Webinar Replay: Q1 '26 Asset Allocation Viewpoints

February 17, 2026

Sébastien Page, David Giroux, Christina Noonan (Moderator)

Christina Noonan

Hello, and thank you for joining us for this quarter's Asset Allocation Viewpoints webcast, “Rally On or Running Out of Steam?”, brought to you by T. Rowe Price's Multi-Asset Division. I'm Christina Noonan, a portfolio manager within Multi-Asset, and I'll be hosting today's conversation. There's a lot happening in markets right now. So today, we're going to cut through the headlines and focus on what's driving returns, from expanding market leadership to the next phase of AI and fiscal policy, and most importantly, what it means for investors.

Let’s introduce today's panel.

Joining me, as always, is Sébastien Page, chief investment officer and head of Global Multi-Asset. Sébastien oversees our global multi-asset investment team and co-chairs our Asset Allocation Committee, which drives tactical investment decisions. Many of you may know him from Bloomberg, CNBC, and LinkedIn, and he's also the author of Beyond Diversification and The Psychology of Leadership. Thank you for being with us today, Sébastien.

Sébastien Page

Thank you, Christina. Excited to be here today.

Christina Noonan

We're also excited to welcome our special guest, David Giroux. David often joins us early in the year to share his perspectives on the market, and we glad to have him back with us remotely this year. He is a portfolio manager for the U.S. Capital Appreciation Strategy, head of investment strategy, and chief investment officer (CIO) for T. Rowe Price Investment Management (TRPIM). David is a five-time nominee and three-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 won 23 best fund awards from Lipper.

So with that, let's get started with you, Sébastien. Let's start by stepping back a little. A lot has happened since this time last year. So before we dive into current positioning, I want to ask you, what has been most surprising since last year or even so far this year?

Sébastien Page

Yes, so far this year it's interesting because we're seeing a rotation from the builders of AI to the beneficiaries of AI, to the victims of AI. I just heard someone describe the current narrative on AI as a heat-seeking missile that is shooting all the different victims of AI, those that get automated away. We'll see.

Going back to last year, to me, the most important part was that the U.S. implemented the highest tariffs in roughly 90 years, 9-0. But it didn't really topple the economy. It dominated the financial headlines, but we didn't get a recession. We didn't get an inflation shock. We didn't get a collapse in corporate profit margins. There was no sustained rise in long rates. No, in fact, Christina, no meaningful slowdown in China's exports. And I was in Canada a few weeks ago. No meaningful, actually, Canada's exports are up. GDP growth for the last three quarters is running at 7% to 8%, potentially the highest level in 20 years ex-COVID.

So maybe that's the theme. And of course, AI was the theme last year. But tariffs, they matter geopolitically. They matter if you're in the financial news business. But they didn't matter fundamentally for the economy. You know, tariff headlines aren't always economic reality. Goods imports, subject to tariffs, represent roughly only 8% of U.S. GDP. Services account for 70% of the economy, and services are not subject to tariffs. We know tariffs collected maybe about $300 billion in tariff revenues, but compare that to AI spending, which, based on some estimates, approached $800 billion. In fact, last year across investment chat rooms, there was a chart that was making the rounds. It was showing that for the previous two quarters, GDP growth was being driven more by AI capex spending than by the consumer.

So a huge factor in the economy, and it reinforces a simple lesson, is that, you know, headline risk can create buying opportunities, especially when you have $20 trillion in COVID and post-COVID stimulus and a historical tech revolution in artificial intelligence.

So, I will say headline risk is not earnings risk, for sure. Corporate profits grew more than 12% last year. And we've had a lot going on over the last few years. Since February 2022, I've said this before, Christina, but we've had Russia's invasion of Ukraine, followed by 9% inflation, then 550 basis points of Fed hikes, multiple bank failures—number two, number three, number four. biggest bank failures in U.S. history—a war in the Middle East, and now record tariffs, at least for the last 80-90 years. And over that time period, the S&P is up by about 60%. 

I'm just reminded back in April, Christina, when I was doing a webinar for clients in the middle of the sell-off, and as I was talking, we were getting streaming questions from clients, and I saw one question that just gave me pause. It was the following. It was from someone who was close to retirement who said, wrote in the question stream, I can't take this anymore. Remember back in April, tariffs were really, those headlines were crashing the markets. We had one of the biggest, sharpest sell-offs in market history. And that person wrote, I can't take this anymore. I need to retire in four or five years. I want to go, I want to sell everything and just hold cash so I can retire. And this is, just gave me pause. And first of all, I said, don't do that, right? But it's also a reminder that often those massive macro headlines, I'm so excited we have David Giroux today. He often reminds us that macro often is noise. And how macro feels at one moment is often different from how it feels the next moment, the next six months. So macro headlines often are buying opportunities. At least that's been the case for the last few years.

Christina Noonan

Thanks, Sébastien. Some great points. And there were certainly some moments last year where tariffs felt like more than a headline risk. But some great reminders there. David, let's hear from you. What has surprised you most?

David Giroux

This year, I think what's interesting about this year, last three months, is what a strange market we're all experiencing right now.

On one side, you have a situation where your growth AI companies that are kind of leveraged AI, stocks are kind of going down. But at the same time, companies that are theoretically impact of AI are getting crushed, at the same time. And you see investors paying up really ridiculous prices for companies in the industrials or financials. And you just have this situation where there is almost no correlation today in the market between growth rates, risk, beta, and multiples. It's just a very, very strange environment, which again, provides a really nice opportunity for investors who have a little bit longer time horizon in the market right now. It's probably the most inefficient market I've seen since I've been a portfolio manager on the Capital Appreciation strategies for the last 20 years.

