Keep an eye on ‘Average Joe’ stocks, portfolio manager says

Key Concepts

• MAG 7: Refers to the seven largest technology companies (Microsoft, Meta, Apple, Amazon, Nvidia, Alphabet, and Tesla) dominating market performance.
• Dovish Fed: A Federal Reserve stance favoring lower interest rates to stimulate economic growth.
• Basis Points: A unit of measurement used in finance to describe the percentage change in an interest rate or yield (100 basis points = 1%).
• Dual Mandate: The Federal Reserve’s goal of maintaining stable prices (controlling inflation) and maximizing employment.
• Second & Third Derivative Stocks: Companies benefiting from the AI buildout, rather than the hyperscale companies doing the buildout (e.g., networking, data center, power, construction, and industrial stocks).
• Trade Tariffs: Taxes imposed on imported goods, impacting international trade and potentially inflation.

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Market Sentiment & Economic Outlook (Jason Katz & Lindsay Bell)

The discussion began with a look at pre-market futures, showing a mixed signal – Dow pointing lower, while S&P and NASDAQ were trending upwards. Yesterday’s market gains were attributed to strong performance in the technology sector. A significant geopolitical factor was introduced: President Trump’s announcement of increased tariffs on South Korean imports (autos, lumber, pharmaceuticals, etc.) from 15% to 25%, driven by dissatisfaction with the delayed implementation of a previously signed trade deal.

Jason Katz emphasized a fundamentally positive outlook, stating markets have “gotten their mojo back” following the “Greenland” situation (unspecified event). He highlighted several key drivers: tax cuts from the “one big beautiful bill,” anticipated deregulation, the expectation of a “dovish Fed chair” appointment, and the approaching midterms focusing on affordability. Katz predicts earnings growth of 10-12% and economic growth of 5% for the year, characterizing the setup as “constructive” for stocks, with average stocks potentially outperforming the broader index.

Lindsay Bell concurred with the broadening of market participation, noting the outperformance of industrials, materials, small caps, and transports year-to-date. She anticipates 2026 as a year of further market broadening, with sectors beyond the “MAG 7” experiencing double-digit earnings growth. While acknowledging the continued importance of the MAG 7, Bell believes the “493 other stocks within the index” will also contribute significantly to market gains.

Tech Earnings & AI Investment (Lindsay Bell)

The conversation shifted to upcoming earnings reports from Microsoft, Meta, and Tesla (tomorrow) and Apple (Thursday). The primary focus for investors is on evidence of AI-driven profit growth, or at least a positive forecast. Bell noted that the setup for the MAG 7 is relatively favorable due to underperformance in stock prices and reduced valuations compared to the previous year. However, she cautioned that investor scrutiny of AI spending, revenue generation, and the path to profitability will be intense.

Bell specifically highlighted the outperformance of “second and third derivative stocks” – companies benefiting from the AI buildout (networking, data center, power, construction, and industrial stocks) – as opposed to the hyperscale companies directly investing in AI infrastructure. This suggests a shift in investment focus towards companies enabling the AI revolution rather than those at the forefront of its development.

Federal Reserve Policy & Interest Rate Outlook (Chris McMahon & Jason Katz)

The Federal Reserve’s policy meeting, commencing that day, was discussed. The consensus expectation is for a hold on interest rates, following three consecutive cuts last year. Investors are primarily seeking guidance on the future rate cut path. Chris McMahon emphasized the need for the Fed to signal the possibility of at least two rate cuts later in the year, alongside continued broadening of market participation. He pointed to the outperformance of consumer staples as an indicator of this broadening. McMahon predicts continued double-digit market returns if these conditions are met.

Jason Katz believes rate cuts are unlikely until later in the year (June), attributing the delay to a “pressure campaign” from the administration that has “backfired.” He suggested the President would have preferred a different candidate for Fed chair. Regardless of the appointment (Walsh or Rick Reer), Katz anticipates a “doubbish” stance, creating a constructive environment for both equities and fixed income. He described the situation as a “tale of two Kevins, and now you can throw a Rick into the mix,” referencing potential Fed chair candidates.

Political Influence & Fed Independence (Lindsay Bell)

The potential for political interference in the Federal Reserve’s decision-making process was raised, specifically referencing President Trump’s comments and his selection of the next Fed chair. Lindsay Bell predicted that Jerome Powell will strongly defend Fed independence during the post-meeting press conference, emphasizing the Fed’s commitment to its “dual mandate” (stable prices and maximum employment) rather than White House directives.

Bell characterized the Fed as being in a “risk management mode,” navigating a challenging environment of somewhat elevated inflation and a cooling labor market. She noted that the market has priced in 125 basis points of cuts, but consensus is not universal, as the decision rests with the committee.

Conclusion

The overall sentiment expressed was cautiously optimistic. While geopolitical risks (trade tariffs) and political pressures on the Federal Reserve exist, the underlying economic fundamentals – driven by tax cuts, deregulation, and potential rate cuts – are seen as supportive of continued market growth. A key takeaway is the anticipated broadening of market participation beyond the dominant MAG 7 stocks, with opportunities emerging in sectors benefiting from the AI buildout and a more diversified economic landscape. Investors are keenly focused on upcoming earnings reports for signs of AI-driven profitability and clarity on future growth prospects. The Federal Reserve’s guidance on future rate cuts and its commitment to independence will be crucial factors shaping market direction in the coming months.