, they've been very much aligned on, on the board. Now that does not mean going forward, it's going to stay that way. And like Paul mentioned, the Fed chair does lack unilateral power to basically move interest rates. So without that ability to convince and get those other members on board, Kevin Hassett does not have the, he's not going to have the ability to reduce rates on his own.

Yeah. And on that consensus matter, who knows what happens behind the closed doors? Right. They meet for two days and then the chair addresses the markets with their comments. And those words, the specific words that the Fed chair uses are so heavily scrutinized and priced in. You'll see wild swings in the intraday as that's going on. And for all we know, there could have been at various points a lot of dissension. But when they go to the markets and speak to give that appearance that we all are on the same page and we've sort of grinded this out and here's what we all agree on, I think is important. And so, you know, I don't know that we're moving into this new paradigm where we have, you know, 40% voting one way, 60% voting the other way, because if the Fed chair comes to markets with that, that we can't agree on this dang thing, trust me, that, that that's almost as bad as making the wrong decision is making knowing that there's sort of this dissension. So for all we know, there could be a lot of that behind the scenes right now. And by design, they do shield the investment public from it. But I'll tell the listeners, you know, it's a consequential appointment. It really is the Federal Reserve, I mean, it's an important institution and it's something we all should pay attention to.

We don't know what's going to happen. And Wes, to your point, I just think the independence is so important. And so I just think people should want to know about that and kind of follow the appointments and the scrutiny to some degree because it is driving all of this economic activity. And we'll see where it goes.

Yeah, there's this growing argument toward what's called the unitary executive theory, which is the White House or the executive should have a lot more unilateral discretion over a lot of government positions because they're the president and they should have that. And I think that that sort of philosophy is extending now a little bit to the Federal Reserve. I don't think that the President is trying to even hide the fact that he wants his people on the Federal Reserve pretty pretty clearly. And I think time will tell the tricky thing about inflation, and I'm not an economist, but this is my understanding the tricky thing about inflation is that it's so momentum driven. Once it gets going, it's really hard to cut it back. And if it, you sort of have to keep it in this, this small range and try to anticipate where it's going to go and make rate changes well ahead of that in order to prevent this momentum trend of inflation getting out of control. And there are, you know, I'd say the biggest complaint in probably America right now is just price increases. They've been going up and up and up for so long now, it feels like years, regardless of the administration. They just keep going up. And it Feels like it's continuing that way right now. And yet if we end up having a decrease in unemployment, some numbers just came out that weren't great unemployment numbers. And so if you have inflation on the rise and unemployment going up, isn't that called stagflation, guys? And do you think that's a concern right now?

I mean, yeah, that, that's the concern. That, that, that's the conundrum with the Fed. How is it right now, you know, unemployment's ticking up. Brandon, we just talked about this with, with the rest of the team. You know what, what's the perfect level of unemployment? We know it's above zero, but there's, I don't, I don't know that there is this sort of perfect level because there's always going to be that labor market friction.

But I think, Brandon, I'll pass this off to you, but I think what we're more looking at is sort of that rate of change. Wes, as you mentioned, when inflation takes up or unemployment ticks up, it becomes this thing that feeds on itself when there's this price action. And now companies are jacking up prices because their overhead's rising. And on the unemployment side, you're getting reads from the economic, economic articles on layoffs and that sort of thing. So you start downsizing and it becomes this thing that feeds on itself. But it's been a slow and steady increase from that, you know, historically tight labor market. But we're at about 4, 4% right now. Foreign change, and that sort of ticked up about 0.1% every few months, every quarter. So it's been in this sort of like slowly increasing, which I don't think is a concern. But Brandon, the impossible question, what's the perfect number for unemployment? How do you address that?

Yeah, I mean, I think, you know, if you're trying to. So typically, unemployment, when it rises, inflation comes down common. Right. But stagflation is a risk, and that would be inflation rising higher as unemployment rises. Obviously, normal economic. You know, the way this works in the economy is if unemployment's rising, the economy's softening, that probably is going to lead to softer consumer spend spending, which in turn is going to lower inflation. But there, but, but all of that, all of that to say that stagflation has been an issue, it's been a long time. But in the, you know, 70s, 80s, that was an issue at that time. And so, I mean, I feel like unemployment is definitely fine where it's at right now. It's not. It's not concerning to your question, Paul. I feel like even a 5% unemployment rate would not be too concerning. But the rate of change is definitely something to watch and unemployment can rise quickly. And so if we, if we see unemployment tick up over the next couple of quarters and it, and it goes to five, five and a half quickly, then, then there's your cause for concern.