Christina Noonan

Thanks, David. All right, let's turn to where we are today, Sébastien. So last time we spoke, you described a balance between the bulls and the bears on the Asset Allocation Committee, and that positioning was ultimately neutral. How are you feeling about markets today?

Sébastien Page

Yeah, we're still having debates between the bulls and the bears. I think that's a feature of the Asset Allocation Committee. But nowadays, the committee is split between the bulls and the bears. I won't give the exact split because it depends on the meeting, and we don't really disclose this. But it is split because we're bullish on the economy, but at the same time, we're cautious on valuations.

Let me explain why we're bullish on growth, for example. You know, it's clear to me that policymakers will pull every lever into the election year. The Fed wants to ease, is probably going to ease a little bit more. Fiscal policy remains highly stimulative. We have deregulation and M&A that continues. The higher-wage consumer is resilient. AI capex, it's expected, will continue to grow, probably by another 80% by some estimates. And corporate earnings remain strong at 10-12%. So it's clear that, again, I'm always reminded, I'm so happy we have David on the call today. I'm always reminded, you know, the macro is only one thing, and the macro now will not be the macro six months from now. But the macro now looks quite good, but it's clear that valuations are a constraint.

You know, U.S. equities trade near historical highs. The price-to-book ratio in the S&P 500 is actually higher than it was during the dot-com bubble. The price/earnings ratio is at 22 or so on forward 12 months. It got to 25 during the dot-com bubble. OK, so it got higher. The price-to-sales is actually higher now. The only thing I would say about this is, yes, valuations reflect, at least from a total top-down perspective, a lot of optimism. And there's basically kind of consensus that earnings are going to continue to grow at a healthy clip, which is what gives us pause.

I would say one thing, though. Margins are almost double tech bubble levels. So we have a different market composition. The S&P's much more of a higher tech, higher cash flow generating index. We talked about this, Christina, a while back. I'm reminded of Alan Greenspan when he was talking about irrational exuberance in the late ‘90s. And the narrative after the dot-com bubble burst was, well, Greenspan was right to talk about irrational exuberance. And maybe some would say we're getting close to irrational exuberance. It's interesting to hear David talk about, at least maybe not necessarily exuberance. I'm curious to hear what David thinks about this, but at least David's saying this is the most inefficient market. You know, the pricing is distorted by many factors right now in his career. I think that's fascinating.

But on Greenspan, there are two caveats to this. He didn't say that the market was exhibiting irrational exuberance. If you go back and look at the history, he was asking a question. How do we know when irrational exuberance has unduly escalated asset values, which then become subject to market crash? This is like convoluted economist talk, but basically a rhetorical question. Second thing that we kind of forget is that Greenspan said this in December 1996, and the Nasdaq went up 288% in the next three years.

Think about it this way. In 2018, the Shiller-CAPE ratio—we don't necessarily use the Shiller-CAPE ratio for many reasons—but back then, it was sitting at near 33, near an all-time high. But if you'd stepped out of equities then, CAPE ratio near all-time high, 2018. Let's sell everything, go to cash. You would have missed roughly 13.7% annualized return on the S&P 500 if you include dividends over the next 10 years through now, 2026.

So you can't just put all the money in the mattress and—just every time the market feels expensive—and I'm really hoping to hear from David on this as well—if you want long-term capital growth, you have to be invested.

I have these videos with my daughter where I explain basic finance concepts to her on LinkedIn. And they've gone a little bit viral. They're a little bit old by now. We started doing this when she was ten years old, and I explained to her things like an interest rate and compound interest. And people like this because it's around the idea of financial literacy. And it's hard for me, actually, a financial expert, to explain this to a 10-year-old. We did a few, the last round we did, she was 14. But my point is, in one of those videos, I explained to her, if you set aside $200 per week for your entire career, for 35 years, but you put it under the mattress, I show her, I have the spreadsheet in the video. I show her, you're going to end up with $336,000. But then I say, if you'd invested your $200 a week over the last 35 years in the stock market, you end up with not $336,000 under your mattress, but with over $3 million. And you can see her eyes. She gets the idea that these things compound really fast. So you can't always go out of the markets when they feel expensive. Right now, we're neutral between stocks and bonds.

Christina Noonan

Great perspectives. And to summarize, so generally constructive on the economy, but cautious on valuations. Let's hear from you, David. So equity markets coming off of another year of double-digit returns. How are you feeling about the market today, particularly given current valuation levels?

David Giroux

I think when you think about the valuation, and Sébastien and I have talked about this before, is that if you look at the historical valuation, go back to 2006. In 2006, 45% of the earnings of the market were coming from financials, materials, energy, all kind of, let's call it low multiple, low margin sectors, right? And today, obviously, they're a much smaller part of the market. Again, it used to be software, semiconductors are a much larger part of the index, tend to be higher margin, higher free cash flow levels, less capital intensive until recently, I guess, with the hyperscalers. And so it is a very, very different market composition than we had even 5 or 10 years ago. And so comparing with the market of 2010 or to today, I think it's very, very difficult.

