U.S. Largest Independent Investment Advisor Discusses August Market Trends: Value Stocks Rebound, AI Spending Surges, Bond Market Tells a Different Story

Charlie Bilello: Over the past year, diversification has almost become a dirty word. Many have asked, why hold value stocks? Why hold small caps? Take international stocks out of my portfolio. But this year, we’ve seen what I call the “everything reversal.” Value stocks are up about 20%, small caps 19%, emerging markets 15%, midcaps 15%, and international stocks overall up 13%. The U.S. market has still performed well, rising 9%, but growth stocks have actually declined slightly this year, with the Magnificent 7 down 3%. How do you view this rotation? What lessons should investors take away?

Jamie Battmer: It’s finally happened, and I’m actually pleased. For about 15 years, growth stocks and U.S. tech stocks had been outperforming exclusively, and the longer this persisted, the more likely people were to jump in at highs. We’ve seen this too many times before—in 2000, in 2010. Back then, emerging markets and international stocks surged while U.S. large-cap tech stocks fell 33%, and the S&P 500 delivered nearly zero return over the decade. So it’s a good sign to see this rotation occur—it means asset allocation and diversification are beginning to work again, rather than everyone chasing the latest trend.

Charlie Bilello: Many of the questions we’re receiving now are the reverse of what they were a year ago. Back then, people were asking, “Why should I hold these?” Now, they’re asking, “Value stocks have risen 20%, while growth stocks have declined—this spread is among the largest on record. Is it too late for me to switch?” I’ll show you this chart: whether it’s large-cap vs. small-cap or U.S. vs. international, the same pattern holds. Value has indeed shown a slight reversal relative to growth, but we’re coming off all-time highs, and this outperformance could very well continue over the next several years. Of course, it won’t happen linearly—but given that value has underperformed for 15 consecutive years, a one-year reversal may still be early in terms of timing.

Jamie Battmer: Yes, it could last another three months or another 30 years—no one knows. But as long as you’ve diversified adequately, this shouldn’t affect your strategy. It’s great that long-underperforming value assets are finally catching up, but don’t rush to chase them. Just as after the 2000 tech crash, many shifted their entire portfolios into value stocks—timing it wrong—or poured into BRICS after emerging markets surged over 100% in a decade—again, the wrong timing. These are just parts of your portfolio; maintain balance. Even if a reversal starts tomorrow, that’s not a reason to rebalance your asset allocation.

Charlie Bilello: Completely agree. If we could truly predict the future, we should concentrate our bets on the assets that will win. But since we can’t, that’s exactly why we diversify. We don’t know what will happen, so we must spread our bets and hold everything.

Jamie Battmer: My crystal ball is just as useless as the ones on Wall Street that pretend to predict the future. The only difference is that mine only needs a small battery, while theirs charge exorbitant fees.

Charlie Bilello: Next, I want to talk about John Bogle’s “iron law of finance,” which is mean reversion. The most overextended area seven months ago, in my view, was the semiconductor sector. I spent a lot of time studying it—it could only be described as speculative mania. We saw this sector rise 237% over 14 months, even surpassing the rally before the peak of the dot-com bubble. In the weeks leading up to its peak, massive amounts of capital flowed into semiconductor ETFs, a classic case of chasing momentum. One DRAM ETF, which held just three stocks, raised nearly $30 billion in about 30 days, becoming the fastest-growing ETF in history. This almost never ends well. In July, the S&P 500 was essentially flat, down less than 1%, but semiconductors fell 20%, and the DRAM ETF dropped 30%. Did you hear a lot of people talking about semiconductors in June? Were many people asking you whether they should buy?

Jamie Battmer: Absolutely. The societal excitement over AI technology’s leap forward has been so intense that everything related to semiconductors has been hyped to the skies. You can debate whether Nvidia is expensive—it’s a large, genuinely profitable company—but many other stocks that rose alongside it are smaller, poorly managed, and merely riding the wave. It’s reminiscent of the last tech bubble, where adding “.com” to a company’s name could push its stock up 50%. Interestingly, our clients haven’t overextended themselves in this trend; occasionally someone asks about it. But from a portfolio management perspective, it has indeed impacted our mutual fund holdings. We’ve done extensive tax-efficiency optimization and tried to balance clients who hold large positions in Nvidia with substantial unrealized gains. When extreme deviations driven by greed and irrational exuberance occur, they create significant challenges. Yet these imbalances ultimately correct themselves, as recent data has shown—reminding us not to be swept up by irrational enthusiasm or chase trends.