Yeah, Exactly. You know, 5% ticking up slowly by two years from now probably not a concern. 5%. Next reading. Okay, this thing might have some legs and 5% turns into seven and so so on. So I think, I think Wes, that's, that's probably the issue is stagflation. That's the, the one thing that's the impossible solution for the Fed. I don't think we're seeing it now even on inflation.

It seems to be steady in the mid twos based on the Fed's core reading. But yeah, it definitely is noteworthy to watch if we have both of those things moving in the wrong direction.

And I want to correlate this a little bit to the day to day lives of our doctors that we work with these practice owners. I think that in the dental space today a lot of profit margins are coming from elective services, cosmetic services.

And not necessarily the cleanings and the, you know, just the basic restoration. Especially if you're, yeah, if you're in network with PPOs, those margins are really, really thin and so cosmetics a lot in these add on procedures are where a lot of the profit margins are being made in the dental space. And if the, if the market goes through a declining cycle and potentially a significant one, people obviously they're going to tighten their discretionary spending and that's where dental offices could be hurt. The other area where I think the Fed choice and the federal rates are relevant to dentists is the borrowing rate. And tell me a little bit about that.

The changes to the fed funds rate affects your 10 year rate which affects the loan rate that they can buy at dental practice. Do a build out, buy new equipment. Can you elaborate on that correlation between the Fed changes in the rates and the borrowing rates of doctors in their office?

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Yeah, that's a, that's actually another topic we discussed yesterday with the team. And the thing is, is that the Fed has a lot of control over short term rates. We all know that. But in terms of their control over longer term rates, they can do that through quantitative easing and things of that nature, but their control is much less on the longer end. And so the Fed really doesn't control the 10 year. And what we've seen is the 10 year actually move higher since the October rate cut. And so there's.

Why is that, Brandon? Why did the 10 year go up in spite of the short term rate dropping?

It's hard to pin down to any one factor, but one of the things that, or many things could be causing that. One of the primary things could be inflation expectations, another being GDP growth. And so if investors are expecting a strong economy, it's common to see that longer end move higher, including a 10 year same thing with inflation. If inflation expectations go higher for the longer term, you expect to see the ten year rise. And so if, if you know President Trump appoints a loyalist to the Fed and they just come in there and hack rates, that does not mean that the 10 year is going to decrease because inflation expectations are actually potentially rising at the same time and that's going to actually have a negative effect on the longer end of the curve.

Interesting. It's almost like an opposite effect in some ways depending on how the market is viewing the long term effect of that short term reduction. Speaking of gdp, where are we with GDP right now?

Yeah, that's a good question. It's a little unknown because of the shutdown. I think some things have been delayed. But the last reading that they had was for Q2 that came in at 3.8%, I believe, which was significantly higher than the expectation at the time. The shutdown is definitely going to weigh on Q3, GDP, Q4 GDP, and we're just waiting for those numbers to come in. But consumer spending does look good and so I expect the US GDP metrics to be, you know, not. Not amazing, but. But still good. Better than expected.

Cool. Paul, any comment on gdp?

Yeah, Brandon actually sent me an article. This is really relevant timing. I feel like we just had these conversations. Brand just sent me an article that there's some revisions upward to expect something like two low twos for the year that that includes the shutdown, as Brandon mentioned. So we had a strong Q2 and then expecting some slowdown. But I think what's really noteworthy is global GDP is markedly higher despite all the trade wars and uncertainty, which is sort of. Again, Wes, you're talking about sort of. You expect one thing and another thing happens. Welcome to the markets. Right, because the global economy is showing signs of strength despite maybe these perceived frictions in global trade. But yeah, 2025 full year expectations is mid to high threes. China somewhere in the 5% range. India 6, 7% range. So we're seeing sort of these counterintuitive developments, but I would say strong would be, if I had to choose one word, particularly for the global side of it and, and solid for the US in terms of at least current GDP readings.