So what we do as a team is we do a bottoms-up analysis of every company in the market, all 500 companies in the market. And really what we're trying to do is determine what is the right earnings growth rate for that company, what is the right multiple for that company, and then build it up from the ground up to a place where you can actually build up the market. But again, the market is a living and breathing entity, always changing. And so we're trying to do this bottoms-up analysis. And that bottoms-up analysis basically leads us to a view that, if you have a five-year horizon like we do, your return in the market for the next five years is supposed to be like probably like 7%. But within that market, again, we don't, I don't invest in markets. You know, there are a lot of companies out there that are really attractive today, where we think there's opportunities to generate mid- to high-teens kind of returns. Some cases, 20% kind of returns. And at the same time, there are some things that are way overvalued and that the potential of generating negative returns from here.

And so, again, I think margins, multiples, you just have to keep in context how the composition of the market is changing. So I wouldn't get too bent out of shape about the margins, the multiple, per se relative history. I think you really do need to do the bottoms-up analysis on all 500 companies, and then you can come up with a stronger case for the market.

Christina Noonan

Thanks, David. So let's pivot to a theme that has been discussed a lot, touched on already, market broadening. So leadership shifting to less expensive areas of the market. And as we get Sébastien's perspective on where he and the AAC are finding opportunities, let's bring in our first audience poll. And it is, do you believe the technology sector will outperform the S&P 500 again this year? And just to add some context, last year, so the subsector, technology subsector of the S&P 500 outperformed the broader S&P 500 by over 6%. So far this year is lagging the S&P 500 by around 5%. So as the audience shares their thoughts with us, Sébastien, could you please share where you and the AAC are finding opportunities outside of U.S. large cap.

Sébastien Page

Well, the Asset Allocation Committee continues to be positioned for further broadening across asset classes. So we're long international value, we're long international small caps, and we're also long U.S. small caps.

Now, U.S. small caps have been a bit of a value trap. Maybe not just a bit of a value trap. U.S. small caps have been a value trap. So what could be the catalyst right now? Definitely lower short rates help U.S. small caps disproportionately. You know, when you have short-term financing and the short-term rates come down, it really comes through your balance sheet, your income statement, and ultimately your balance sheet. But it really comes through the financials, the bottom line. U.S. small- and mid-caps have more domestic exposure. They are facing a decreasing regulatory burden. There's improving regional bank lending with decent economic growth. And the relative valuation, yes, versus large-cap, looks like still a coiled spring. If you look at the S&P 600, which focuses on companies that have positive earnings, the price/earnings ratio for that asset class is near the median of its history.

Meanwhile, almost all other asset classes trade above the 90th percentile. Again, going back to what David was saying, it then comes down also to security selection in those asset classes, which is a huge part of what we do at T. Rowe Price. But from the perspective of the Asset Allocation Committee, we see value in shifting capital towards that asset class tactically.

Within U.S. large cap, I'll repeat something David actually said in our mid-year update for those who listen to it. You know, we're kind of doing a barbell approach right now. We're looking at reducing exposure to the core but adding to both growth and value at the same time. You know, we're-- David, I think every time I talk about individual securities, I always say, don't listen to me, because as an asset allocator, I need to look at the world from the top down. But David told us in a prior webinar that as an example of core versus value and growth, we don't want to be completely exposed to the growth theme. So we like the barbell with value, but in the middle, there are companies like Costco, GE trading above 40 price/earnings ratio, Walmart over 40. I think David mentioned Goldman Sachs 2.7 times book value. Again, don't listen to me when I talk about individual securities, but this is illustrative of this non-AI core names that look expensive, and it echoes some of the things David has said before at a prior webinar. So here we are.

Christina Noonan

Thanks, Sébastien, and thank you to those who participated in the poll. Looks like only 44% of participants think that the technology sector will outperform the S&P 500.

Sébastien Page

44.

Christina Noonan

44, yeah. So I think pretty balanced, more balanced than I expected. And so it is early days in the year, and it started last year, but we really are starting to see this broadening. But an interesting follow-up question came in from the audience. I’ll give it to you, Sébastien. What do you think could derail this broadening that we've seen so far?

Sébastien Page

Look, I think that the broadening should continue over the next 6 to 18 months. What would derail it is a return to the large-cap trade, obviously U.S. large cap. And I think easily, if it's been derailed before—let's just put it that way, right? We've had momentum in broadening for a few months, and then it's been derailed. And every time, it's the mega companies—the big platforms—just delivering blockbuster earnings above expectations. And then we, plus they're starting at a lower valuation than they were in the past. Mag 7 valuation is own. So I think that the story could still repeat itself if just the earnings on that part of the market outperform expectations like they have, and economic growth at the same time—like the nominal GDP starts dropping unexpectedly. Watch for unemployment claims, for example. You have a combination here where that we could go back to reconcentration in the market.

Christina Noonan

Thanks, Sébastien.

David Giroux

Christina, can I provide a perspective on that? I think what's interesting is, well, the stocks have changed in the last three months of what's working. Fundamentals have not. If you look at the reason why information technology and other tech names within other sectors —like a Meta or an Amazon, which are technically a lot of information technology, but still technology companies—why they outperformed so much last year was because their earnings grew a lot faster than the rest of the market. And that's very likely to happen this year as well.

And so I would actually take the argument that I think information technology will outperform this year just because it's going to outgrow. And from Sébastien's really good point, valuations on those stocks are much lower today than they were even coming into last year. So you're going to have probably have a combination of multiple expansion as well, relative multiple expansion plus very strong earnings growth. And I think what's interesting to me—again, going back to this really inefficient market we're seeing today—is you've seen consumer staples are up 15% this year, as of the time we're recording this. And what's interesting is their fundamentals haven't changed one iota. You know, Mondelēz hasn't grown earnings in four years and are not going to grow earnings again this year. There's been no real change in their trajectory. Verizon and AT&T—no real change in their trajectory. Caterpillar has gone for trade for 16 times earnings to 32 times earnings. Really no big change in their fundamentals at all.

