Q1 '25 Asset Allocation Viewpoints: Views from David Giroux on Market Shifts

Christina Noonan

Hello, everyone, and thank you for joining us for today's quarterly Asset Allocation Viewpoints webcast: “Views From David Giroux on Market Shifts.”
After two consecutive strong years in equity markets and post-election optimism driving markets higher to start the year, we’ll delve into where we're still finding attractive opportunities. We'll also discuss how potential policy shifts and the mixed economic backdrop could impact our outlook and tactical positioning.

So now, let's take a look at T. Rowe Price’s Multi-Asset Division, the host of today's event. Our team is dedicated and experienced and manages over $530 billion in assets. Our investment approach is anchored by three key principles: strategic portfolio design, tactical asset allocation with a 6- to 18- month investment horizon, and active security selection driven by our robust research platform.
OK, let's introduce our panel.

I'm Christina Noonan, a portfolio manager in the Multi-Asset Division and today's moderator. Joining me are Head of Multi-Asset and CIO, Sébastien Page, and our special guest, David Giroux.
David, who joined this webcast this time last year, is the portfolio manager of the U.S. Capital Appreciation Strategy and Head of Investment Strategy and CIO for T. Rowe Price Investment Management, or TRPIM. David is a five-time nominee and two-time winner of Morningstar's Fund Manager of the Year award in the Allocation category and the Capital Appreciation Fund, available to U.S. investors, has also won 22 Best Fund awards from Lipper.
Just recently, David achieved a significant milestone in one of his U.S.-registered funds by delivering consistent outperformance relative to Morningstar peers over the past 17 consecutive years, demonstrating highly skilled active management. We're thrilled to have him here to share his insights.
Thank you for being with us, David.

David Giroux
Thank you for having me. Thank you for the kind words. Appreciate that.

Christina Noonan
And Sébastien Page, who you may recognize from Bloomberg, CNBC, and a top voice on LinkedIn, is the head of Global Multi-Asset and CIO, overseeing an investment team dedicated to Multi-Asset portfolios. He is a member of the Asset Allocation Committee, responsible for tactical investment decisions and the author of award-winning research papers and the book “Beyond Diversification.”
Sébastien's second book, coming out in April, “The Psychology of Leadership,” is available for pre-order now. So thank you for joining us, as always, Sébastien.

Sébastien Page
Thank you, Christina. I'm super excited to have David Giroux, not only because he’s clearly a legendary investor, but every time we get David on this webinar, we get a huge jump in audience and the ratings are always really good.
So I'm going to talk about the tyranny of high expectations. The expectations are high.

Christina Noonan
No pressure. So today we'll explore the current economic and market backdrop, identify opportunities, and share our thoughts on tactical asset allocation.
We want your input too, so keep an eye out for polls, and please continue to share your questions with us. So let's get started with you, Sébastien. We'll dive into markets soon, but first I want to set the stage talk a little bit about the economy.
So the backdrop has shifted significantly since last year. Believe it or not, people were calling for recession. Now, it seems more optimistic, especially around potential for new policies. Can you talk about how you're feeling about the current economic landscape and the Asset Allocation Committee’s views?

Sébastien Page
I'm feeling good about the economy. It is a consensus view. You don't hear a lot of negative comments about the U.S. economy these days. Now, there is a pessimistic view you can take. And it's usually around the fact that unemployment is going up and it's gone up by 70 basis points. So historically, that's very hard to stop.

You could also say, look, we're in a manufacturing recession and manufacturing PMI’s have been showing contraction for two years. And you can also scare yourself with the yield curve: when it's actually dis-inverting is where it gets scary.
You know there's data there that shows that there's some fragility. You can even build a recession probability quantitatively if you only look at these three things. If the change in unemployment, the manufacturing sector, and the yield curve dis-inverting. That could actually produce a recession probability of 90%.

It can actually configuration that looks like 2007, but I'm positive on the economy because the rest of the data, the majority of the data is positive on the economy and I'm going to go through it real quick.
Are you ready? Here we go.

First of all, we started 2024 with a GDP forecast of 1.2%, and we've continually surprised on the upside. We're trending towards 3% for 2024, so much higher than what we expected. The GDP now measures at 3%.
The composite PMI is above 50, which shows expansion. The Citi Economic Surprise Index is in positive territory and significantly up in six months.

Unemployment is rising, but by historical standards, is quite low at 4.1%. That’s a full economy, and people, especially the high income consumers, are spending. A 30-year average in unemployment is 5.6—far and above 4.1. Unemployment claims are still very low, much below the long-term average.
The ISM manufacturing actually surprised on the upside. Maybe people are stockpiling ahead of tariffs, but industrial production also jumped above expectations. Retail sales are strong.
We've seen a massive jump in small business optimism.