When do we get the next GDP reading? Do you know?

Well, I don't know that with the, with the shutdown, I think we're still waiting on Q3, so. So a lot of those.

Administrative functions just sort of went on hold. And so I think we're going to get a weird sort of timeline around this data. But the good news is we have all sorts of economists, you know, reading into the adp, labor reports and so on and so forth to try to get a read on it. And so that information is public. Published pretty regularly, those expectations, but I think it's going to be on hold to get the official reading for, for the 2026 period.

All right, Brennan, I can see you're doing some research. Any, any comment on that?

No, I was just quickly trying to find when they expect that Q3 GDP number to be released. I couldn't find that.

No worries. All right, let's go on to this bubble watch concept. Is AI a tech trap or a productivity boom? Ready for this one, guys? Couple things. Big Tech's AI infrastructure outlay is expected to hit 3 trillion by 2028. I think I mentioned this in our last podcast that some of these tech company stock prices are going up or down their spend, not their profitability. The more they spend in AI, there's almost been a correlated increase to their stock price, which is kind of an unusual thing to have stock prices affected so much by spend rather than by revenue. But, but 53% of investors are fearing a bubble right now. And so our valuations priced correctly in this AI space we have, revenue will always lag. Monetization of tech investments, meaning you invest in technology, you, you hire a lot of people, you're buying data centers, you're building all that out, and then at some point, whether that's a few months or a few years, there should be a return on that investment. And given this is a lot of new tech evolution, I don't think we're entirely certain what that lag looks like. And are we going to fully monetize the amount of spending going into AI technology and these data centers? Energy is definitely a bottleneck in getting these data centers in place and getting them powered. There's a lot of sort of revisiting the nuclear option to literally the nuclear option to power these data centers. Let's talk about this one, guys. Is it time to trim the magnificent 7 exposure which are heavily in tech stocks? Can AI be as evolutionary, evolutionary as many think, or are we in a bit of a bubble?

Yeah, I mean, it's, it's gotta be the question on everyone's mind right now. You know, the funny thing is, if I had to think of one bullish indicator, it's how consensus, how much consensus there is around this bubble. Because, you know, historically they, they sort of come out of nowhere, right? They're obvious in hindsight, but, but at the time they seem like life's good and, and, and it just seems to be this general consensus in the markets, less a few analysts and few pundits that.

Think this can be monetized and, and justified.

So, so yeah, I do, I, Wes, I do think there's a bubble. I, I think it's, it's hard to deny that you bring up the really billion trillion dollar question, which is what's that monetization timeline and in the extent of it, and that's the unknown. Right. Is AI transformative? Of course. I mean we all use it. It's amazing and it's going to continue to get better. But, but what's the impact to, you know, administrative labor jobs? And how does that impact gdp and how does that impact these companies ability to monetize. So there's all these layers to unpack. And so right now as it pertains to mag7 a lot of that pricing is coming.

Well with Nvidia you're looking at more of an infrastructure investment, right? With the GPUs, with Google Meta and so forth, you're looking more at a front end use case pricing, meaning they're going to be monetizing and capitalizing on the model itself versus Nvidia looking more like hey, they're the guts in these systems. Right. And so I do think that's probably a shakier valuation than saying, you know, looking at companies further down the chain to your point, nuclear energy, renewables, but also just the, the components that make the semiconductors themselves. And so that, that might be something where we say hey, those companies might still be able to benefit. And whether or not the front end use case pans out exactly as expected might be the case. But I do think when we're looking at the Mag 7 and those front end.

Sort of users or, or, or companies that will capitalize from the front end use case, that that's where I think the valuations become shakier and shakier. I know Brandon agrees with the bubble, but I'm curious what your take is in specifics to the value chain and you know, are we still seeing certain segments that might be under Love that could benefit from it? I think that's a worthwhile discussion.

