It may be time to get 'bullish' as 2025 winds down, reasons to invest outside the US

Key Concepts

• Market Performance: Major stock indices (Dow, S&P 500, NASDAQ) showing gains, with NASDAQ potentially ending a losing streak.
• MAG 7: Mixed performance within the "Magnificent Seven" group, with Nvidia up and Alphabet down from its all-time high.
• Semiconductor Stocks: Generally performing well, including Nvidia, Broadcom, TSM, and AMD.
• Cryptocurrency: Bitcoin experiencing a significant bounce.
• Robinhood: Stock up due to expansion into prediction markets.
• Commodities: Oil (Brent crude, WTI) and gold futures showing a bounce.
• Federal Reserve Beige Book: Indicates cooler consumer spending and hiring, but higher prices in early November.
• Economic Indicators: Consumer spending decline, slight deterioration in the job market (increased layoffs, hiring freezes, managing hours), and AI's impact on entry-level positions.
• Inflation: Moderate price increases reported, with retailers and manufacturers facing higher costs due to tariffs.
• Monetary Policy: Beige Book data to inform the Fed's upcoming policy meeting, potentially influencing rate cut decisions.
• Global Investing: Argument for increased international exposure due to a weakening dollar and potential for non-US assets to outperform.
• AI Investment: AI's broad impact across sectors, particularly service-based industries with high human costs.
• Value Stocks: Definition, identification using Yahoo Finance screener, and risks of value traps.
• Options Trading: Strategies for playing AI and specific stocks like Bitcoin, Meta, and Vertiv.
• Tesla: Stock movement influenced by CEO Elon Musk's posts on robo taxis and AI chips.
• Chinese Military Companies: Pentagon's reported conclusion on Alibaba, BYD, and BYYD.
• Deere: Stock decline following Q4 results and a cautious outlook.
• AI Bubble Debate: Arguments for and against the existence of an AI bubble, comparing current conditions to the late 1990s tech bubble.
• Zscaler: Strong revenue and ARR growth, but stock under pressure due to profitability and outlook.
• Cybersecurity and AI: The increasing importance of AI security and Zscaler's role in providing zero-trust architecture and cost savings.
• AI's Impact on Zscaler: Productivity gains in customer support and software development, leading to potential headcount efficiencies.
• Threat Landscape: Increasing sophistication of cyber threats, with hackers leveraging AI, and Zscaler using AI to combat these threats.

Market Performance and Economic Insights

Current Market Trends: As of the closing bell, major stock averages are on track for their fourth consecutive day of gains. The Dow is up approximately 0.8%, the S&P 500 is also up around 0.8%, and the NASDAQ has gained nearly 1%. If this pace continues, it would mark the first positive week for the NASDAQ in four weeks, breaking a three-week losing streak.

MAG 7 and Semiconductor Stocks: The "MAG 7" stocks present a mixed picture. Nvidia is up over 1% today, a reversal from yesterday's decline. Alphabet, while still hovering around the $319 level, is down about 1% from its all-time high. Semiconductor stocks, in general, are in positive territory, with Broadcom, TSM, and AMD also trading higher.

Cryptocurrency and Commodities: Bitcoin is experiencing a substantial bounce, up 3.5% and trading near $90,000. The sustainability of this rally is yet to be determined. Crypto stocks are also in green territory, with Robinhood up 10% following its announcement of expansion into prediction markets, its fastest-growing product. Oil futures (Brent crude and WTI) are up about 1%, and gold futures are hovering around $4,200 per ounce.

