New York morning trade, we are looking at the major US stock averages pulling back below the flatline.
This has come on the heels of some hotter than expected for CPI figures at the same time we are looking at the S&P 500 continuing to hit new record highs driven by the massive boom in AI as well as the resilient economy.
But underneath the surface there are some warning signs that big tech companies are spending. billions of dollars on AI this year alone, which has some experts worried they are building too much too fast and add in the fact that oil prices continue to rise and this does come as a fragile ceasefire continues to hold in the Middle East.
Well joining me this morning at the New York Stock Exchange is Julian Koski, co-founder and CIO of New Age Alpha.
Great to have you here.
Thank you so much.
Thank you very much.
Well, we got those consumer price inflation figures that we're looking for, and for the most part they did come in line with estimates, but we do seem to look at the core CPI figures slightly higher than expected.
So where do you stand in terms of the market outlook right now?
Well, I don't think it's time to react.
Often reaction that's happening right now is behavioral in nature.
We tend to worry about this, but the question becomes is this going to find a way into the more fundamental side of the economy, which is the actual underlying earnings, right?
And there's no evidence to suggest that that is happening or is going to happen.
When it does happen, that's the time to react.
Behavioral reactions often, I believe, one you just avoid them right now and we're in that moment right now.
So speaking of which, oil prices do remain elevated given the fact that WTI and features are above the $100 level and we'll have to wait and see to see whether or not this starts affecting Americans more than they are right now.
But I do want to expand on what we're seeing when it comes to the AI trade.
So first and foremost in terms of video, we are still awaiting their earnings at the end of this month, but you believe their stock is undervalued, is that correct.
That is correct and it's based on some math, right?
In other words, if you take Nvidia's stock price and you work backwards, figure out what does that stock price imply in terms of its growth rate.
It implies a growth rate of around 47%.
Now on a historical basis, Nvidia in the last 12 quarters has delivered a mean growth rate of 97%.
So what is there to suggest that they are actually going to start missing now?
There's nothing.
The math actually says the opposite, right?
I have no evidence other than what you hear on the news and things like that, people saying it's overvalued, but the mathematics suggest it's not.
And on the flip side, tell me your take on a name such as Alphabet, one of the Mag 7 names.
So on Alphabet, for instance, their probability of failure was about 1%, right, and the growth rate that they needed to achieve was around 2%, so it was relatively small.
And in the last earnings you can see they did extremely well, and that is how we think about buying stocks.
We answer one question.
What is the likelihood that the company will fail to deliver the growth, and we work on the math to answer that.
There's nothing else that drives our analysis and with Alphabet, it was a very, very low probability of failure going into this earnings season. and we're looking at a space such as technology that is a very big space because within the tech sector there are also plenty of names.
So when we're talking about AI within the ecosystem how are you looking at the individual names again so all about probability of failure.
So if you take the semiconductor.
Right now, the median probability of failure is around about 37%.
That means with all those companies, about 43 names I think in that ETF, there's a 63% chance that the companies within there will deliver the growth indicated by their current stock prices.
So it's not suggesting overvaluation in any way.
And with the names, I understand that you're concerned about Tesla now we got their earnings earlier in the season, but what do you make of what the company is doing and their new vision?
Well again, you see investors trading on what I call vague and ambiguous information, right?
Storytelling, right?
The storytelling is impacting the stock price.
It's driving the stock price higher.
That is requiring that Tesla deliver more growth to support that stock price, but Tesla's historical.
Delivering on that growth hasn't been there, so it has a relatively high probability that it might not deliver the growth implied in that stock price.
Stocks that trade on storytelling are very difficult to deliver the growth because the stocks overinflated and it might be in the case of Tesla.
And Julian, if I understand this correctly, you advise people to value stocks like an insurance company, is that correct?
That's right.
Actuaries underwrite risk based on known information and in the world. stock market, there are only two pieces of actual known information that is the stock price of the company and the financial statements.
The rest of it is, as I said, it's vague and ambiguous, right?
So we try to eliminate that.
We want to make sure we are buying stocks based on underlying fundamentals, not on behavior, not on storytelling, on noise. speaking of which, there are a lot of risks out there, and we know there's been plenty of volatility across all asset classes in 2026.
So whether we look at the Of equities or commodities or even crypto or even bonds across the globe, we know there's been a lot of volatility this year.
So how do you assess risk?
So we think of it in 4 different measures one, and we don't use one measure, we use 4 in an orchestrated way.
One is a Fed decision, but an actual Fed decision, not are they going to increase rates, but when they make a decision.
2, the LEI, the leading economic indicator.
3, the VIX, and the fourth one is the momentum of the S&P 500.
And why those four?
Because we want to know what the Fed is worrying about.
We want to understand has it impacted the economy?
LEI is going to tell us that.
And then we want to know what human behavior is telling us.
The first leg down in any volatility is going to come from human behavior.
It's the second leg which has now hit the fundamentals and actually hit the economy that's when investors need to be worried.
So we think of those four things.
In the last 15 years there have been 42 events.
Where the S&P 500 has gone down around about 7%, right?
But if you kept your portfolio at 80/20, you would have outperformed that all the way through all of those events.
In other words, the um the V shape is often very, very strong, and you're going to recover. and finally Julian building on what you just said heading into 2026 we're looking at US equity markets seeing double digit gains for three consecutive years and when we were talking about diversifying outside of the US, we're looking at equity markets across the globe, but given how the Middle East conflict has been affecting central banks in Europe as well as Asia and in other economies, what is your outlook for equity markets. of the US, whether we're talking about the developed economies or even emerging markets, I think each of the economies face different risks.
It's very difficult to look at them in totality.
One has to break them down into pieces.
What I can tell you is that very bullish on the US economy.
I don't see any evidence of overvaluation.
Yes, there's constant volatility.
There's constant noise out there.
But if I'm an investor today, I stay with the US, Europe has its problems, maybe bigger, but again I can't comment on what that's going to mean to the fundamentals of those companies because that's what it comes down to the individual company, not the total economy.
I've got to look at each company within that and make a decision.
Well, Julian, it was great having you join us here at FinTech at the New York Stock Exchange.
I appreciate your time and thank you so much for all of your insight.
Thank you very much.
Thank you.