Yeah. I think what I'm looking forward to seeing is, is where the monetization comes from first in terms of, you know, what companies start to say that they're getting revenue from the investments that they're making. I think that that might be the software side. So like a Salesforce and may may have revenue coming from AI investments before say a Microsoft or Nvidia is obviously selling the product and so they're already benefiting from revenue as a result of AI. But the large companies that have been investing in AI infrastructure have not monetized that. And so there was a recent MIT study published in August that indicated 95% of companies are experiencing no real ROI from these generative AI investments and the stocks are priced to perfection. And there's definitely revenue price into the stock price today. The question is, is that overblown.

Or is it going to eventually lead to those really significant revenue increases that are getting priced in. And if you compare this to the dot com era, it's a very similar story in what happened in the late 90s and I do believe that the revenue that is going to eventually be generated from AI investments will be much lower than what's expected and what's being priced into many of these stocks. That's not to say that AI is not evolutionary and it's going to change the world. You can have both. You could have a bubble and still have a new technology that transforms the way we do everything. The Internet did that as well. And there was a bubble that coexisted at the same time that we, we basically developed and integrated the Internet into everything we do in our lives.

Completely transformed the economy and one of the, one of the largest historical bubbles on record. Right, exactly.

I want to put excuses, I want.

To put in perspective a little bit here these valuations. Are you ready? And I want to look at three companies that I just did a little research on. OpenAI, Nvidia, and then I want to go with more of a standard company, Walmart. Right. And what are the valuations on these? For OpenAI, the valuation is $500 billion. That's the stock price times the number of stocks outstanding. That's it's what's called its market cap for listeners, 500 billion. What is its revenue projected this year? I think it's around 13 billion. So the market valuation is 500 billion revenue. 13 billion. That's a 38 times revenue. 38 times revenue. Okay, so hold that one in your mind. 38 times revenue is the market valuation. Let's look at Open. I'm sorry, let's look at Nvidia. So Nvidia is around the hardware. OpenAI, of course, being around the software. And Nvidia's market valuation is 4.3 trillion. It got over last month or in October it exceeded 5 trillion. The first company ever in history to exceed 5 trillion in market cap. And it's profit, Its profit margin was. What was its profit margin?

I think Nvidia's. What's Nvidia's revenue? Nvidia was 134 billion.

Sorry, no. Nvidia's total revenue for last year was 60 billion. This year I think it's on track to do 130 billion. So 130 billion is its revenue. Its market share is almost four and a half trillion. That came out to be a 34 multiple of revenue. So you take its revenue times 34 and you get its market share. Let's look at Walmart. Walmart is valued at 915 billion. Its revenue is about 650 billion. So its multiple is maybe 1.3, 1.3 versus 38 and 34 to put in perspective the massive valuations on these tech companies. I just want listeners to get some perspective on the amount of investment and therefore price increases that have been driven up into these big tech stocks. Right now, to me all signs are pointing to a bubble. The challenge is it's easier to predict a bubble than it is to predict when the bubble is going to burst.

Yeah, and wise, I appreciate that comparison. I mean it's obviously anecdotal and kind of comical in a sense because you know, Walmart should trade at a lower multiplier of sales. We know this, right? It's consumer goods, there's a lower barrier to entry and so forth. But a smart colleague of mine says is where there is high margins, that that's where you're going to see competition. So, so the Nvidia growth story has been one of obviously sales but also profit margins, meaning they can charge whatever the heck they, they want pretty much. And, and as demand for their product outpaces production capacity, these profit margins on their unit sales has grown astronomically to the point where you have other people or other companies rather stepping into the space. Like Google just recently announced they're getting into the space, albeit with maybe a lower.

Quality processor. Nvidia's got the gpu, they have another letter that they throw on top of it. I forget what it is, but something tpu. Tpu. Okay, so yeah, something pu. And, and then you're seeing Broadcom come into the space and you know, even intel, they're getting in the fabrication side and that's been their corporate ship. But they are, you know, collaborating with other design companies, Qualcomms and those.

Companies in that space that even if they make a lower product for 40% less the economics of the investor being the company buying the processing, they're going to move in those directions. So it's funny to compare back to a Walmart, but it is true because now look at retail, you have Costco, you have Target, you have all these other companies competing, you have Shopify, you have all these different things. And so eventually there is a right sizing, right? With high margin, high opportunity comes competition. When and to what. Capacity is really, really hard to predict though. But yeah, these valuations are just ripe for the competition. And I think we're going to see it. I think we're already starting to see it.