And so you've just seen this kind of trade not driven by any kind of fundamental — just kind of this repositioning trade. But again, I don't think that is really driven by fundamentals. I think that's just driven by retail trading or people not wanting to be what worked last year. So again, I think I'm a little skeptical of what we're seeing right now will continue all through all this year.

Christina Noonan

Thank you, David. Great perspective. And if we can stick with you as we talk about some key themes driving markets. So AI remains a dominant force, but sentiment has shifted from with concerns around disruption, capex intensity, creating volatility. Broad question, how are you thinking about AI theme at this stage?

David Giroux

It's a really important question right now in the marketplace. And again, it's a very strange set of events, right? You have the AI companies who are best positioned to benefit from AI —their stocks are going down, right? And then the companies who are going to be, but AI is going to be a bubble, so that's going to be negative for the hyperscalers, and they're going to destroy all this capital, so they're going down. But then at the same time, AI is going to destroy all these business models—in indexes and insurance brokerage and transportation and all the insurance, health care distributors—and they're all going down. And then companies that are kind of levered to AI infrastructure building, like in Caterpillar, are going up. So it's just a very strange [set of] bedfellows.

I think the reality of AI today, the truth of the matter is, no one knows exactly how AI is going to play out. That's just the honest answer. It's still too early. Despite the $800 billion of spending that Sébastien correctly highlighted, it's still really early. We know there are great use cases. We know it is great at coding. We know it is great at marketing. We know it is great for legal work. But we don't know—is it going to be great for agents? Is it going to be great for retail? Is it going to be, is it going to really have a great return and really impact white-collar employment? We just don't know that. It's still too early in its journey. So I think anyone who tells you exactly how AI is going to play out over the next three to four years, I think it's still just way too early.

I will say that I think the winners of AI the last couple of years, it may be a different group of companies, right? There was a time where Nvidia had 99% market share. They had all the GPUs, and that is changing. Where you're seeing more ASICs come in, that benefits that come in, like the Broadcom. We're seeing a second merchant silicon solution with AMD come in. And those are two companies could potentially win. Either hyperscalers are, you know, to think that Nvidia's moat, their GPU moat starts to unravel a little bit, that probably benefits the hyperscalers. They get more of that rent that drives more inference demand, which is actually higher margin than training for those guys. So whether you look at Amazon or a Microsoft, they have not been the great stocks in the last year that they were the last five years. But I would argue that they are very, very well positioned for the future of a world where you have multiple GPU options, you have ASIC solutions, and where their valuations are very, very attractive. So, AI winners may change a little bit here in the next five years, but I still think there's the best risk/rewards probably in the hyperscalers right now.

Christina Noonan

Thank you, David. And we can build on that. You mentioned the labor market impact. Can you talk about how you think that could be disruptive to jobs?

David Giroux

Yeah, I mean, the bull case for AI is there's this $40 trillion white collar TAM [total addressable market]. And again, I know people don't like to talk about this very much, especially people in the AI industry. They don't talk about it like they used to. But the reality is this is a software or AI trade-off for white-collar labor. And again, when we talk to companies right now, maybe not always, but right now, 80% of all AI spending is for labor arbitrage. Can we reduce people who do coding? Can we reduce people who do legal work? Can we reduce people who do marketing? And I think there's this, and it's not a situation where we need to have the unemployment rate go from 4.4%, 4.3% to 20% to have an impact. I mean, if you just see it have a situation where the unemployment rate goes from 4 to 6%, or even 4 to, that has huge implications on rates, on the economy, on consumer spending.

And again, we just don't know. If you can't be bearish on AI, you can't be bullish on AI and you'd be bullish on, like banks per se or rates. Because if the reality is AI really takes off, that's going to drive rates lower, it's going to drive unemployment higher, drive short-term rates lower. It'd probably be very, very bad for like for the Goldman Sachs that's trading for 2.7 times book value or JP Morgan at 13 or 14 times P/E or Goldman or Morgan Stanley at 16 times P/E. Some of those financials, which I think are viewed as like a safe haven, if AI really plays out in a big way, I think you'll see financials get hit pretty hard over time. There are very, very few safe havens in the market today from AI.

Christina Noonan

Thank you. All right, let's shift gears to outside the U.S. And before we hear from Sébastien, we have another audience poll. If you joined us last year, you may recognize it, whether international markets will outperform U.S. markets this year. Interestingly, only 15% of the audience last year thought that international markets would outperform U.S., as we know, went on to outperform U.S. markets by over 10%. So I thought it would be interesting to pose the same question: Will international markets outperform U.S. markets? So as we hear from the audience, Sébastien, can you talk about some of the opportunities that you're seeing across international markets?

Sébastien Page

Well, I just came back from the Gulf region, and I have to say there, the amount of capital being deployed is surprising. It's a lot. It's palpable everywhere. The traffic now, if you're in Dubai or Riyadh and you want to do small talk, it's everyone's talking about how bad the traffic is. The cranes are up everywhere. The region's growing at a healthy clip in terms of GDP growth. Inflation's contained. Unemployment is incredibly high. This is just an example of the last few days in the Gulf region. I'm still a little bit jet lagged, by the way, but I'm getting over it. There's growth there.

