Jim Caron

Consumer sector is undervalued; strong jobs and falling energy prices will boost consumer spending and lift the sector.

US equities remain attractive because earnings are strong, multiples are contracting, and nominal GDP growth of 6.1% supports further gains. The market is broadening, with value outperforming growth by 10 percentage points in the first half, and the rotation into cyclicals is supported by a resilient consumer.

Value stocks have outperformed growth by 10 percentage points in the first half, and the rotation into low-beta cyclicals should persist as the economy remains resilient and investors move out of momentum tech names.

Underweight duration, overweight credit: high-quality credit benefits from low defaults and strong cash flows, while duration is risky with sticky inflation and potential rate hikes.

They maintain underweight duration in their portfolios because they believe yields will stay elevated due to inflation and the Fed not cutting rates, and this positioning serves as a better hedge relative to equities.

Speaker explicitly states "Technology, AI, defense-related, another area that was exceptional growth." Defense-related technology spending is linked to exceptional growth, compounded by the AI thematic. Positive view on the growth trajectory of technology firms involved in AI and defense. Geopolitical de-escalation reduces defense urgency; AI hype fails to materialize in earnings.

Speaker explicitly states "Love the Health Care sector, particularly managed-care areas. That benefits the most from AI over the long run." The sector is positioned to be a primary beneficiary of long-term AI adoption and integration. Favorable long-term structural growth driven by AI tailwinds makes the sector attractive. AI adoption in healthcare proves slower or less impactful than expected; regulatory changes affect managed care.

"Cyclical broadening in the market is one of those [themes] and that is what we are doing... It means small caps and mid-caps relative to large caps." Assuming the economy avoids a recession and the oil shock is absorbed, the market rally will broaden out from mega-cap tech into smaller, cyclically sensitive companies that are currently trading at relatively cheaper valuations. LONG because small and mid-caps offer better relative value if the macroeconomic expansion continues. The oil shock translates into a severe growth scare or recession, which typically disproportionately hurts smaller, cyclical companies.

"Cyclical broadening in the market is one of those [themes] and that is what we are doing... It means small caps and mid-caps relative to large caps." Assuming the economy avoids a recession and the oil shock is absorbed, the market rally will broaden out from mega-cap tech into smaller, cyclically sensitive companies that are currently trading at relatively cheaper valuations. LONG because small and mid-caps offer better relative value if the macroeconomic expansion continues. The oil shock translates into a severe growth scare or recession, which typically disproportionately hurts smaller, cyclical companies.

Private credit markets have ~20% exposure to software (vs 3% in high yield) and are trading at discounts to NAV due to fears of software obsolescence. The market is overpricing the risk of AI disrupting software cash flows. Buying private credit at a discount allows investors to capture yield and capital appreciation as the "software is dead" narrative proves to be exaggerated. LONG. If AI actually causes systemic defaults in SaaS companies, private credit portfolios will suffer significant impairments.

"People are really trying to evaluate the creative destruction that's coming out of... large language models... If you invest in a lot of things that are not subject to creative destruction, then you're probably not going to have a very high return." This is a bifurcated trade. The market is selling software because it fears AI will replace "seats" (SaaS pricing model). The trade is to LONG the disruptors (AI infrastructure/models) and AVOID the "safe" low-growth legacy companies that are insulated from change but offer no upside. LONG volatility/disruption (AI) and AVOID the "Halo Trade" (low obsolescence, low growth). Identifying the winners of "creative destruction" is difficult early in the cycle; many disruptors will also fail.

Caron identifies a "cyclical broadening" and specifically highlights Caterpillar (CAT) as a "very strong, very old-school" company employing technology well. While software is hit by AI fears, the "real economy" (Industrials) is benefiting from productivity gains and a shift in labor share to skilled trades (electricians, welders). LONG Industrials. Global economic slowdown reducing demand for heavy machinery.

Caron identifies a "cyclical broadening" and specifically highlights Caterpillar (CAT) as a "very strong, very old-school" company employing technology well. While software is hit by AI fears, the "real economy" (Industrials) is benefiting from productivity gains and a shift in labor share to skilled trades (electricians, welders). LONG Industrials. Global economic slowdown reducing demand for heavy machinery.