Financial conditions ultimately are loose. Just look at credit spreads. The Fed is easing. Maybe, still, a little bit.
Fiscal spending shows no sign of slowing down. Pedal to the metal.
And then we're talking about deregulation and lower taxes.
Do I sound like a raging bull?

I guess a lot of data that shows we can expect positive growth this year, but it's not a given, and we've seen the markets back in August. Remember we had a bad NFP print. And we've seen how much of a knife’s edge we could be with the economic data. The problem? The problem is clearly…It's…Look, it's consensus. And that's why valuations are so high. That's why stocks have done so well. That's why spreads are at a bottom, bottom range of their historical range.
We can look at a chart here and we'll pull it up on the on the slide.

Let's just remember that if you add up real GDP growth and inflation, and you're looking at 5% or maybe even 6%, if you look at this chart and you draw a line to the left. You realize that 6% or even 5, 5.5% nominal GDP growth. Let’s say that’s what we get this year. It's actually higher than any calendar year post-financial crisis and pre-COVID.

These are still decent levels of nominal growth. Again, the tyranny of high expectations. Most people expect this. We have very high valuations. That's what we'll talk about today, I'm sure.
But on the economy, because your question was about the economy, I think things are looks, they look just fine in aggregate.

Christina Noonan
Thanks, Sébastien.

So, let's bring you into conversation, David. So does look positive for a lot of the reasons that Sébastien highlighted. What's your view on the market or the economic backdrop? What maybe gives you some pause?

David Giroux
Well, I would just say, historically speaking, how you feel about the economy today has almost zero predictive capability as to when you're out, right? You know, we all felt really, really good at the end of end of 2017 with a task coming at 2018. And the stock market was down. We thought we're going to recession the end of 2018, right? And then, 2019, people that feel really, really good about the world. We had COVID, the world’s going to end. In 2021, felt much better about the world. 2022, as you said, we all thought we were going to go into recession. Every celebrity CEO was on a recession and we didn't go into recession, right?

It's hard to say the predictive value of how we feel today, you know, has very little predictive value about what we're going to feel in a year, which is that's really what's going to drive stocks.
I think as Sébastien correctly highlighted, there is a lot of optimism. There's a lot of optimism about the new administration. A lot of optimism about deregulation, maybe reshoring. Maybe there's not as much concern around what are some of the negative indications potentially from a crackdown on immigration.

What does that impact have to do on inflation, potentially. There's not much talk about. You know, we now have interest rates that are, you know, mortgage rates close to 6% or 7% now. We have, you know, 10-year Treasuries at 4.6%.
So it's not a great environment for borrowing, which is one thing that attempts to drive the economy. It's been early, early in earnings season, but we're not seeing a lot of loan growth out of the big banks. They're repricing their securities books. But they're not driving a lot of loan growth potentially. So, yeah, I think, I think Sébastien characterized it well with a lot of energy, this idea that, yeah, high expectations and high valuations, it’s not a winning combination.
Usually what you want to do is have low expectations and low valuations; that's we get really excellent, really superb equity returns going forward.

Sébastien Page
You know, David, I had I once said this on Bloomberg TV: the secret to happiness is low expectations. And someone took exception to this and actually reached out to me and said, you want to set high goals in life. And I think that's a misinterpretation of the statement than the ‘tyranny of high expectations.’
What I mean by the ‘tyranny of high expectations,’ I think, is what David means, is when everything is priced for perfection, you need everything to go really well. And if there's a fly in the ointment, like a very efficient new AI model, like DeepSeek, you can see, can wobble the markets 'cause you're fragile. The fragility, the tyranny of high expectations is what we have to deal with.

David Giroux
Yeah, I always think that, as a former industrials analyst, you know, you always want to buy industrials when they were out of favor and they had low valuations. And then people would always, when things felt good about the economy, industrials would go for high valuations and you know, expectation of higher earnings expectations. But the returns were all much so much greater when you had the combination of low valuations and low expectations. Just like, again the returns from buying equities in the summer of 2022, during the middle of COVID. During the end of 2018, the returns 1-2 years out were so much greater than they have been over time.

Christina Noonan
Yeah. So certainly, a lot of optimism priced in. Want to focus on one detail that David brought up, Sébastien, is inflation. A lot of these policies that are being discussed could risk reigniting inflation and we know inflation has been coming down, but still is above the Fed’s 2% target. Will certainly be a topic at their meeting this week. How is the Asset Allocation Committee thinking about inflation and expressing their view on inflation?

Sébastien Page
By the way, the questions are just pouring in fast and furious. I’ve never seen this. Thank you, all. We'll try to get to them.
David, before I answer because I want to know where we're going. Do you think inflation is coming up or down, or what's what would be your base case on inflation.