Charlie Bilello: Here’s another lesson about leverage. We’ve seen a surge in leveraged ETFs and related products, along with numerous stories about margin accounts. In South Korea, many retail investors were liquidated after using leverage to bet on SK Hynix and Samsung. In the U.S., there’s a hedge fund called Situational Awareness—a somewhat ironic name, given their apparent lack of it. They made an extreme leveraged bet on semiconductors, growing the fund from hundreds of millions to $45 billion over a few years, becoming one of the fastest-growing hedge funds in the U.S. But then things went wrong. Essentially, they received a margin call and were forced to sell the majority of their stock positions to Ken Griffin’s Citadel.

Jamie Battmer: This is essentially synonymous with “This month, we let you down”—sorry, we’re only human. Humans are inspired by some things and terrified by others. All data overwhelmingly proves that humans cannot beat public markets. Don’t try to beat them; the optimal strategy is to own them. So when we design portfolios, we assume “this month might let you down.” The market may decline, the economy may weaken—these things happen—but the portfolio is built to withstand them and recover. But when people bet heavily on these things, you get headlines like, “Sorry, we got greedy, got excited, and let you down.” Those headlines are as old as newspapers themselves.

Charlie Bilello: This fund fell 67% in July—clearly not what investors expected, though extreme volatility was anticipated given its prior massive gains. As usual, the issue is that investors chase past performance. They didn’t benefit from the rise, yet they’re bearing the loss. A very true saying in investing is: you have to survive to fight another day. When you use leverage and that leverage encounters extreme volatility, you may lose your chance to fight another day. This is a valuable lesson for all investors.

Charlie Bilello: Third topic—history rhymes again. We’ve all heard the saying: history doesn’t repeat itself, but it often rhymes. I’ve been talking about the IPO market. In the first few days after SpaceX’s IPO, I posted numerous warnings noting that its market cap briefly exceeded $3 trillion—higher than Google and Amazon—and its price-to-sales ratio surpassed 150x. Many said, “Charlie, you don’t understand this company; this time is different; it won’t follow a typical IPO pattern.” But today, the stock has declined more than 50% from its peak, fallen below its offering price, and is now below its first-day closing price. In reality, nothing was different—just as you wrote in your letter last quarter.

Jamie Battmer: Thanks, Charlie, for teasing me with this—actually, I stole all these images from you. But seriously, Mark Twain’s saying that history doesn’t repeat itself but often rhymes, along with my favorite book, “This Time Is Different: Eight Centuries of Financial Folly,” both tell us that this isn’t just something that’s happened over the past 15 or 30 years—it’s been going on for a thousand years. It goes back to human nature. It’s perfectly normal for people to get excited about these things, and we have many clients who are excited. If our custodial partners can help them secure a relatively higher allocation, we’ll accommodate their requests—but the data tells us not to. What surprises me most is how Wall Street pretends it can predict the future. Ask a hundred people whether a hot IPO is a good thing and whether they should participate, and most will say yes. But if those same people held up signs saying, “Buy this IPO—it loses an average of one-third of its value in a year,” no one would buy it. Yet Wall Street manages to get people in again and again.

Charlie Bilello: They’re excellent at sales—that’s undeniable. The demand is clearly there, with the offering being oversubscribed many times over. We’ve seen this movie before: excitement peaks in the first few days of trading, and you’re essentially providing exit liquidity for others. Those who bought at the IPO price are the sellers. Next week will bring the first real test, as SpaceX insiders and early investors haven’t yet been allowed to sell. The first earnings report drops next week, and two days later, the first group will be permitted to sell. That’s the real test. If you have a 10x, 20x, or 30x unrealized gain on SpaceX, won’t you sell some? This looks like a high-probability outcome.

Jamie Battmer: We have hundreds of clients who are SpaceX employees or associated with the company. The key point is that you cannot control what the market does—lock-up periods of three months, six months, or any duration are entirely outside your control. What you should focus on instead is proper estate planning, risk mitigation, and risk management. That’s exactly what we do for our SpaceX employee clients. For companies like Anthropic and OpenAI, or anyone holding highly appreciated assets, future public market movements are speculative—but there are many actions you can take that are within your control and unrelated to stock prices. That’s the focus, not obsessing over how the stock will move tomorrow. Of course, what happens as lock-ups gradually expire is certainly worth watching.

Charlie Bilello: It’s not over—there are still five months left this year. Looking at this chart, U.S. IPO fundraising has already hit a record, totaling approximately $144 billion since 2026, surpassing the peak of the 2021 bubble. Of course, much of this is driven by SpaceX. But as I’ve always said, historically—whether in 2021 or 2000—when such massive waves of supply emerge and investors seek liquidity exits, it often signals a tougher market ahead. This may not happen this time, but if history rhymes, it wouldn’t be surprising if the listings of companies like OpenAI and Anthropic coincide with a period of market difficulty, given the sudden surge in supply.