We see opportunities outside the U.S. It's a big wide world for investing. And I would say that if you look at an aggregate level, MSCI All Country World Index and ex-US and compare it with the U.S., say the Russell 3000, you're still getting on a median basis, not on a market cap weighted basis, but on a median basis, you're still getting return on equity numbers that are 5% higher and margins that are 5% higher. Of course, then it comes down to actively managing those exposures, but it shows that from the top level, it reveals that there are opportunities there.

And on AI, I was in Canada before, doing roundtables. I did roundtables in the Gulf region. I have two takeaways. I ask everybody, especially at roundtables, what's your favorite use of AI? What's the best use you've found so far, either personally or professionally? And I have three conclusions from these multiple discussions in multiple regions with sophisticated investors. Conclusion #1 is that everyone has used AI, everyone has tried it, and everyone's impressed by it. Second conclusion is that, in general, with a few exceptions, most people are still just scratching the surface they're using something to summarize a document or to help with writing assistance. But there's a lot more. When David talks about TAM, it's—equity analysts like to talk about TAM and it's total addressable market, right?—and to me, we're only scratching the surface, just based anecdotally on these discussions. So while everybody's used it, everybody's just scratching the surface, with a few exceptions. If you run into someone who's used Claude code, and you say, who's used it here? People are amazed and blown away, and that's more advanced, I think, application that are only coming out now and maybe part of this software sell-off that we're seeing. But the third conclusion I will say, and I'll just leave it at that, everybody loves to talk about AI, because it impacts everyone. And you bring this up as an icebreaker at a roundtable and everybody's got too much to say and you run out of time. Everybody, it impacts every aspect of our society.

Christina Noonan

And so international markets. Seeing a lot of fiscal stimulus there. Is that factoring into the committee's decision to be overweight versus the U.S.?

Sébastien Page

Look, there's fiscal stimulus in the U.S., but if you look overall at the opportunity set for the continued broadening of markets, if you look from the top down at superior margins and superior earnings growth, at least for the median, and superior ROEs, you have opportunities. We like international value. We like international small- and mid-cap.

And, you know, just think of Germany, by our analysts' estimate, increasing their debt-to-GDP by 20% over the next five or so years. That's a dramatic shift. And counterintuitively, trade negotiations have led to more domestic investment, diversification of trading partners, and stimulus and growth. And the central banks are still dovish. There's momentum. Quantitative analysts know that when there's momentum and valuations on your side, typically it's a stronger signal than only one of those two signals working at any point in time. And we're in that sweet spot right now with the international trade.

Christina Noonan

It certainly reinforces the case for diversification. Let's go back to you, David. Can you talk about where else you're finding opportunities, particularly across utilities and health care?

David Giroux

Sure, I think utilities is a really attractive place. We've talked about this in the past in that, for basically 15 years in a row, there was basically zero growth in underlying power consumption in this country. Residential, commercial, industrial; it's basically flat as a pancake for 15 years. In that period of time, utilities were storm hardening, they're rebuilding the grid, replacing old poles, new poles, all that kind of stuff. And basically, they were kind of producing, let's call it 5% EPS growth. That was what that's what they were producing. And, you know, utilities in the right jurisdictions with the right commissions, the right governors, the right incentives, they are seeing an influx of incremental power demand. In some cases, one utility we own there in Indiana, the new consumption, the new power demand from a hyperscaler is actually greater than all the power they're using in that whole region for residential, industrial, and commercial customers. So you're seeing this real increase in demand for power from the hyperscaler. So maybe a little bit from like EVs, but really for the hyperscalers. And that is just really transforming utilities from this old, dodgy industry to a growth industry in many respects.

But again, when you think about utilities, no one's building data centers in California. No one's building in the Northeast where power prices are high. You really got to go to the Midwest. You got to go to Texas, where low cost of power, the Amers of the world, the PPLs of the world, the CenterPoints of the world, the Nicors of the world, they really benefit from this thing. They're going to get a disproportionate amount of hyperscaler capex. That's $800 billion that Sébastien referenced before. They're really, and again, this is not, they're signing up 15-year take or pay contracts. So this is not something like if AI slows down, these guys are all going to get hurt. You know, these are contracts that go through 2040 and beyond. So we really like that.

Health care is really attractive to us as well. It's been a tough area the last couple of years. You've had some issues with managed care post-COVID. People didn't get the care they needed during COVID, and now they have like an echo boom for care, if you will. So they've had high utilization rates. That's been a negative there. You had life science tools. Again, you had a COVID boom and bust. But I think we are actually getting to a place now with a little bit more stability with tariffs. We're getting stability with regard to pricing with drugs. So I think that's going to unleash a couple of things. That's going to unleash a lot of SMID biotech takeouts by big pharma. They have a $400 to $500 billion patent hole to fill over the next decade. So we're going to see a lot of SMID biotech takeouts. There's going to be a lot of benefit from comes that are tied to the biosimilar cycle. So whether it be a drug distributor like either like a McKesson or a Cencora would benefit from that theme. You would also see life science tools. Again, we've had like a kind of a down market last couple of years, but I think we are finally set up for a really strong kind of life science tool environment that benefits like a Waters or a Revity potentially as great investment ideas.

And then managed care, again, we've had, you know, we finally believe we've actually kind of gotten, the cost curve is kind of starting to peak out. Price has gone up and margins, margins are way too low in that sector. So we like United Healthcare. So there's, I think there's really good low risk value in utilities, very, very low risk value in health care. And again, I would contrast that with industrials or Verizon or AT&T, where those companies are all trading at kind of ridiculous valuations. You look at utilities, you look at health care, very limited AI risk as well, but much lower valuations and also much lower, much also very low AI risk and a lot more upside. So if you don't want to play, you don't want to play big tech, you don't want to play the hyperscalers, I think utilities and health care are a great way to get this, get that non-AI risk exposure without paying kind of ridiculous prices like you're seeing today in telecom or industrials or energy.