David Giroux
Again, I would I focus much more on the on the micro analysis than the macro analysis, but what I would tell you is, yeah, I think the expectations for CPI throughout the next 12 months are about 2.5%.
If you look at kind of where we've been running on like a, you know, on a month-over-month basis depending on where the PCI, CPI or PCE, we're kind of just a tiny bit higher than that right now. And again, outside of tariffs, which again, tariffs will most likely be a one-time event that we'll talk about, I’m sure, which shouldn't permanently increase the rate of inflation, necessarily. Yeah, I would argue that we're probably more likely to be on the low end of the 2.5x tariffs than the high end.

Part of what's going right now also is there's a weird way, now you may know this, over the way we calculate financial services inflation. When equity markets go up a lot, I guess you drives, you know maybe 25 basis points of abnormal inflation. Cause the way the Fed calculates it, the more the stock market goes up, the more inflation goes up. Market goes down, inflation goes down.

So if you have a more normal equity market next year, which I think is probably a fair case, that would actually could subtract maybe 20-30 basis points from kind of the run rate inflation. So again, I'm more in the camp that we're going to be more in a 324, more than a 2627. But I think the the big thing we have to take a step back, is yes, the Fed wants to get to 2%, but we're not at 8% anymore, we’re not at 7% anymore. Some of those crazy numbers that were again a culmination of a lot of things going wrong at the same time, whether you know for most of my life we've been in this environment of, let's call it, you know 2.5 to 3% and the U.S. economy did fine during that period of time. The equity markets did fine.
That was basically where inflation was for most of 2001 to 2007, so.

Sébastien Page
So we can run at 3% and it's not the end of the…things aren't necessarily going to break.

David Giroux
I agree.

Sébastien Page
Look, I I think the base case is that it continues to come down. To David's point, we were at 9% and now we just printed 2.9 headline last 12 months.
The rents data, especially the new tenant rents data, just came out negative year-over-year and that is a leading predictor of the shelter component of inflation, which is a big part of it. It's above 30% of the inflation. So I think the base case is that we're going to be stable, 2.5%, 3%, or maybe coming down. But in the Asset Allocation Committee, we're actually positioned to protect against an inflation surprise to the upside.

And what's interesting, if you look at a chart of inflation swaps, we have a chart there that will show that is for the five years and also for the one year. If you look at the one year, the inflation swaps, which is kind of what the market is expecting or pricing in. It has quietly gone up from 1.7% to 2.7%, so a little bit above David's expectation. It’s creeping up and the question is what is driving this?

Look, I think on inflation, everything else but rent has potential to surprise on the upside, relative to a pretty stable-to-declining expectation. So, goods disinflation, for example. We're kind of running out of the normalization of goods prices. If you look at the used cars over the last three months, actually growing pretty fast, like annualized rate of 20%.

Services outside of rents, they're really getting more and more expensive, whether it's transportation services like flying or whether it's insurance costs and so on. And then you have, of course, commodities, which are unbelievable, in my mind as an asset allocator, the most difficult asset class to forecast, to understand because of the intricacies of the supply side and the intricacies of the demand side. The commodities can always surprise on the upside, especially if this administration, for example, we really put pressure on Iran a lot more than we did in the last administration. Who knows? There could be disruption, disruptions to the oil supply. So if there is a risk that the base cases were stable, we’d come down. If there is a risk, we want to hedge, it's probably to the upside of those expectations on inflation.

David Giroux
But, but probably the biggest driver that inflation swap is both oil prices, which have risen, as well as they're probably betting some risk of tariffs, right? Because that that's not a core number, that's that's the number that includes potential for tariffs.

Sébastien Page
Yeah.

Christina Noonan
So downward trend, but certainly some factors there that could push inflation upward. Let's zoom out a little bit. David, we want to get your thoughts as a multi-asset investor. We know bond yields have been trending upward, extended equity valuations. How are you thinking about that allocation between stocks and bonds right now?