Yeah, I like how you teed that up, Wes. One of the things that stood out to me was the revenue number, which I know OpenAI is non public and so There's a lot of debate over whether or not the information that that's put out there is even accurate. But I think you said it was 13 billion in revenue for the. For the year, right?

For AI. Open AI. Yeah.

OpenAI. And so if you. One of the things that we haven't talked about yet on this podcast, but definitely we should at least dabble in it a little bit, is the circular funding that's going on. And if you look at the amount of money that OpenAI look at how much they're pledging to invest versus their revenue, the question is, do they even have the ability to get the revenue up to where they can make these investments? If the answer to that is no, then most of these deals that have been pushing the AI bubble higher are basically useless. There's. There's nothing that says open AI has to make these investments, and if they cannot, they will not. They don't have any other choice. And so we're seeing all of these deals getting priced into stock prices, and we don't even know if those deals are valid or going to come to fruition. This could just be an example of Sam Altman being the eternal optimist on. On the AI front. And we. Maybe he is a genius and this all pans out and he saw it before, before anyone else did, but this could be a situation where he was completely. He got ahead of himself.

Yeah. And I'm. I'm really curious if open AI is going to be to AI what Netscape was to the Internet, because it was the first to market. However, just this past week, it was shifted from first place to second place in terms of functionality behind Gemini, which is Google's product. Google is very intelligent. And if you look at Google's revenue relative to its investment in AI and its stock price, I think. I think Google is in a much better situation financially to be the winner here over Open AI, even though OpenAI came to the beginning. In the beginning, however, there's a bit of an incestuous relationship across these mag7 companies when it comes to AI. Or maybe a more softer way of saying that is this interconnected systems, in which case some of the bigger ones are investing in OpenAI and Microsoft owns half of Open AI and they're all sort of connected to each other in different ways in this. In this AI scene taking place right now. And if AI is in a bubble, it's not just going to be one of them that falls. This whole system of MAG7 interconnectedness is really going to suffer financially.

So Brandon, there's a term for that contagion. You know that that's where you in the more interconnected an ecosystem is, the more at risk it is for a contagion where an issue can spread and multiply and kind of feed on itself. And I'll add to that Wes, because of the, the, you're, you're citing the Mad Mag 7 and the interconnectedness. But think of all that investment, right? 3 trillion expected versus 30 trillion American economy as measured by GDP. It's become such a material piece. But think about the fallout down to credit, right? How many banks are exposed to these loans and then the energy side, how many of these energy production facilities are going up around these data centers and the construction and so on and so forth. And so I think that that dynamic and the money sloshing around between entities and, and, and, and infrastructure and products and, and these companies, their market caps without the, the concept of a fundamental economic output, I. E. Revenue. It's not by revenues that that's where we're seeing the, the major issue that contagion risk which is not being justified by the revenue generation, at least currently.

And go ahead, Brandon.

Yeah, I was just going to introduce another topic here is the debt and how these things are being financed. And so, you know, Meta just entered a joint venture to basically keep debt off their balance sheet for a massive data center that they're building, you know, a lot.

Not their building, Brandon. Wink, wink.

Exactly. Somebody else's building, right. So that they can structure it this way so that they don't have to put the debt on their balance sheet and they can keep their pristine credit rating. So the question is, you know, is this even within US GAAP accounting rules allowed? And based on a Wall Street Journal article that just came out, it's very questionable. And I think the SEC needs to look into this now because if they don't, it's got the potential to start to happen in other companies. Right? Because everybody is going to try to copy what Meta is doing.

And that's something we talked about last podcast. I want to say, you know, if there was one thing that I thought was really.

Different, you know, this time is different. We joke about that in finance, but is that the big tech companies, they didn't really have this debt issue, right? They had really clean balance sheets. Her valuations were getting stretched, but. But they had really clean balance sheets. But now that they're going into this capex cycle and at such an aggressive clip, if those balance sheets, whether directly in terms of gap Reporting or indirectly through these joint ventures and so forth, become more levered. That's where I think, okay, now when there's a small pinhole in the balloon, that's where you can see it really, really kind of explode. So that was, that was the one thing I was hanging my hat on, is how clean these balance sheets were. And we're starting to see this stuff come out. And so that's, that might be the ticket, I think, is the debt. You know, you can lose your own money, but when you're losing someone else's money, that's when this thing can get out of, out of control. Right?