Christina Noonan

Thank you, David. And interesting follow-up question from our audience. So finding utilities attractive, are you finding them too popular now given the increased demand for electricity? And what about any policy considerations impacting both utilities or health care? Can you touch on that?

David Giroux

I think it's actually, Christina, it's a great, great point. So you have to be, not every state is the right state. This is, again, this is where really good security analysis comes in.

You know, if you're in the Northeast and you're paying really high prices for energy, or if you're in the PJM region, which is kind of in the, let's call it Pennsylvania, Illinois, Maryland region, you're getting higher prices because of data centers, this unregulated power market there. But if you're in the right state where price - in Texas, power prices in Texas are 25% below the national average. That's a very pro-industry, pro-business state. And so they don't, and again, a CenterPoint there, they don't have a rate case for the next three years. So they're in a great spot. A NiSource, Indiana. Again, they just put a big data center in from Amazon. It's going to take a billion dollars off customers' bills for the next 15 years, about $7 a month, $78 a month on the average residential bill. That's great. Indiana rates are 12% below the national average. So, you know, you can't go to, you have to be worried about a policy in California, you got to be worried from Virginia, you got to be worried about certain states, like in the Northeast. But I don't think you should be worried about Missouri. I don't think you should be worried about Texas.

And so, there are some concerns. But I think if you do the really good security analysis, you actually go country, state by state, commission by commission, governor by governor, you can actually find some really good value in utilities and insulate you from that policy risk, which is a fair risk for some utilities.

And again, I think most of the health care risk from a policy perspective is kind of behind us. Right, we were concerned about tariffs with the IEEPA [International Emergency Economic Powers Act] tariffs that Sébastien talked about earlier. We kind of got concerned about it. We were worried about most favored nations pricing on drugs, kind of gotten past that, right? We were worried about managed care. We've taken a lot of the pain out of managed care now. So I think a lot of the policy uncertainty, even vaccines, I think we've taken a lot of the - they've done what they're going to do on vaccines. So I think from a policy perspective on the utilities we own in the right states in most of the big buckets of health care, I think we're in a really good spot.

Christina Noonan

Thank you, David. Very insightful. Let's pivot to the macro backdrop. So we've seen positive economic growth, softening labor market, sluggish manufacturing, housing, evolving Fed policy. Sébastien, how do you piece all of this together, and what's your view the macro?

Sébastien Page

Yeah, I mean, I don't know. Do you think the labor market is softening?

It's actually hard to tell. On the GDP growth side, things are looking quite good. If you take the last three quarterly GDP prints, we only have preliminary data for the latest one. But we're potentially running at 7, 8% nominal. So take a 4% plus 3% inflation. That's high nominal growth. As I said earlier, it's outside of COVID, the highest level of nominal growth in 20 years.

But again, I'm always... I'm almost reminded of David Giroux's wisdom that the macro now is not the macro later, and you can't just invest based on the macro right now. So what are the risks that we're watching? And to be clear, the Asset Allocation Committee, as I mentioned earlier, is neutral between stocks and bonds. We're watching inflation risk. Inflation has been coming down, but it remains a risk. Think of commodities. Commodities, as an asset allocator, I gotta say, probably the hardest asset class to forecast. And that's always a risk to inflation. And right now it's running low, but it could… We've seen it in precious metals, for example, right, with some precious metals up 100% in a couple years. There's also a housing shortage in the U.S., which could make housing inflation stickier. Let's remember, we're running massive deficits in the U.S. So we're positioned for a steepening of the yield curve by being short duration in the Asset Allocation Committee. So I think inflation's a risk.

Another risk that we ought to discuss: I'm positive on AI. Our investment platform is positive on AI. It's going to change a lot of things in society, but we can't avoid the question. When we talk about a macro risk now is how close are we to being in an AI bubble? And I don't think we're there, but we're certainly starting to see some cases of overinvestment.

I mentioned this before. I went to Palo Alto for the first time, and first thing I learned is you're not supposed to wear a suit and tie in Palo Alto. You won't fit in. David, I don't know if you've been to Palo Alto, but don't wear the tie if you're not going to fit in. But it's also a very vibrant area, and it's ground zero for Silicon Valley and tech innovation, and Stanford University is there. And I had to give a talk at a dinner. And I met with entrepreneurs in the late stage, maybe pre-IPO, and I was shaking hands [with] people, and that kind of occurred to me at one point in the dinner that probably half the room was already a billionaire on paper. My co-presenter's company, I asked him after, what is it worth? He, in a very nonchalant way, said $3.5 billion. So I went back and looked at how many so-called unicorns we had 10 years ago. It was less than 200. How many do we have now? Over 1,300.

It is a question. At which point do we get overinvestment? The market action so far this year is showing signs of worries of an overinvestment in AI. Again, generally long-term bullish on the AI theme and its impact on society and the economy, although David raises really important points about its impact on labor. I just heard a statistic that about 1/4 of U.S. jobs, it's estimated, are at least 70% automatable. So that gives you pause. And based on what David was talking about earlier, about white-collar jobs.