Federal Reserve Beige Book Analysis: The latest Federal Reserve Beige Book, released shortly before the market close, offers insights into the US economy. Key findings include:

• Consumer Spending and Hiring: Cooler consumer spending and hiring were observed in the first couple of months of November. Consumer spending declined further, partly attributed to a government shutdown. This aligns with recent cooler retail sales data for September, suggesting a tepid spending pace through November.
• Job Market: A slight deterioration in the job market was noted, with an increase in layoff announcements. Employers are attempting to limit headcount through hiring freezes and only replacing departing employees. They are also managing employee hours to adjust to workload fluctuations.
• AI's Impact on Jobs: Some firms reported that AI has replaced entry-level positions or increased productivity, thereby curbing hiring.
• Labor Costs: Employers are facing higher labor costs, particularly due to increased healthcare insurance premiums.
• Inflation: A "moderate increase in prices" was reported. Retailers and manufacturers are experiencing higher costs, largely due to widespread tariffs. The extent to which these costs are passed on to consumers varies based on demand, competition, and consumer price sensitivity.
• Price Declines: Prices for certain materials have declined due to weaker demand, reduced tariffs, or postponed tariff implementation.
• Future Outlook: Businesses anticipate continued cost increases from tariffs, but plans for passing these costs to consumers remain mixed.

Implications for Fed Policy: The anecdotal evidence from the Beige Book will be crucial for the Federal Reserve's policy meeting in two weeks, especially given the lack of more current official government data available before the meeting. The cooling consumer spending, a softer job market, and mixed signals on price pass-through could sway the Fed towards a rate cut.

Global Investment Opportunities

The Case for International Exposure: Sahil Matani, Director at 91 Investment Institute, argues that investors should look globally for opportunities. He notes that while the S&P 500 is up 16% year-to-date, the Nikkei is up 25%, and the Hang Seng is up 30%. Matani believes we are still in a "Goldilocks world" for next year, characterized by falling inflation, high growth expectations, and easy policy. He anticipates a multi-year weakening of the US dollar, which historically benefits emerging markets and non-US assets. While US assets are expected to perform well, Matani suggests that emerging markets and international assets will likely outperform.

Specific Regions and Sectors:

• Korea: Was the best-performing asset outside the US this year.
• China: Matani believes the "net issuance" issue, which has historically detracted from returns, has permanently changed. He expects China to perform well, particularly AI-linked stocks.
• Emerging Markets (EM): Historically, EM has shown the highest beta to a falling dollar, benefiting significantly from dollar depreciation.

Portfolio Allocation: Matani advises thinking in terms of cycles. While US assets have dominated recently, cycles from 2002-2011 saw non-US assets perform exceptionally well. He suggests a "bigger than market weight" allocation to international assets, reducing the current US asset weighting (which touched nearly 70% of MSCI World) to a much lower level.

AI Investment Beyond the US: Unlike the internet era where gains were concentrated, AI is expected to have a broader impact through cost efficiencies, productivity gains, and new business models. Matani sees the most significant AI investment opportunities in service-based industries with high human costs, such as finance and professional services. He expresses confidence in Nvidia's guidance and believes the AI "bubble" is unlikely to burst soon. However, he notes that investors will increasingly question the productivity gains that justify massive AI data center spending and the feasibility of cutting global labor costs significantly. While not pessimistic, he believes AI will need to demonstrate more progress to earn confidence. He sees reduced risks of a "super bubble" due to increased investor skepticism but maintains that AI is a transformative technology.

Fed Policy and Market Dynamics: Matani believes inflation is set to come down, leading the Fed to adopt an "easy mode" policy, prioritizing unemployment over inflation. He anticipates Fed rate cuts in December and several more next year, projecting 2026 as a strong year for investors. He emphasizes the importance of understanding the underlying growth and inflation dynamics to inform investment strategy and policy expectations.

Identifying Value Stocks

Defining Value Stocks: A value stock is defined as a stock priced low relative to its earnings, assets, or cash flow, offering potential upside if expectations improve. It's akin to finding a good quality item on sale that is temporarily out of favor or in the wrong size pile.

The Risk of Value Traps: A "value trap" is a stock that appears cheap but continues to fall because its underlying business is deteriorating, not just due to temporary negative sentiment. This can be caused by declining earnings, shrinking industries, or impending dividend cuts.

Using the Yahoo Finance Screener: The Yahoo Finance Screener can be used to identify undervalued growth stocks. A preset search for "undervalued growth stocks" yields over a hundred names. Key filters include:

• Trailing Price-to-Equity (P/E) Ratio: 0 to 20 (paying under $20 for each dollar of last year's profits).
• PEG Ratio: Below 1 (price is low relative to earnings growth).
• Earnings Per Share (EPS) Growth: At least 25% above one year ago.
• Exchange Listing: NYSE or NASDAQ.

