We love having you on because of the historical context. You can put today's investment in buys. But I mean, we look at what's happening in the market when you're thinking of a juggernaut of $100 billion coming into

US in energy. Well, it feels like a lot of money is already going in that direction. Yeah, well, when you rebase it relative to sales or relative to market cap, I mean, you haven't really seen that much

of a move. I think we talk about this all the time with money funds sitting on the sidelines, how much cash is on the sidelines or how much cash in terms of nominal CapEx. But when you actually renormalize it, given the move that we've seen in the

marketplace over the last five years, it's a much lower percentage than you would think. Interestingly enough, specifically for tech stocks, and I would say more specifically for software stocks, CapEx is very much an alpha factor, meaning that that spending is usually a good

thing for stocks because it's very correlated to earnings growth. Okay. So I'm not going to ask you to opine as to where exactly Masayoshi Son is going to be putting his investment. But if you are looking at, and every day, whether it's retail or institutional

investors right now allocating to opportunities, do you have to be put off by some of the valuations right now? Or actually, do you keep chasing the momentum and keep chasing the names that have done well? Well, it's interesting. So technology has had a little bit of

Underperformance over the course of the last six months. And because earnings growth and free cash flow has been so strong, you're actually out of an anomalous valuation situation. So, I define anomalous valuation as top quartile.

So, we have fallen out of top quartile levels, which is where you see the risk-reward become fairly negative for tech. Now, as we enter 2025, coming out of that top quartile valuation zone, I actually think it sets up for a pretty positive

risk-reward. And for all the talk about momentum stocks, on our data, when you look at it specifically within technology, I'm not seeing any anomalous behavior, meaning I'm not seeing top quartile relative performance over the last year, and I'm not seeing top quartile valuation on

that top quartile of momentum, meaning that because earnings and free cash flow are so strong, there is no valuation situation where you're saying you're overpaying on a consistent basis for technology stocks that have been leaders in the S&P 500. Wow.

So, it still feels like there are basically opportunities in the market. What about the next tear down? We started to see software names really come into the rise as people started to reallocate, perhaps from the semiconductor trade, out to the killer applications being borne out.

Is that something that you'd like to see more of? No, that's a great question and a great point. Because of the three big areas within technology, if you say hardware, software, semis, where are the opportunities?

It looks very interesting, the data in
software. To me, given the strength in free cash
flow and earnings valuations, we're actually in the bottom half of the
distribution from a valuation perspective.
When you look at all the data back to

1962, what you see is that it very much
empirically skews your risk-reward odds for the software sector specifically.
So when you have strong growth and valuation support, it's a very positive
risk-reward for a sector. Of those three,

hardware, software, and semis, software is
the only one of those three industries that looks like that.
So I think as we enter 2025, that's where it looks like the opportunities
are to me. And in the US, today, yes, in the US.
What of the US exceptionalism on this

trade that we all keep talking about?
I mean, is it going to dominate for 2025?
It looks to me, it does look like that. So everything outside the US, whether
you want to talk about EEM or ACWI ex-US, what you find is that
valuation screen looks like a

quantitative value trap to me, meaning
that when you bottom that bottom quartile relative valuation on earnings
or free cash flow, you only have a 30% odds of outperformance.
Like, 30% is not zero. But at the same time, it's hard to say
that that valuation is a critical

driver.
And the reason why it's not a driver is because often international stocks are
cheap for a reason, even on a sector-neutral basis, taking out technology,
median stock to median stock. The S&P 500 outgrows their international
peers by about 300 to 400 basis points a

year on earnings, and it's growing every cycle. So unless you think something is going to change, that hasn't been the case over the last 15 years. I think the risk-reward is still more favorable in the US. This is why your historical context is so

important to this. I go, therefore, to the macro picture. We are, of course, seeing the macro news on our own investment coming from massive, but we're also seeing the macro news of we're waiting on rates to go down. What does that mean for that cash on the

sidelines that still perhaps is waiting to enter? Yeah, so rates, let's talk about rates being an alpha factor for the market. I think people get a little confused in terms of thinking about whether or not the playbook is a good thing or a bad thing.

Rates are not the critical driver. Earnings growth is the critical driver. So when you look at the Fed from a playbook perspective, sometimes the Fed's cutting because they have to. That's not good for the market. Sometimes the Fed is cutting because they can, and what you see from a

quantitative, differentiable from those, like trying to divide those two, is your starting point on earnings growth matters a lot. Our starting point of positive earnings growth usually predicts a more bullish situation for the S&P 500. Your starting level of the Federal

Reserve matters a lot as well because that's essentially a mathematical definition of the Fed put, meaning if the Fed is high relative to inflation, they can do something to the extent that the economy is hit with a shock. That's a good thing.

That's our situation as we enter 2024.
And most importantly, the Fed can definitively change the willingness to lend
of banks because that's been in contractionary territory and because
that slightly improving earnings growth is likely to broaden out in 2025.
Including, those small businesses have

been lagging and that skews your risk
reward, being pretty positive, as we enter 2025.
But then how risk-hungry do the edges of the market become?
I mean, we look at a day where MicroStrategy, which has basically been
a leveraged bet on Bitcoin, hugely

outperformed Bitcoin, and in and of itself, is
now going to be added to the Nasdaq. I mean, are we going to see more money
flow to those sorts of riskier edges? Now, that's a great question.
So, I mean, without talking about

the idiosyncratic names, when I look at
quality, which is sort of the opposite of the fact that you're talking about,
it's been a darling of the factor, much like low volatility was only underperforming, I
think, three times in the last 20 years.

Well, that's left quality stocks fairly
expensive, and that doesn't necessarily mean those high-quality stocks need to
underperform by a lot. But to the extent relative earnings, or
those relative returns, start to inflect lower, that usually does lead to
underperformance in the factor.

So for anybody with a quality bias, I
think about scrubbing your portfolio and thinking about better risk-reward in
what have been historically riskier names.

2025 Tech Momentum

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