David Giroux
It’s funny. There's no, there's nothing easy. I mean, there's no easy answer. In many cases. You know, Sébastien made the comment. Spreads are really, really tight. So high yield, leveraged loans spreads, investment grade; all tight versus history.
That's, it's not a, not a great place to be. Rates on Treasuries are very attractive versus history on an absolute basis, but again, there is some longer-term concern about the debt sustainability. So that’s kind of a wild card that we didn't have, maybe, in the past.
And in equities, again, I know when people say the equity market’s expensive at 22 times, I tell people that's actually an irrelevant number because the market has changed so dramatically in the last 18, 19 years. Back in 2006, S&P 500 earnings, about 40% earnings came from financials, came from materials, came from energy. All low multiple sectors. I think we have a very different market with more software, more technology, lower, much less low multiple sectors in the market.
So what I'd like to look at is if you look at the market ex-growth stock; 44% of the market is growth stocks. The market's stocks historically traded for about 15 times, about 18 times. If you remove, look at heavy 6 level companies which are more value stocks actually. People want to play in the U.S. recovery: banks. You know, parts of semiconductor market. Historically trade for about 12 to 13 times. Now trade for 17 times earnings. Never really traded that high, ever.
So no matter where you go in the equity market, it's a it's not a lot on trade. And I'm sure we'll get to this a little bit later.
But the nice thing is, we don't invest in the market. We invest in a handful or a couple handfuls of really amazing companies and where we see value in the marketplace today is really what kind of got left for dead for last year, right. Healthcare, life science tools, managed care, software. GARP. Special situation companies. That you know, those are all stocks that don't feel like the markets are 22 times earnings. Don't look feel like, you know, valuations are really, really stretched, those are all things have been left behind where we see really good value in the market.

Sébastien Page
But we probably need to translate GARP for our audience.

David Giroux
Of course, of course.
GARP is growth at a reasonable price investing. A GARP stock traditionally would be a, kind of, grew mid-single digits organically, a little bit of margin, a little bit capital allocation, can generate low double digit EPS growth and tends to have very low earnings volatility, relative to the market.

Christina Noonan
Thanks, David. So let's hear from the audience before we dive a little deeper into the stock market. We have a poll. So we know, David alluded to the market's been very concentrated largely in these Magnificent Seven growth tech stocks for some time now. Just to put statistics around it, top ten stocks now accounting for almost 40% of the index’s total market capitalization, nearly double what it was a decade ago.
So we'd love to hear your thoughts, whether you think we'll see a broadening in the market in the other 493 going forward, so please share your thoughts in the poll and your insights will help shape our discussion as we hear from Sébastien.
So, Asset Allocation Committee holding a little bit more of a bearish view, still position for broadening. Can you touch on that and whether you think the market is currently in a bubble?

Sébastien Page
I'm looking at the poll results and it's so far 60% of our audience and wow, we have a lot of votes. We have a huge audience today. Thank you, David. It's 60% expect the market to broaden beyond the Magnificent Seven.
I suspect this is in part due to the sell-off of yesterday, in the Magnificent Seven, in particular in NVIDIA and given DeepSeek. We can maybe talk about that if we have time in the Q&A, but it is a significant innovation, according to our analysts, but doesn't change the medium-term view on AI being a really important revolution in productivity and so on and spending.

So anyways, for - is the market in a bubble? That's a good, it's a good headline for an article. Is the market in a bubble? I think you’d get a lot of clicks on it. I don't think we are. I think markets are very expensive, but I don't think we are in a bubble.
Sometimes I talk with clients about how 2021 felt and as an investor, I don’t know how you felt in 2021, but there was a lot of speculation. Someone at one point paid $1.3 million for essentially a photo, a JPEG of a rock. A gray rock and this I use this to illustrate…

David Giroux
People are paying $6 million for a banana now.

Sébastien Page
Exactly. And this is where I was going, David. This is the answer I've been getting, so I point this out. We're at a level of liquidity and speculation in 21 meme stocks. We're sending checks to everybody. Someone paid, to David's point, $6 million for a banana taped to a wall, and he ate it.
So maybe we are getting in speculative, in the speculative realm. The price/earnings ratio on a forward 12-month basis for the S&P 500 is at 22, that is above its 95th percentile of its 30-year history. If you adjusted for the technology weight in the index, which is about a third of the index and you account for, say, the return on equity of the market, which is remarkably high given the companies that dominate the index, then you just do price/earnings divided by ROE, you go down to the 70th percentile. Still expensive, but there is some fundamentals behind this.
I looked today at the tech sector’s return on equity in 1999, just to compare with where we are in the tech sector nowadays. In 1999, the tech sector, for the ROE for the tech sector was about 15% return on equity. And now it's for the tech sector, it's 30% return on equity. And there's not as much debt fueling the investment into the infrastructure. Back then, it was the Internet, now, it's the chips. A lot of those are funded just from cash. So I don't, it doesn't feel like that.

No bubble is the same. But I just, I I don't think we're quite there yet. There are lots, lots of stocks in the world that aren't trading at outrageously expensive valuations. For example, if you do this exercise where you look at the average stock in the world, you take the MSCI All Country World Index equal weighted. So just the average stock in the world, it has a price/earnings ratio of 14 and that is basically its 30-year average. This speaks to our position for the market to broaden. I think we're approaching peak concentration. I don't know if you agree, David, but I think we're approaching peak concentration now and the unloved, left behind parts of the markets could perform and you'd get a broadening and from that perspective, the average stock in the world trading at 14 P/E is not that expensive. Not bubble-like, put it that way.