The bottom line, my colleague Dom Rizzo, who runs a global tech strategy, likes to say that our job is to navigate bubbles responsibly. And I think right now we're looking at a situation where we're comfortable being at our strategic asset allocation. I know we have a lot of advisors in our audience. Advisors spend a lot of time with their clients talking about financial policy statements, talking about strategic asset allocation. All this great work that advisors do to determine their clients' risk tolerance in the current environment, it's good to stick to that risk tolerance, not panic and go to cash, not put pedal to the metal. Neutral is boring. There's an opportunity, I think, under the hood to be long the broadening trade based on how the Asset Allocation Committee is positioned. But at the top level, neutral feels comfortable. It's not hitting the panic button. But the question of overinvestment will remain, and it's on our radar.

Christina Noonan

Okay. And translating that into fixed income positioning, you mentioned underweight duration, but also under the hood, still seeing some opportunities in credit as well.

Sébastien Page

Diversified long positions in credit markets. Spreads are really tight. David and I just talked about how you can't really compare S&P margins or price/earnings ratio to what they were 10 years ago because the market had a different composition back then. The same is true for credit.

We all like to say credits, as an asset class, it's at an all-time tight, but it's not the same asset class it used to be. Our economists don't expect a recession over the next six to 18 months. So there's an opportunity to stay long a diversified portfolio of credit that is supported by bottom-up analysis. Our research platform is awesome. And I'm not just saying that. I think we have one of the top research platforms in the world. And one of the things our credit analysts do is they look at every issuer in the high yield market and do a full-on probability of default. Then they aggregate it. And they tell us, as asset allocators, what the aggregate probability of default is based on forward-looking models. And that is not signaling a recession. It's actually signaling below historical average defaults. Plus, we manage those portfolios actively where we seek to avoid defaults, and historically have shown that we can reduce default rates close to zero, if not zero. Then we can be long credit, even though spreads are, quote-unquote, at an all-time tight. It's not a large position, but on the margin, long diversified credit, long cash, so a position for the yield curve to steepen. I think you pair that fixed income construction with how we described our portfolio construction for equities, and you're in a position to-- to quote my colleague Dom Rizzo-- navigate the bubble responsibly. Did I just say we're in a bubble? I don't know. I... I'd love to hear what David thinks, ultimately.

Christina Noonan

Yeah, so let's go to you, David. Interested in what concerns you as you look at equity and fixed income markets, particularly around fiscal spend and the mounting U.S. debt backdrop.

David Giroux

Yeah, it's really, it's a really important question. And I think if I come back someday as an economist, I will always say that we're not going to be in a recession. Because the reality is, 92% of the time, since 1982, we're not in a recession, right? 89% of the time since 1945, we're not in a recession, right? Recessions are rare. Betting on recessions is not a good strategy. But there are these three big, small probability, medium probability events over the next 5 to 10 years that are medium probability, but very, very bad severity, right? That's…so, I don't worry about the recession.

I worry about these three things. What are those three things?

And it goes to one of the things you raise. It goes to this idea of deficits. We believe probably the $300 billion of Trump tariffs that are coming in right now, making the deficit look a little bit less bad than it is, will probably go away. Some of the spending initiatives that are spending cuts are supposed to happen in future years won't happen. And so you're probably going to be at the 7% deficit to GDP, which is just unsustainable. And the incremental buyer of Treasuries today is a much more yield-focused buyer. And there will come a point in time where we're going to have to get higher and higher rates to issue more and more debt. I think the numbers that came out today or yesterday were, I think over the next 10 years, we have like $26 trillion of deficits. That's just a crazy number. So now the question is, when does that become an issue? Is it an issue tomorrow? Is it an issue next week and next month? Is it next year? Is it 10 years? I don't know, but there will come a time where the amount of deficit spending will cause a problem. And you know, we saw a little bit of that in Japan recently. A couple of years ago, we saw 100 [bps] spike in the 30-year UK rate. We've seen Bitcoin go up because of some of these fiscal concerns. So you're seeing some cracks in the surface, little cracks here. So I worry, we are driving a car at a very, very high speed at a wall. We just don't know when that's going to happen. When that's going to become an issue. Like I said, today, tomorrow, next month, five years, I don't know. But that will be an issue and that'll cause markets to come down dramatically.

There is a high probability, I don't know, a medium probability that sometime in the next 10 years, China would go into Taiwan. And probably, with our adventuresome foreign policy, those odds have probably gone up a little bit. You know, that China, Taiwan produces 90% of all the leading-edge semiconductors in the world. And that would be a huge, China would have a tremendous amount of power over us if we weren't able to access leading edge semiconductors. And so that is, that's another market down 30, 40% kind of day. That's probably at 50% odds over the next 10 years.

And the last issue, again, I think Sébastien kind of said it correctly, is AI. I'm not convinced the hyperscalers are over-investing. They're getting very good returns on their investments so far. So, and they see very, very good growth and backlog and getting very good returns. Their margins actually have been going up, not going down. But there is a question, like we talked before, no one really knows how AI is going to play out. Is it going to be this niche, really attractive tool for a certain number of applications? Or is AI going to be something that is transformational and drives unemployment to 8, 9, 10%? And we start talking about basic income, right? So there's a wide range of outcomes. And one of those outcomes is a real, if Sébastien made a really good point about how much AI capex is driving GDP growth, if that fell off a cliff in ‘26, ‘27, ‘28, that would probably cause a recession and probably cause the stock market down 30%.