Refining the List: Further refinement can involve:

• Market Capitalization: Excluding companies under $1 billion.
• Dividend Yield: Sorting or filtering for forward dividend yield to identify companies paying a dividend. However, caution is advised as a high dividend yield can sometimes signal an expected dividend cut.

Examples of Potential Value Traps:

• Pfizer: Down 3% year-to-date, pays a significant dividend (6-7%), but cash flow is tighter due to pipeline rebuilding, resulting in a weak PEG ratio. It represents "real income today with real questions about longer-term growth."
• Ford: A cyclical value stock with a 5-6% dividend yield. Profits are under pressure from EV losses and a choppy auto cycle, with reduced guidance. Its negative PEG ratio indicates expected earnings shrinkage. Despite being up over 30% this year, it's down 50% from its 2022 highs.

Key Watchlist Items for Value Investors:

1. Earnings Results and Guidance: Monitor if profits are still growing or starting to decline.
2. Dividend Changes: Observe hikes, pauses, or cuts, as the income line often shows early signs of stress.
3. Performance vs. Benchmarks: Compare the basket's performance against the S&P 500 or NASDAQ over time.
4. Interest Rate Expectations: Shifts in rates can significantly impact the pendulum between value and growth stocks.

Options Trading Strategies and Market Outlook

Year-End Positioning: Bob Lang, an explosive options technical analyst, advises a bullish positioning into the end of the year, citing seasonal trends like the post-Thanksgiving rally and the Santa Claus rally (last five trading days of the year and first two of the new year). He notes that after this period, market dynamics may change.

Bitcoin and Market Correlation: Lang highlights the correlation between Bitcoin and the broader stock market. He observed Bitcoin and the market rising together in late 2024 and falling sharply together recently. If Bitcoin shows strength, it could signal further market upside. He notes a significant drop in volatility (40% in four trading days), which has been positive for markets and set up strong technical signals.

Options Trade for Bitcoin: While specific options strategies are not detailed, the discussion implies that with reduced volatility, options might become more attractive.

Meta Platforms (META): Lang sees Meta as having bounced nicely off the $680 level on strong volume, suggesting sellers are exhausted. If the stock holds this level on a retest, he expects a move back up towards the $690-$700 range (50-day moving average). He believes a run to the 50-day moving average is achievable by year-end, offering a nice profit.

Vertiv (VRT): Lang identifies Vertiv, a power and cooling company crucial for AI data centers, as a high-flyer with high beta. After a significant pullback from $204 to $145, the stock is bouncing around the 50-day and 20-day moving averages. He suggests a potential pullback to the $165 area before further upside.

• Recommended Trade: A February call option with a $170 strike, costing around $20 per contract. He anticipates the stock reaching $200-$205, leading to a sharp increase in option value.

AI Revolution and Tech Stock Analysis

AI as a Transformative Technology: Dan Ives, Global Head of Tech Research at Wedbush, emphasizes that the AI revolution is still in its early stages, with only about 3% of US companies and less than 1% globally having adopted AI. He contrasts the current situation with the late 1990s tech bubble, highlighting that today's tech giants have substantial balance sheets and free cash flow, and AI has broad enterprise use cases in robotics and autonomy. He likens the current AI phase to "10:30 p.m." in a party that will go until "4 a.m."

Nvidia (NVDA): Ives calls Nvidia the "Rocky Balboa of the AI trade." He believes Nvidia's earnings are underestimated by 15-20% for the next year, driven by demand from sovereigns in Asia and a potential re-entry into the China market. He notes the 12:1 demand-to-supply ratio for Nvidia chips and that even major players like Meta are struggling to secure enough supply. He dismisses concerns about Google's TPU chips as a significant threat to Nvidia's dominance, viewing them as an additional catalyst for Google rather than a direct competitor to Nvidia's core business. His price target for Nvidia is $250 for the end of next year.