Christina Noonan
Thanks Sébastien. So let's move to you, David. How are you navigating this narrow market where you, you touched on a little bit earlier, but where are you seeing these opportunities for broadening and how long can this narrow market leadership persist?

David Giroux
You know, I think, I don't. I would draw an analogy. Again, if you think about what happened back in like 1998, 1999, 2000, right? Technology earnings of the S&P 500, I think they peaked at like $9. I could be off by a dollar. And then they went to $0, right? That and again, valuations were really, really high. So you had complete kind of earnings as well. You're not going to see that, we don't have that kind of dynamic going on.

Again, I think with the exception of a couple companies in that Magnificent Seven, again as soon as we group these companies all together, they're really very different animals and different end markets and different, different valuations. Clearly. Well, there's some that are extremely expensive. Some are very, very attractive. Some companies trade below 20x earnings. Some other companies that are trading in right where they traded historically, even though you know AI may be still be a positive for these companies.

So the market’s more concentrated over time, not because we put higher and higher multiples over the last 10 years - because their earnings have grown up a lot. And I think if you look at a lot of the Magnificent Seven, but again with maybe one or two exceptions, yeah, I don't believe that we're going to see those companies contract in a material way, all seven of those companies. So again become more concentrated just because they've grown earnings at so much faster pace than the rest of the market, right?

That's why we're more concentrated. And the reason again, the challenge with the 14 multiple, from my perspective is, you know, there are a lot of companies out there that are just not accreting value, like not growing the dividends, growing their earnings. Just really low quality companies. And you know the challenge with international investing has been that, you know, there's, it's just not the same caliber of companies internationally as we have in the U.S. Call me a homer, but as someone who's gone through every company in Japan, every company in Australia, every company in Europe, we, they just, you know, they don't have the same quality companies. And I'm saying kind of growth rates, they don't have the same capital allocation prowess that we do.

So you're really comparing apples to oranges when you compare U.S. companies versus non-U.S. For the most part, there are some exceptions to that rule, but 9 out of 10 times the U.S. companies are a better company and will be a better stock over time. And deserves to trade for a higher valuation.

Sébastien Page
Right. There's a reason for that spread.

David Giroux
They don't grow.

Christina Noonan
Yeah. And so do you think recent events coming out of DeepSeek that could be a catalyst that could disrupt the leadership that we've seen, the narrowness in the U.S., do you think there -?

David Giroux
If DeepSeek is what we think, it could be, right? There's a lot. There's some – first, of impacts for this, a lot of secondary impacts from that. You would argue that the merchant silicon manufacturers who are supplying the training companies. You guys make an argument that spending billions of dollars in training is not a good investment, you don't need to do that.

So there's companies that are either benefiting from training or who are merchants, like those companies would be in challenge. But you would also argue maybe the cloud companies or software companies, which the cost of AI goes lower, would be huge beneficiaries of that, potentially.
So again, maybe one could be the in the in the in the Mag Seven goes down on that, which happened yesterday or and some other companies actually benefit from that who are also in the Mag Seven, potentially. And then maybe some software comes up behind, maybe benefit from that. So I don't think that changes the narrative dramatically, but it could, you know, one very important company could be a little more challenged by that.

Sébastien Page
It shakes things up between the different players in the space.
There was over the weekend, in the Wall Street Journal, an estimate that training DeepSeek cost $5.6 million. And that the other models cost about $100 million to a billion dollars to train. Now since then, I've been looking at what our analysts are saying and it's not really clear that this is the math and how it's not really clear how much it really costs to build this.

But I think the general conclusion that that the model is very efficient computationally holds. And that definitely, I think shakes things up in terms of the different the different players. But you know, I've read one of our analysts who said look, you know, if you think medium-term it's quite possible that the big players are going to actually double down in training the top models and they're not shy about spending to make that happen.

David Giroux
Actually, the only thing I would argue is we're actually seeing the exact opposite of that right now. Right now, if you look at what we've seen publicly announced for Microsoft, which did $20 billion of capex last quarter, they said we're going to do $80 billion of capex this year. So they’re not… they were going up, big, big, big. Now they're kind of flat line. Meta said we’re going to do 60 to 65 in ‘25. We did $16 billion last quarter, so 16/16/16, right? So the biggest spenders are actually flattening out.

And I think one of the things that's really interesting about this space is that all these companies do not want to be in a situation where they are beholden to one company. And so we are seeing more and more discussions around ASICs. ASIC, which are I think custom chips that replace merchant silicon, that can be done - that are much cheaper, maybe as much as 1/5 of cost. Much less power, maybe 1/6 the power consumption and they can actually also drive down the cost of AI. And so, I think there is an argument to be made that the second derivative AI is slowing. Training, which is where NVIDIA dominates, is going to become less.

