Integrating AI into companies ‘is VERY powerful,’ says Roundhill Investments CEO

Key Concepts

• Soft Landing: A scenario where inflation is brought under control without causing a significant economic recession.
• AI (Artificial Intelligence): The development of computer systems able to perform tasks that normally require human intelligence. Specifically, Generative AI is highlighted.
• Magnificent Seven: The seven largest US technology companies (Alphabet/Google, Apple, Amazon, Meta, Microsoft, Nvidia, and Tesla) that have driven significant market gains.
• Market Rotation: A shift in investment from one sector or asset class to another.
• PCE (Personal Consumption Expenditures): A measure of the price changes of personal goods and services, used by the Federal Reserve to gauge inflation.
• PPI (Producer Price Index): A measure of the average changes in selling prices received by domestic producers for their output.
• KBW (Keefe, Bruyette & Woods): A group focused on financial services companies.
• Duopoly: A market structure in which two firms dominate the industry.
• Full Stack (in AI context): Investing across the entire AI value chain, from chipmakers to software developers and infrastructure providers.
• Metaverse: A network of 3D virtual worlds focused on social connection.

Market Outlook: 2025 Setup for Stronger 2026 Performance

The discussion centers around the current market conditions and outlook for 2025 and 2026, with a focus on potential investment opportunities. Both Elizabeth Evans of J.P. Morgan and David Kotok of Round Hill Investment see 2025 as setting the stage for a robust 2026, driven by a soft landing, solid growth, and moderating inflation.

Economic Data and Federal Reserve Policy

Recent economic data, specifically PPI and PCE numbers, suggest disinflation is occurring, leading to a pause in Federal Reserve policy. This pause is contributing to market volatility. Despite this, the consensus is that leadership will remain concentrated in large-cap technology, but broadening is expected in 2025. Evans anticipates equity growth in both the S&P 500 and the Nasdaq, projecting returns of +1.9% and +2.8% respectively, with expectations of 2.4% by the end of 2026. Earnings are currently tracking at 12%.

AI and Market Exuberance

A key debate revolves around whether the current enthusiasm surrounding AI represents a bubble similar to the dot-com bubble of 2000. Evans argues against this, citing that short interest remains high (88th percentile) and equity inflows were relatively subdued last year ($100 billion into equity mutual funds versus $1.6 trillion into money market funds). She notes that while some AI-related names were flat, there hasn’t been the excessive pre-top exuberance seen in the past.

Sector-Specific Opportunities

Several sectors are highlighted as potential investment opportunities:

• Regional Banks: Evans points out that regional banks have underperformed large money center banks by 20% and believes there’s a “catch-up” opportunity. Positive factors include lessening credit concerns, a deepening yield curve, and a favorable regulatory environment. The KBW Regional Banking Index is specifically mentioned.
• Defense Sector: Huntington Ingalls Industries (HII) is singled out as a particularly strong performer, up 49% since September. Its duopoly in shipbuilding, coupled with the Trump administration’s commitment to military capabilities, is seen as a key driver.
• Technology (Large Cap): Google (Alphabet) is favored, with the expectation that its partnership with Alphabet and the upcoming Gemini launch will drive continued upside.
• Industrial Energy/Infrastructure: Baker Hughes is presented as a miscategorized company. While traditionally viewed as an oilfield services provider, it’s evolving into an industrial energy and infrastructure play, deserving a higher valuation multiple (currently trading at 9-10x, compared to what would be expected for a traditional oilfield services company).
• Metaverse: Round Hill’s MTV ETF, focused on the metaverse, has performed well due to companies integrating AI into their ecosystem buildout.

Market Resilience and Breadth

Kotok emphasizes the resilience of corporations and the productivity gains potentially driven by AI. He argues that the current bull market is not “crazy exuberant” and has room to run, referencing historical market patterns (“history doesn’t repeat, but it rhymes”). He highlights a positive signal: increased market breadth, with over 62% of names participating in the rally since late November, contrasting with the previous concentration in the “Magnificent Seven.”

ETF Opportunities

Kotok identifies three ETFs with long-term potential:

• CHAT (Certain Chat Progress): An actively managed ETF focused on generative AI, up around 50% in 2025, investing across the full AI stack (including Nvidia, Samson, and Micro).
• MTV (Roundhill Metaverse ETF): A play on the metaverse, benefiting from AI integration.
• SMH (VanEck Semiconductor ETF): While acknowledging Micron’s recent strong performance and potential cyclicality, Kotok believes the structural demand for memory and storage will continue to support the stock.

Notable Quotes

• Elizabeth Evans: “We think leadership remains a concentrated in mega-cap technology. But we do think unlike 2025 will start to see a broadening out.”
• David Kotok: “History does not repeat, but it rhymes.”
• David Kotok: “Corporations were incredibly resilient…there is a productivity happening.”

Technical Terms & Concepts

• Yield Curve: The difference in interest rates between long-term and short-term bonds. A deepening yield curve is generally seen as a positive economic sign.
• Short Interest: The percentage of a company’s shares that have been sold short, indicating bearish sentiment.
• Parabolic Move: A rapid and sustained increase in price.
• Full Stack: In the context of AI, refers to investing in all layers of the technology, from hardware (chips) to software and applications.

Logical Connections

The conversation flows logically from a broad overview of economic conditions and market outlook to specific sector and ETF recommendations. Evans establishes the macroeconomic context (soft landing, inflation), while Kotok reinforces the bullish sentiment with historical data and observations about market breadth. Both then identify specific areas where they see investment opportunities, supported by company-specific examples and analysis.

Data & Statistics

• S&P 500 Return (2025): +1.9%
• Nasdaq Return (2025): +2.8%
• S&P 500 Return (Expected by end of 2026): 2.4%
• HII Stock Performance (Since September): +49%
• CHAT ETF Performance (2025): Around 50%
• Short Interest: 88th percentile
• Equity Inflows (2024): $100 billion (equity mutual funds) vs. $1.6 trillion (money market funds)
• Regional Banks Underperformance: 20% relative to large money center banks.

Synthesis/Conclusion

The overall takeaway is a cautiously optimistic outlook for 2026, built on the foundation of a resilient economy and the continued growth of AI. While acknowledging potential risks, both Evans and Kotok believe the market has room to run, with opportunities in sectors like regional banks, defense, and technology, as well as through targeted ETF investments. The key is to focus on companies demonstrating strong fundamentals and benefiting from broader economic trends, rather than chasing speculative bubbles.