Innovation and AI Continuing to Power Market Resilience: Insights from Wayne Penello

US markets are turning lower in midweek trade on the heels of some hotter than expected producer price inflation.

Now, despite stocks being near records, there are some pressure points for the US economy.

Also, we saw April CPI hit its highest level since May 2023 due to high gas as well as fuel prices from the ongoing U.S.Iran war.

Meanwhile, we're continuing to monitor the as well as 10 year yields and also we are looking at energy and information tech are the S&P's best performing sectors in 2026 with the AI race helping markets avoid a historically bad midterm election year so far while joining me to break all of this down is Wayne Penello, founder, President and CEO of NextGen EMP.

Good morning Wayne.

Thank you so much for joining me today. to start the week, the S&P 500 closed above 7400 for the first time ever, but we are also looking at oil prices still elevated.

So what is your overview for the US macro backdrop right now?

Well, the markets always have 3 tailwinds, and typically they're inflation, which is working, increased population, which is happening, but most importantly, innovation.

So innovation is really driving this market, and I'm very optimistic about the future of the economy over the next several years because of the efficiencies it's bringing to not just major companies but to everyday people.

I mean, if you were to ask me 6 months ago.

How much time does AI save me?

I would tell you 10 hours a week, but today it probably doubles my productivity.

That's, that's going to trickle down to everybody.

I do want to expand on that way another strong earnings season so far with over 80% of companies beating on reports.

So tell us why you like to separate the top 25 companies of the index from the rest and what is it actually telling you.

Well, the interesting thing about that is, it isn't a predictive tool, but it helps you understand the dynamics that are going on in the current moment.

So if you take the top 25 companies, the S&P 500, they fully represent more than 50% of the total capital markets, market cap of the S&P.

And there are times when they're just going and blowing all by themselves and the rest of the economy is lagging.

There are other times when, as we saw yesterday, they were pretty stable, but if you look at the 475 companies that literally are about 4% on average, 4% of the size of the top 25 companies, they, they really suffered yesterday.

And that that pulled the market down a little bit.

You didn't see it in the S&P because of the weighted average of the companies as the index is structured, but you could see it in individual holdings.

So it tells you if, if both are going up or down in sync, it's a risk on, risk off trade that large money managers are just deciding whether to be in or out of the market.

But when they separate.

It tells you which aspect of the market they're focusing on in the in the current time frame, which can be very helpful tactically in terms of you may like, you want to own a company per se, but it may, it may be at its, its recent highs.

So do you really want to buy it at its recent highs, or do you want to wait for some meaningful drawdown before you position yourself?

And this will give you some guidance around that. and we are smack dab in the middle of Q2 2026.

A lot has happened so far in the first half of this year.

So given all this volatility, I understand that you say predicting the short term is difficult.

So what should risk management actually look like?

Most people use diversification as the tool to manage risk, and unfortunately when you have, for example, a risk off trade, correlations jump very high, almost to one.

So at that point, as we saw in 2022 when you diversified into stocks and bonds, it didn't work because inflation and increasing interest rates affected everything.

So what you really want to think about is.

A thoughtful selection of which assets in your portfolio that you own, discipline sizing of those assets, and then, and then finally selective hedging.

Because it's, it's my basic tenant that if I want to beat the S&P 500 or any other index, all I need to do is avoid the dogs in that index and and so if on the other hand you take a strategic position that I want to use the companies that are less than likely to match the overall average as a hedge, now all of a sudden you've created a portfolio that protects you against systemic risk.

Because when those correlations jump to one, those individual holdings that you've got short, if you will, but that you use to hedge your portfolio are going to protect you, but at the same time, when the market's up, they're not going to drag down your performance significantly.

Yeah and when you're also the co-CIO of the NYSC listed efficient market portfolio plus ETF.

So tell us how this fund takes all of this into account.

So EMPB is is a long short fund.

It is broadly diversified and it essentially looks at the industry sectors that make up our economy and makes a decision around which ones are unlikely to achieve average performance.

I mean, in any given year, one industry's going to have an edge over under industries in terms of growth or profitability because of current. events.

So if you can identify those that are likely to lag behind, and this is no disrespect to the fund managers that operate those indices, I mean they're actively doing the best they can, but in the last couple of years it would have been very hard for health care to keep up with the semiconductor industry, for example, because of the massive growth in semiconductors.

So what our fund does is It takes a takes a broad position, broadly diversified, long portfolio of exchange traded funds, so we are a fund of funds, and then on the other hand we hedge the systemic risk by going short and a limited degree and using those shorts as hedges against the overall performance and the overall goal is we're willing to sacrifice a little bit of upside gain, but over a long period of time we expect to match.

The the overall performance of the market, but in the short term what we're really looking to do is minimize those drawdowns because drawdowns kill compounded returns.

For example, if the market drops 50%, I'm going to use an extreme example, then you need a 100% rally to get back to where you were.

But with a hedge portfolio, if you can cut those losses in half, so your portfolio only lost 25%.

Then you only need a 33% rally to get back to break even.

So with a hedge portfolio, you spend more time compounding returns instead of trying to catch up.

Well, we will have to leave it there for today, but thank you so much for joining us today and thank you so much for sharing your perspective.

Remy, it's a pleasure.

I hope to talk to you again.

Thank you so much.

Have a great day.

Thank you.