A small part of the market, inference, can be a big part of the market where ASICs can play, and so you know you would make an argument. But again, NVIDIA is not in a really good spot right now, and a lot of the ASIC guys where the cloud hyperscalers are in a much better spot than they used to be.

Sébastien Page
It's remarkable. As an asset allocator, David does it all bottom-up, but as an asset allocator I've never been so interested in securities. Because they're so big, some of them are bigger than the entire small cap asset class. And they really matter.
And David, there's a question in the question feed, this question for David, do efficiency gains…the question is do efficiency gains in GPUs…but I think it's a broader, do the efficiency gains in the models themselves, like with DeepSeek, change your thesis on utilities?

David Giroux
No, no, no, not at all.
Again, there, you know, it's a really, it's a great question.

So. What I would tell you is: You know, if you bring down the cost of AI, you bring down the cost of training, it actually drives more inference. So there's two. Right now the market. Last year, the market was dominated by training. That is Anthropic, Google, Open AI. Trying to build the biggest, baddest kind of fundamental model you can do that can kind of give you almost every answer, right? And what we kind of figured out even before DeepSeek was, you keep putting more GPUs against the same information, you don't get a lot better results, so the ROI C is going down.
And so what we, if the commodity, if we see commoditization at the trading level, you don't need to spend as much money on those next training models. And what we're seeing with the DeepSeek, whether you use ASICs, maybe you don't need to use Microsoft successors, not with the with, not the best fundamental model, if you will. If that's the case, inference really takes off.

That’s where I think you will see power consumption that will benefit the utilities. Again, we were never building in into our assumptions this idea that data center gross doesn't mean go from 3% of U.S. production power usage to 12%. We always had to go from 3% to 8% because of ASICs getting much more, much more, much more power, less power intensive if you will.

But again, remember, we didn't just go buy a whole bunch of utilities. We went to where are the most likely places data centers to be built? Midwest, cooler, less lower power cost, a lot of space. We didn't buy utilities in California, in the northeast, or Florida, or the East Coast. We went to the, and those guys are going to really benefit.

You know, there are utilities in the Midwest that are probably going to their organic growth rate of electrical consumption go from, you know basically zero to maybe 5% or 6%, maybe even high single digits potentially because they're in the right markets, right jurisdictions, right cost structure and they'll benefit whether that number is 8, 12, or 7.

Christina Noonan
Thanks, David. I appreciate deep insights on AI, AI derivatives.
Can you talk about some of the other themes that you've been looking at, maybe more durable three to five year?

David Giroux
Yeah. I always think with, you always want to own. I always get really excited. There's no easier way to make money in the marketplace than to find a company that is that is accreting value at a healthy rate, that is out of favor for some kind of non-fundamental reason, right? So I've always been a fan of software companies. We like software, but they always trade for very, very high valuations relative the growth rate. And last year, if you're a tech investor, it was all about AI, AI, AI, right? And their first derivative and the second derivative beneficiaries got all the attention.
And so we found a situation where you could buy companies with 98% recurring revenue, 95% recurring revenue that had never traded evaluations as low as they've been at the end of last year.
Software is actually our largest offer winner portfolio now, starting to reverse nicely earlier this year so far, but the idea you can buy companies that are growing the top line at low double digits that are improving margins that are buying back stock, generating mid teens earnings growth and you can buy those at like 20 times free cash flow or, you know, 23 free. It doesn't really make any sense. That's where we see really good value.

Christina Noonan
And health care? Touch on health.

David Giroux
Yeah, health care was the second worst performing sector last year. Again, very much out of favor.
There's not a pure AI story there. But yet again and again, people want to buy cyclicality. To buy banks, as you know, some banks actually trade for higher valuations and then medical device companies today.
But when we look at life science tools, look at managed care, we look at companies, you know, really good managed company, well managed companies, companies with double digit earnings growth, low cyclicality, sometimes low FX exposure, trading at really record levels relative to the market. We see, we see really good value there.

Christina Noonan
Thank you, David. So, Sébastien, before we pivot back to you, let's check in with our audience again.
We spent a considerable amount of time discussing U.S. markets, but given the current backdrop, we want to ask you, the audience, if you believe there are opportunities for markets outside the U.S. to outperform or is 2025 shaping up to be another year of U.S. exceptionalism. Kind of touched on this earlier, but curious to get your thoughts.

Looks like some results are already coming in with an astounding yes, it looks like there will be.

Sébastien Page
Well, I mean the vote is overwhelmingly 88% yes. It's still moving, but I think there's something you might have said earlier. I think you, David, framed it.