Palantir (PLTR): Ives describes Palantir as the "messy of AI," with unparalleled use cases. He believes it has the potential to become a trillion-dollar company within two to three years, despite its current high valuation. He anticipates significant growth in commercial bookings.

Tesla (TSLA): Ives views Tesla as a pure technology company, not just a car manufacturer, and believes investors underestimate its potential. He sees Elon Musk as a "wartime CEO" focused on robotics and autonomy. His base case price target for Tesla is $600, with a bull case of $800. He considers Tesla and Nvidia the two best companies in physical AI.

Other Tech Stocks:

• Salesforce (CRM): While not in Ives' top 10, he is positive on Salesforce's turnaround under new leadership, drawing parallels to Microsoft's strategy under Satya Nadella.
• Amazon (AMZN) and IBM: Also viewed positively and included in Ives' "Ives AI30" ETF.
• Intel (INTC): Ives acknowledges Intel's improved position due to government backing and its inclusion in the AI revolution, though he still sees an uphill battle in innovation.

OpenAI's Entrenchment: Ives does not view OpenAI's entrenchment as a negative, comparing it to foundational companies like Oracle and Microsoft. He sees these relationships as crucial to the AI revolution's progression.

Zscaler's Performance and AI Security

Zscaler's Financials and Market Reaction: Zscaler reported strong top-line growth with Annual Recurring Revenue (ARR) up 26% and revenue growth also at 26%. Remaining Performance Obligations (RPO) accelerated to 35% year-over-year, and free cash flow margin was 52%, achieving the "rule of 78" (revenue + free cash flow margin). Despite these strong results, the stock is under pressure due to concerns about profitability and outlook.

Addressing Analyst Concerns: CEO Jay Chaudhry clarified that the strong growth is not solely due to the Red Canary acquisition. He stated that Red Canary's contribution margin is relatively small, and its primary value lies in its "generative technology" for security operations. Organic growth and ARR growth were strong even without Red Canary.

Enterprise Spending and Zscaler's Value Proposition: Chaudhry described the enterprise market as tight with increased deal scrutiny. However, Zscaler is succeeding by addressing two key enterprise needs:

1. Cybersecurity: Enterprises prioritize cybersecurity, especially with the convergence of AI and security.
2. Cost Reduction: CIOs are seeking simplification and consolidation to reduce costs. Zscaler's platform can eliminate numerous network and security point products (firewalls, VPNs, routers, switches), offering significant cost savings. By combining strong security with zero-trust architecture and cost savings, Zscaler has a robust pipeline and is closing deals.

Competitive Landscape: Chaudhry believes competition has lessened at the high end of the market. He differentiates Zscaler from firewall companies, stating that firewalls are not zero-trust architecture and have failed to prevent breaches. He compares this to comparing an electric car to an internal combustion engine car, where the latter can never achieve zero emissions. He also dismisses smaller, money-losing companies as platform-level competitors. Zscaler's primary challenges are "inertia, lack of education, and lack of awareness" in the market.

AI and Cybersecurity:

• Customer Implementation: Zscaler helps customers implement AI by securing AI applications. This includes products for red teaming, guardrailing, and generative exchange. A strong foundation of zero-trust architecture is also essential for good AI security.
• AI Cycle: Chaudhry believes we are in the early stages of the AI cycle, but AI-driven security threats and attacks are emerging (e.g., deep fakes, hijacked AI agents). AI is acting as a catalyst for the security business.
• AI's Impact on Zscaler: Zscaler is experiencing tangible productivity gains from AI in customer support (faster case resolution, better training for support engineers) and software development (testing, code generation). These gains translate to a lower headcount increase than otherwise would be needed, with productivity improvements estimated between 10-15%.

Evolving Threat Landscape: Chaudhry notes that the threat landscape is worsening due to increased online business and the availability of AI tools for hackers. Hackers are using AI for automation and to identify attack surfaces. However, Zscaler is leveraging AI to combat these threats, analyzing half a trillion transactions daily to identify malicious activity earlier in the reconnaissance phase. He believes "fighting AI with AI" is key to customer safety.