So again, when we think about the equity market, again, I think this is really important where good fundamental and not talking about markets, not talking about indexes, but where are the 50, 60, 70 companies out there that have the best risk/reward in the marketplace? That you can generate not 6 or 7% kind of returns, but low- to mid- to high teens kind of returns with kind of low AI risk, right? Utilities, parts of health care, very, very well-protected parts of software. Somewhere software will get disrupted, not all software will get disrupted. There's a lot of great software companies that will not be disrupted, look really great to us. Smith Biotech, again, we're going to all be taking, a lot of Smith is going to be taken out of the next couple of years. So there's really great pockets of opportunity in an overall kind of expensive, maybe a little bit speculative market right now that we're trying to take advantage of. So hopefully that gets to the heart of the question.

Christina Noonan

Thank you, David. All right, as we begin to wrap up, I want to ask both Sébastien and David, many investor expectations for this year are quite bullish, predicated on this market broadening. What do you think is a consensus view that could be wrong at the end of the year?

Sébastien Page

Maybe David just hinted to it that all software is dead. It kind of feels like consensus right now, but maybe that will turn out to be wrong. You never know from a macro perspective. Again, last year, the consensus, quote-unquote, was that tariffs would be incredibly disruptive to the economy. And we didn't get a recession, we didn't get margin compression, we didn't get a rise in the 10-year, we didn't get all the disruption that we expected. So the big macro mistake this year, I'm going to use probabilities, like David, and maybe it's a very small probability, but it's never really zero that you don't get a recession.

There are four indicators in the background. If you want to be bearish, I think those are the key four indicators. No one's really talking about them right now, but in the background, historically, they all point towards a recession. So that's my scary four. Unemployment has gone up by 90 basis points since the bottom. That's a recession signal. Manufacturing, with the exception of the last print, has essentially been in a recession, according to PMIs. The yield curve is dis-inverting. Historically, that's a signal. And housing activity is basically 10-year low. So if you want to dig and you want to make a recession call, you can. And again, the consensus is that there is no recession, but it's rarely zero.

Christina Noonan

OK, thanks, Sébastien. Anything to add, David? Anything you think investors may be missing this year?

David Giroux

Sure, I'm going to go on a, I'm going to be non-consensus, which I guess this would have been consensus a couple of years ago. Now it's non-consensus, I guess. So I'm going to be anti-international. Again, I think if you look at a mean, again, most indexes are, most managers do a weighted average as opposed to a median index. So I'm going to look at, again, I think if you look, we don't know all the numbers, not everybody's reported, but in 2025, SPI vendor earnings were going to be much stronger than almost all international markets. So while international outperformed last year, it outperformed because of the FX moves as opposed to any kind of fundamental change in the mean index EPS growth, right? So that will occur again this year. So I'm going to say U.S. over international. I think that I have a high confidence in that.

I'm going to go against the broadening trade again, just from this perspective of nothing has really changed with fundamentals. Sentiment's changed. Stock prices have changed. Multiples have changed, but from fundamental, nothing's changed. Staples are not better today than they were on November 15th. Telecom companies are not better than they were on November 15th, right? So CAD is not worth 8 points higher than they were a couple, just three months ago, right?

So I'm going to say we don't broaden, I think, information technology and all the peripheral information technology plays like Amazon Meta outperformed this year. I'll make those calls. And I will make a call that we do not cut interest rates this year, too. That's my only macro call. I don't like macro calls, so you got to take that with a giant grain of salt. I'll leave the macro calls to my good friend Sébastien, who's much better at that than I am, but maybe that's my only one macro call. But treat that with a giant grain of salt.

Christina Noonan

All right. Thank you, David. Great note to end on. I know our audience and investors are always curious to hear your thoughts, so thank you for being so thorough. And Sébastien, thank you for your thoughts as well, and to the audience, we appreciate you joining us, and we look forward to seeing you again next quarter.

202602-5065292

Investment Risks

Active investing may have higher costs than passive investing and may underperform the broad market or passive peers with similar objectives. Each persons investing situation and circumstances differ. Investors should take all considerations into account before investing.

International investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as specific country, regional, and economic developments. The risks of international investing are heightened for investments in emerging market and frontier market countries. Emerging and frontier market countries tend to have economic structures that are less diverse and mature, and political systems that are less stable, than those of developed market countries.

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Glossary of Terms

Application-specific integrated circuit (ASIC) is a customized semiconductor chip for specific use.

Barbell is an investment approach that seeks to allocate assets between high-risk and low-risk assets.

A basis point (or bps) is equal to 0.01% or 0.0001. It is used to describe changes in percentages or interest rates.

Bearish is used when describing market sentiment; a bearish investor generally expects prices to fall.

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Morningstar’s Fund Manager of the Year Award, now the Morningstar Awards for Investing Excellence, recognize portfolio managers and asset management firms that demonstrate excellent investment skill, the courage to differ from the consensus to benefit investors, and an alignment of interests with the strategies’ investors. The Morningstar Awards for Investing Excellence award winners are chosen based on research and in-depth qualitative evaluation by Morningstar’s Manager Research Group. Morningstar’s Outstanding Portfolio Manager Award recognizes an individual or team who has produced exceptional returns over the long term. To qualify, a manager’s strategy must currently earn a Morningstar Medalist Rating of Gold or Silver for at least one vehicle and/or share class in the appropriate asset class (equity, fixed income, or allocation). David Giroux won the Outstanding Portfolio Manager Award for the Allocation category in 2025. He previously won the Morningstar U.S. Fund Manager of the Year award for Allocation Funds in 2012 and Allocation/Alternative Funds in 2017.

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