David Giroux
But the problem with this, the only problem with this is it it's become a little bit consensus and I don't like being consensus. I thought it was out of consensus last 10 years. It's become a little more consensus.
The only thing that that bothers me about that poll a little bit.

Sébastien Page
Well, the Asset Allocation Committee is going to be easy for me, is neutral. We're neutral between non-U.S. and U.S. stocks and look, we're on the margin long emerging markets, which is very much out of consensus.
Under the hood, if I look at what our international portfolio managers are doing, they're underweight China and they like countries like Argentina and Brazil. And in terms of sectors they like healthcare, energy, materials.

That's what we're looking at outside the U.S., the Asset Allocation Committee also has an overweight position to Japan with significant changes to corporate governance, a weaker yen can help exports. And there's pretty good case for Japan from the perspective of the Asset Allocation Committee.
So that that's what it looks like. We could have continued to have a stronger dollar and you see when you hear things about tariffs, you see the dollar go up almost immediately because the countries on the all else being equal in the receiving end of tariffs, they're incentivized to devalue their currencies to kind of offset the tariff and make the goods cheaper so that you're seeing that happen. And if you look at the growth differential between the U.S. and the rest of the world, that also speaks to sustaining a high dollar and maybe even a stronger dollar.

I don't know if you have a view on that one.

David Giroux
No, no, I I think the only challenge is all those things make sense. It does appear that the dollar relative like purchase power parity also does look rich. It's at the very high end of its trading pattern versus kind of PPE, PPP kind of analysis. But again, on a longer-term basis, the dollar should strengthen versus other currencies given all the reasons that you mentioned.

Christina Noonan
Yes, I guess let's stay that on tariffs. Getting some questions from the audience on that. It's impossible to really know what the outcomes will be, but do we have a feel for who will be most negatively impacted by tariffs or countries or different regions?

Sébastien Page
I mean, I was in Canada a few weeks ago and I can tell you that people there are genuinely worried about the threat of tariffs and they're hard to predict, really.

You know, we went from 60% of China down to 10%, down to, we don't really want to do, and then we're back up on the tariffs. They're very hard to predict. I think that's kind of the name of the game too, to make it somewhat unpredictable, a tool for negotiation.
I do think, personally, that this administration wants the stock market to go up. I think that's one measure of success that they use and that they'll actually be attentive to this and maybe at some point attentive to the bond market as well. We haven't talked a lot about the bond market, but the levels of deficits are very high by historical standards. They're basically recession levels and we're not in a recession if if you know if you look at the data as of now. Maybe we will be. Maybe we will be a year from now.

David Giroux
Who knows?

Sébastien Page
So thoughts on tariffs?

David Giroux
You know, I think it's it's really hard, as you say, to predict. I think the odds that we will have some tariffs this year are quite high. The magnitude is to be all over the map.

I think it's also, one of the things that's interesting, is we have Trump and Republicans are going to have to find a way to pay for extending the tax cuts, or at least partially pay for extending the tax cuts, and even introduce new tax cuts potentially. And so one of the ways they could do that is, you know, put in place tariffs on China, right? I think we do like $450 billion a year with China, so in terms of tariffs, just assumption, it's $450 billion over 10 years, right? A 10% global tariff, I think gives like a 10% global tariff gives like another 1.9 trillion over. It's probable, that I think Republicans will want to have some tariffs in place to help offset the tax cuts that expire in 2026, as well.

So there'll be something, but I don't I think it's really hard for us to predict.

Sébastien Page
There's a question in there. I think it was, do you expect a corporate tax rate to go, to go below 21%?
I mean, the promises that were made on the campaign trail about tax cuts were very broad, right? No taxes on tips, no taxes on overtime, no taxes on Social Security. Lower the corporate tax rate. Remove all these threats of taxes on inheritance and capital gains. Like it's just very -.

David Giroux
You forgot no, no tax on automobile insurance or your automobile loan.

Sébastien Page
It was sort of like, it's like, the I refer to it as…there was a show by Oprah Winfrey one time where she gave a car to every member of the audience. I don't know if you saw that. It was like, ‘you get a car, you get a car, you get a car.’ Was sort of, ‘you get a tax cut, you get a tax cut,’ now. We actually need Congress to get that done.

David Giroux
The odds of that having across the board, tax cut, on the corporate rate is very, very low. Every one point you bring the corporate down cost about $125 billion over 10 years. You want to go from 21 to 15? That's a little more than $700 billion.
And there’s no offsets for that.

Sébastien Page
It would be 15 if you make the goods in the U.S., which is also a grave -.

David Giroux
And that’s not as expensive. That’s a lot less expensive, if you did that. That's actually possible.
I think I've seen the score, that’s only like $300 billion. Only $300 billion amongst friends.