Yes, yes. And the question is what, what has led to that? Right. What is led from. Because even companies that were not taking on debt are now starting to, you know, like Meta. And so the free cash flow was supporting the AI spend and these companies have a lot of free cash flow.

Right.

But, but they're spending so much now to where they're tapping out their free cash flow, hence why they're having to tap into debt in order to make these investments. And so if that's the phase where we're entering, which I think we are, where we're basically, we're saying AI spend is so high that even the largest mega tech companies in this country are not able to fund it through their fees, free cash flow, they're going to have to rely on debt funding. That's a, that's a whole different story. And it's going to impact the balance sheet and valuations, et cetera.

Yeah, nobody, nobody pays attention to balance sheets in a bull market. But when the bear market comes knocking, that's when that becomes really, really important. Now for our listeners, I'm not necessarily against an investment in Meta or Google particularly. Those two are stocks that I've acquired over the years. And I, and I do appreciate and, and enjoy how they've treated me. And I don't necessarily plan on selling, but I, I do think when I think about my position in a Google or Meta, you know, that the AI capex is not the premise of my investment, it's more the fundamentals of, of what Brandon said, the free cash flow. That's always been the case for me. I don't know who's going to win the arms race. I actually don't particularly care who's going to win the arms race, but I do know the companies are positioned to compete in that race. And so when we look at a good investment and we're looking at the long term horizon of that Valuations will ebb and flow, but cash flow is king. Right. And so I do think though that that is something that I'm, I am considering. What Brandon is saying is how much of that cash flow is now being committed to this unknown outcome and does that change my philosophy around this company's valuation? Because I can live with valuations getting stretched and coming back to reality and hold true. But what I can't live with is a company that's committing so much of its cash flows and, and signing up for liabilities, either directly or otherwise. And when that cycle does come down, valuations do come back and their cash flows do cycle down with an economic retraction, can they make those obligations? And so that's really the fundamental, I guess, crux of this company. Are they turning from these cash cows to these companies that have these obligations that may or may not be met?

Let's go ahead and stick the landing here with the following question.

Yep.

Yeah, so over the past 15 years, growth companies have really crushed kind of the marketplace. They, they've definitely won over value based companies, kind of older school, traditional style companies. Brandon, as our chief Investment officer here at Practice CFO and as the one who is kind of the lead thinker around our investment strategy for our clients, how are we lined up going into 2026 in terms of our allocation between growth and value? And what recommendations do you have for listeners when it comes to their investment portfolio?

Yeah, so we're positioned really, really towards value and quality. And Paul kind of alluded to it a moment ago, there's still value and quality in tech. These companies that maybe not taking on as much debt, who that do have revenue like a Google, but you have to search for it a little bit more. It's not just blindly investing in the S and P index. And so I do think that 2025 has shown that there's some appetite for a rotation out of growth into value. We've seen that the last couple of months, the beginning of this year was a really strong rotation from growth to value. And I think that's, that's going to continue and we've positioned ourselves, you know, to benefit from that rotation. And it's a valuation decision really what, what sectors look more better valued, which by the way, my opinion is that AI is going to impact virtually every single sector in some way, shape or form. And so there are sectors that are undervalued, that have not been fully priced for perfection. And those are the sectors that I'd rather invest in, like consumer staples, for example. A Walmart is going to monetize AI. They're going to create efficiencies and they may do it faster than Microsoft is able to monetize their AI investments. It's also going to take them less money probably to do it because of the way that they're rolling out AI. It's a little bit of a different business model obviously. And so that's how we positioned ourselves. We're staying diversified. Of course, that's always the story. And so we want to keep at least 20 to 40% of the portfolio in international stocks. International generally has a way less tech, way lower tech sector exposure than the US and so our tech exposure is somewhere around 15 to 18%.

Right.

