00:00Lizanne Saunders of Charles Schwab writing the following, the broadening gap trade should have
00:04legs in 26, though not necessarily in a linear fashion. I'm pleased to say that in the studio
00:08is Lizanne Saunders now. Lizanne, good morning. Good morning. Good to see you. Thanks for being
00:12here. How is the stage set for the 493 versus the 7? So I think it's the trajectory of earnings
00:19that matters. I think one of the mistakes that investors often make is they'll look at data,
00:24comparative data at a snapshot in time, and they'll compare level. So if you take the MAG7
00:30as a cohort and you look at earnings growth rate, even by the end of this year, it'll still be higher
00:34than the other 493. But directionally, it's heading down and directionally, the other 493 is heading
00:39up. And it brings up what I've said for my 40 years doing this, which is better or worse often
00:44matters more than good or bad. And I think that's one of the fundamental underpinnings for some of
00:49this broadening out. So let's talk about the contribution of the MAG7. You detailed this
00:54in your recent note. They're the big contributors. Is that something you've got to mitigate as you
00:58look at the S&P 500 and how it's weighted for this year? I think that one of the things that we find
01:04that the mistakes that investors make is they conflate contribution with price performance.
01:10So they think generically of cohorts like the MAG7 and they're constantly barraged with
01:17they're the primary outperformers. They're among the biggest contributors, but they're not the
01:23price outperformers. So NVIDIA, the poster child for all of this over the past year is the number
01:28one contributor to S&P returns by virtue of the multiplier of its cap size. But for calendar year
01:342025, it was ranked 75th in terms of price performance. So 74 stocks performing better than
01:42NVIDIA, number one contributor. I think it lends its impression to investors that the only way to do
01:50well, however you define that, is to be concentrated in those names. That's an institutional problem. If
01:56you're benchmarked against the cap-weighted S&P on a quarterly basis, you are at the mercy of the
02:01construction of the indexes. But that's not an individual investor problem. And what's also
02:07interesting, the best performer is we went kind of old school last year, you know, SanDisk and
02:13Western Digital. I just bought my daughter for Christmas an actual digital camera because she
02:20likes the photo quality better and unwrapped it. And there was, you know, SanDisk on it. And this
02:25is not a recommendation. I don't cover individual stocks. It's just a story. But I just think that
02:32the opportunities are fairly ripe. And what was also interesting about last year, and we've talked
02:37about this before, is the churn and rotation under the surface. You had a very strong year for the S&P
02:42500, but the average member had bear market level maximum drawdowns. It just happened on a rotational
02:50basis. I think that fed the opportunity for investors to look outside of that small concentration
02:57of mega cap names. And that's what I think has legs in 26. A lot of people, when they're asked
03:04about the broadening out trade, start talking about U.S. versus the rest of the world. And they
03:08start saying, if you really want to diversify, go to Europe, go to Asia, go elsewhere. How much is
03:13that part of the proposition versus trying to identify the best stories? Yeah, I think international
03:18diversification makes a lot of sense. We've been espousing that for a while. And suggesting to
03:23investors that they have international diversification, for many years, you just had to constantly say,
03:29I'm sorry. And now to some degree, you get to say, you're welcome. So, you know,
03:33clearly it worked in the last year, but you do tend to go through multi-year secular cycles.
03:39Not U.S. is the only game in town 100% of the time in a linear fashion and, you know,
03:45discard all the international. But I think that we're maybe in one of those waves where not
03:50necessarily that international is going to consistently outperform, but as a diversifier,
03:55it adds benefits.
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