Christina Noonan
So any summarizing thoughts? Sounds like cautious reasons to be optimistic. But after two consecutive strong years in equity markets, probably more cautious tone. Any summarizing thoughts on the market before we move to last part?

Sébastien Page
Look, as I said, I think the economy looks just fine at the moment. I'm going to refrain from making a big call about the next 12 months.
You know, the economy just it looks quite fine in the U.S., but it's consensus. It's very much consensus, and if there's anything I've learned from David Giroux is to question the consensus.
And so you know, we often say ‘stay invested, stay diversified.’ It's very trite for these, for our clients who are advisors in the audience. You probably say that often, ‘stay invested, stay diversified.’ When you have a strong economy, but it's already priced in, you know we're close to our benchmark weights in terms of stocks versus bonds in the asset allocation portfolios. And we're doing this, our equity positions in particular are broadly diversified so we’re positioned for the market broadening.
I guess that's my point. You always say stay invested, stay diversified. What I'm saying is it really matters to say that right now.

Christina Noonan
Fair enough. All right, great discussion on markets and the economy.
Let’s shift gears a little bit. So I mentioned in the introduction, Sébastien has a new book coming out, “The Psychology Of Leadership”, which is available for pre-order now on Amazon. I’ve already got my copy. In it, you talk about what you think are some of David's secrets for success as an investment leader.
Could you please give us a preview?

Sébastien Page
Yeah. So David has not a full chapter, but quite a few pages in the book. He was very kind. He let me interview him and I basically asked him what are your secrets to your success from a leadership perspective, from your habits, and so on. And we had a really nice discussion and I'll let you expand on this, David, but my two main takeaways from this, I talk about it in the book.
You know, I've rarely met someone like David who has the capacity to get very engaged in what he's doing. And I've seen it. We worked together on some projects on some committees. And this level of engagement, I was curious. How do you get that?
And he we talked about time management, which was fascinating. And David talked about return on time spent. You might want to expand on that.
The other take away is, David, you find tremendous meaning in what you do and you're doing… you you could go and run a hedge fund if you wanted to -

David Giroux
Oh...

Sébastien Page
But you're doing this for your investors. And you really care about making the financial lives of your investors better. And that really came across. So I don't know if you want to expand on that.

David Giroux
Oh, you're very, very kind. There's a lot of things there. I'm not going to run a hedge fund. I don't want to make myself rich. I'd rather make our investors rich.
In terms of in terms of time management that, that, that aspect of it is I think you know our job is so much about - you know there's unlimited things you can do.
You can listen to 1,000 different conference calls every quarter. You can interact with almost anybody on the sell side or spend time with our analysts. And what is the time? And how do you get the best edge, if you were, the competitive edge, versus everybody else? And I think what we try to do for time management is okay, let's take the S&P 500 companies, right? Let's slice it down to 125 companies. They don't have one of these, we call six fatal flaws, right? I'm not going to spend a lot of time on those companies that have one of the six fatal flows.
Bad management teams. Bad gap allocation. Secular risk, valuations extreme - just to name a couple.

So we're going to spend all of our time these 125 stocks, and we're going to go to models out five years. We’re going to interview the management team six times a year. We're going to, we're going to know the internal rate of return better than anybody else in the marketplace, and I'm going to dedicate 95% of my team's time. Not on the macro, but on knowing these companies better than anybody else.
And so when things don't feel great, we have the confidence to step up and buy the stock.

And you know, you talk about time management, I think. One was interesting was when I found out Larry Culp was going to be a new CEO of GE. I think it was like 2018 and he became CEO. And I wasn't thinking about GE at all that time and I basically stopped doing everything else in my life for two weeks and did nothing else, 14 days, but to work on GE to understand GE and let everything else, APMs handle everything else. And should we make a big bet here?
It's such a complex company, and it turned out to be a four-bagger for us, right? A four-bagger from the from the bottom.
So yeah, I think making sure you have a competitive edge where you spend time is really, really critical. And again, I'm really looking forward to reading the book. It sounds great.

Sébastien Page
Great. Yeah. And you called it ROTS, return on time spent, which I thought was a cool acronym. And I talk about it in the book. Otherwise, the book's about using the power of positive psychology to set goals, execute against goals, and bring people along. That's what it's about.

Christina Noonan
Thank you for sharing some of the secrets that have made you so successful.
Let's wrap up here.

See if there's any other closing thoughts before we wrap up.
Great note to end on and thank you for sharing that insightful preview Sébastien, and thank you David for your perspectives today. That wraps up our viewpoints webcast “Views From David Giroux on Market Shifts.”
It's been a great discussion and I want to extend a big thank you to our panelists for joining us today.
 
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