Right now where the S and P is going to be 35 to 40. And, and I think that that is going to protect us against any downsides with this AI bubble that we've been speaking of.

Great. Paul, anything you want to add?

You know I, I don't want to, I don't want our listeners to think we, we hate tech because it seems to be a thing. We don't, we, we definitely don't. And, and the, the economy is shifting towards it. But yeah, to Brandon's point, be just being focused on those quality factors I think is incredibly important. And you know, Staples, these other industries. What brand saying Walmart. I love the Walmart use because it's just like the most boring mega corporate conglomerate. But anyways we're not necessarily in love with Walmart but it's just a, it's just a relatable company for that concept. But what he's saying is, you know, OpenAI might take 5, 10, 15 years to generate the revenues to, to justify its, its private valuation. Whereas Walmart's going to figure out how to save money like now, right? Whether it's their call center, whether, you know, whether it's their logistics, whether this and that, they're going to realize efficiencies in their business model using the technology. And so, and it's not sexy, it's not going to double their revenues, but it might increase their profit margins 4, 5, 6% percent and could increase, you know, their, their, their income by 20, 30, 40%. Same way dental office. If you can, if you can lower your supplies, lower your labs incrementally, you can, you can increase your operating margins exponentially. The same is true at, in a corporate infrastructure. And so that, that's really what we're looking at is what, what are smart prudent companies balance sheet oriented like I said no one cares about balance sheets in bull markets, but they certainly do in, in bare markets and then internationals. Internationals have been great protection against, you know, volatility in the dollar. Had a great year beating the US Markets, which we haven't seen in quite some time. And, and we expect that to potentially continue.

Great.

All right.

Just our, our standard theme or philosophy as we help our clients with their assets is to not fear these market cycles, even big ones, but always look at these crises. As the quote has often been stated, don't let a good crisis go to waste. If the stock market does fall dramatically, everything becomes cheaper. And that's the time to really try to create that surplus. Manage your spending, be disciplined around your, your finances and buy. That's, that's when people really make money, is when there's blood on the streets, as I think Warren Buffett says, or somebody. That's the time when you really make your money. And it feels very difficult to do it, though, because you feel like it's just going to keep falling and falling and falling. And very few people hit the bottom. Exactly right. But if you're somewhere near the bottom 25% of that decline, you're going to end up having a pretty good ROI on that. Just give it a few years for it to do its thing and come back, as it always does. But, you know, it's like a forest fire. The stock market sometimes needs to flush out the garbage that exists. And right now I think there's an increasing amount of, maybe I won't use the word garbage, but.

Unpredictability in how much productivity is actually going to be able to be monetized from the AI momentum right now. So this has been really productive. Thanks, guys, for joining. Any final comments before we part ways until next quarter?

Yeah, I just mentioned, I really like what Paul said, is that we're not, we don't want to scare anybody from the tech space. Right. What we're, what we're saying is position yourself to capitalize on a value rotation. Preserve tech. You know, you want to keep tech in your portfolio because to your point, Wes, markets are unpredictable and this, this thing could go higher for the next year or two. And so that's the main theme, I think, for 2026, is to adapt, diversify, and stay the course and really try to find value under the hood where it exists. It's out there. You just got to look a little harder.

Awesome.

And I would just add, do your planning. When times are good, don't wait till times are bad. And so make sure we're thinking about budgets, make sure we're thinking about contingency plans allocation now times are good, relatively speaking. And when that blood on the street scenario happens, who knows when doesn't matter because you've already got your plan in place.

And for those of you nearing retirement and will be living off of your assets in the near future, I. E. The next, you know, right now to the next maybe few years, it might not be a bad idea to go and revisit your risk tolerance and really mentally simulate what would happen. How would you how would your sleep at night change if the S and p fell by 50% and let's say your portfolio fell by 25 to 35%? Just do the math. Think how would you feel at night and then potentially make some changes. Now that said, you don't want to let emotions drive wholesale decisions. I don't recommend just moving to cash or going all into gold. But just think about where you are situationally in the evolution of your own life and make your investment choices based on that. And then I think you'll be as ready as you can be to weather any storms that may be coming. Thanks guys for joining. Until next quarter, have a great one.