The Wisdom Behind Better Investing (With Jenny Harrington & Rebecca Patterson)

Liz Ann Sonders · Charles Schwab

Market breadth is improving and leadership is rotating beyond tech into other sectors.

About 75% of S&P 500 constituents have outperformed the index over the past month, up from only 17% just a few weeks earlier, which points to a broadening out. Former darlings have retreated while other areas of the market have accelerated. She uses a wartime analogy: some generals have moved back from the front lines while many more soldiers have moved up. Health care leapfrogging tech to become the second-best sector year to date is part of the same rotation.

“You have about 75% of the S and P's constituents have outperformed the index over the past month. Just a few weeks ago, that had gotten down to only 17%. So we are seeing a broadening out.”at 3:53

Liz Ann Sonders · Charles Schwab

Profitable small caps are massively outperforming unprofitable ones, reversing last year's pattern.

Within the Russell 2000, profitable stocks are up more than 20% year to date, while unprofitable stocks are up only 2 to 3%, an 18-percentage-point spread in favor of profitable companies. Last year the unprofitable stocks had about double the performance of the profitable ones, so the pattern has fully reversed. She argues profitability matters particularly as you move down the market-cap spectrum.

“The profitable stocks within the Russell two thousand are up more than 20% year to date as we tape this, and the nonprofitable stocks are up only two or 3%.”at 11:08

Collin Martin · Charles Schwab

Starting yields are attractive; favor short and intermediate maturities over long-term bonds for now.

Starting yield tends to be a very good indication of forward bond returns, and today's yields are high, so starting yields look attractive. Prices could still fall somewhat further. The preference for short and intermediate maturities over long-term bonds reflects a wish for more clarity on inflation. The view depends on the Fed hiking two more times; if inflation stays sticky and the Fed must hike more, Treasury yields would likely move higher, which is the main risk to the view.

“when you look at bond investments, starting yield tends to be a very good indication of forward returns. Not that you can't see prices fall a little bit further from here, but we think the starting yield is attractive.”at 9:23

Collin Martin · Charles Schwab

Treasury auction demand has held up and should continue given attractive, elevated yields.

Upcoming 10-year and 30-year Treasury auctions will test demand with yields still elevated. Weak auction demand would be concerning, but demand has generally held up. He expects that to continue given the relative attractiveness of where yields are today.

“Generally speaking, if you had a weak demand, that can be a little bit concerning, but demand has generally held up, I think that should continue given the relative attractiveness of where yields are today.”at 36:13

Liz Ann Sonders · Charles Schwab

Election uncertainty wasn't a big driver of recent weakness, so it's not a clean clearing event.

A clearing event typically means a period of weakness is followed by a lift once an uncertainty resolves. She argues the reason this label may not fit is that election uncertainty and potential policy changes were not a big part of the underlying weakness seen recently. What the election did was be decisive, without a drawn-out contested result, and she thinks the market may be reacting to that decisiveness. The AI and data center story is where the election may matter more, given how political data centers have become.

“I don't think the election uncertainty about it, potential policy changes were a big part of some of the underlying weakness that we have seen recently.”at 1:32

Liz Ann Sonders · Charles Schwab

Data center buildout is decelerating as cancellations rise amid political pushback and higher costs.

Data center politics has become bipartisan, since constituents are concerned about rapid growth, and the political backlash is a factor. Whether from that force or from data centers being less popular and from constraints on building AI infrastructure, with costs rising significantly, data center cancellations this year are up significantly. She argues the data center push had already shown deceleration, which is part of why forward earnings estimates for the AI story have not received a significant boost. She also points to concerns about credit availability, the cost of credit and a potential peak in forward earnings growth expectations for capex spending.

“showing that the data center cancellations this year are up significantly... I think there's a lot at play that had already shown some deceleration in the push higher in data centers.”at 2:57

Liz Ann Sonders · Charles Schwab

Health care is an AI beneficiary, from operational efficiency to diagnostics, testing and disease prevention.

Health care recently leapfrogged tech to become the second-best performing sector year to date, and the top two sectors have had a negative correlation, which is unusual over fifty years. She argues health care's leadership is not just a risk-off move into defensive areas. Instead, it is an example of an AI beneficiary, through the low-hanging fruit of inefficiency and the implications of AI for diagnostics, testing, disease prevention and cure.

“I think health care is actually an example of an AI beneficiary, in terms of everything from the low hanging fruit of inefficiency, but also the implications of AI on things like diagnostics and testing and disease prevention and cure.”at 5:36

Collin Martin · Charles Schwab

Expects gridlock to limit fiscal changes, which markets welcome; fiscal concerns not the main yield driver.

With Democrats in Congress and President Trump saying he will veto anything, not much is likely to change on the fiscal side, which he sees as good. Markets appear to be breathing a sigh of relief that fiscal concerns may not become more worrying. He notes fiscal concerns have not been the dominant driver of markets lately, though they play a role and will be watched in the coming weeks and months.

“if there were concerns on the fiscal side, you know, it's tough to get much done right now. If you have, you know, Democrats in Congress, president Trump saying he's gonna veto anything, there's probably not much gonna change there on the fiscal side, which I think is good.”at 6:16

Collin Martin · Charles Schwab

AI-related corporate bonds carry rising risk; favor a defensive approach given supply and profitability concerns.

Year to date, communications and technology sector bonds have underperformed Treasuries the most, while most other sectors outperform, so the market is bifurcated. Top-down corporate fundamentals look healthy, but the data center build-out is funded by heavy long-term corporate debt issuance. That raises supply and demand questions (will there be enough buyers, which could require higher yields to clear) and profitability concerns. Profitability risk may not hit highly rated companies for years, but credit ratings, company size and cash-flow stability matter, and there will be winners and losers. He suggests investors check the tech exposure in any bond portfolio, individual bonds or fund.

“there's clearly these risks on the tech and communication side with all the AI build out, with supply and demand concerns, especially knowing that they're issuing so much long term debt.”at 7:51

Collin Martin · Charles Schwab

Expects the Fed to hike twice more: December and early 2027.

His firm's outlook is based on the Federal Reserve hiking rates two more times, once at the December meeting at the end of this year and once more likely in early 2027. Two- and five-year Treasury yields already price in about two hikes. The main risk to the view is that inflation stays sticky or moves higher, forcing the Fed to hike more aggressively, which would push Treasury yields higher.

“Our outlook is based on the Federal Reserve hiking rates two more times. So once by... at the end of this year, the December meeting, and then one more time likely early in 2027.”at 9:34

Liz Ann Sonders · Charles Schwab

Inflation isn't just energy; tariffs and AI input costs mean it won't fade even if the war resolves.

She argues inflation is more than an energy story. Tariffs are one driver, and AI is another because of the rising cost of many inputs into the AI build-out. Because of these other factors, she does not think the inflation story will fade if and when the war is resolved.

“So inflation is more than just an energy story... There's a tariff element to it. There is an AI element to it given the rising cost of many of the inputs into the AI build out. So I don't think the inflation story starts to fade if and when there's some sort of resolution in the war.”at 10:41