Jamie Battmer: Yes, Charlie and I have both been in the industry for over 20 years. The last time people were this excited about individual company names was during the previous tech boom. In 2021, it was more driven by SPACs and financial engineering, but this surge of excitement around names like SpaceX and Anthropic has brought back the same atmosphere we saw with Google, Facebook, and even pets.com—something we haven’t witnessed in 25 years. Those who lived through it know the outcome usually isn’t pretty, and investors need to remember that now.

Charlie Bilello: Excitement and investment returns are not correlated. Over the long term, it’s often the boring things that win. When Anthropic and OpenAI go public, everyone will be excited, and their stocks may experience a spike, but be cautious about assuming this momentum will continue and chasing the rally. S&P has stuck to its principles and refused to change its rules to include SpaceX in its index—it’s the only index provider to do so. Nasdaq changed its rules, and many major ETF issuers followed suit due to overwhelming demand to include SpaceX. So far, sticking to the rules has been correct, as SpaceX has not yet turned a profit and won’t be included in the index for at least another year.

Jamie Battmer: In the short term, the results certainly look good, but who knows about the long term. Looking at the bigger picture, this comes down to a fact: 87% of companies with annual revenues over $100 million are still private. Therefore, we recommend eligible clients allocate to both public and private markets. Another misconception on Wall Street is that private markets are superior—the holy grail. In reality, they’re not better; they’re just different, offering diversification. This allows you to gain broader exposure across the entire economic system. In the short term, it’s beneficial that SpaceX isn’t in the index, but as more massive IPOs emerge in the future, it will be an interesting debate whether index providers stick to their principles or make compromises.

Charlie Bilello: And if you hold a total market ETF, SpaceX’s weight is only about 20 basis points due to its low float, so your exposure to SpaceX in a total market portfolio is extremely small. But if you allocate 5%, 10%, 15%, or 20% of your portfolio to SpaceX, that’s a massive overweight and a huge bet.

Charlie Bilello: Next, let’s talk about inflation—I call it the “low inflation lie.” The federal government and the Federal Reserve are trying to convince everyone that inflation is under control and not as high as it seems. But the Fed’s preferred inflation measure, core PCE, has been above 2% for 64 consecutive months. Now, the consequences are beginning to show. The 30-year Treasury yield has risen to 5.2%, the highest since July 2007 and a 19-year high. The bond market is responding to many factors, but certainly one of them is this: inflation is not as under control as the Fed claims, nor is it anywhere near the 2% target. Also worth noting: this is the first time during a Fed rate-cutting cycle that the 30-year yield has not only failed to decline but has actually risen significantly above its level at the start of the cuts. To me, this signals policy missteps and suggests investors are growing hesitant about holding long-term U.S. Treasuries.

Jamie Battmer: Hopefully, because you really shouldn’t hold more bonds than necessary to meet your short- and medium-term cash flow needs. The risk is that someone might say, “5% is good enough—I can live off that.” But data overwhelmingly shows that over the long term, bond returns are roughly half those of the stock market. And if interest rates surge like they did in 2022, these so-called safe assets could drop by 20%. A common misconception is that bonds underperform over time, but they don’t always serve as a safe haven during storms—if the storm itself is a spike in interest rates. And regarding the chart you just showed, inflation is the ultimate hidden tax, and many of those numbers we all know are nonsense—for example, the claim that healthcare costs have declined over the past decade; 100 out of 100 people know that’s false. Take my family: we have three kids, come from a Midwestern farm background, and eat a lot of bacon. Bacon prices have gone crazy—I still have a pack sitting in my fridge. I told my family, “Try a cheaper brand,” but the kids refused to eat it. So maybe they’re just picky—or maybe it shows that even ordinary people are clearly feeling price increases.

Charlie Bilello: Completely agree. The real issue is the cumulative increase—that’s what’s always bothered me. When you listen to the Fed, they always focus only on what happened over the past 12 months. But even looking at just that number, inflation has been rising, not falling. New Fed Chair Kevin Warsh took a very hard line this week. Here’s a quote from this week’s press conference: “Households and businesses have endured dissatisfaction with persistently high inflation for 63, 64 months. We are here, we will deliver, and we are laser-focused on doing so.” Similar tough language to his first press conference in June. But so far, there’s been no action—the Fed hasn’t raised rates and is still engaging in some form of quantitative easing, with its balance sheet still expanding. Over the past six years, U.S. inflation has averaged about 4% annually—twice the target. In my view, the Fed must act. If you have a 2% target and want to regain credibility as an inflation fighter, you need to raise rates. The market is now pricing in a 25-basis-point hike in September, and I believe that’s a high-probability outcome. What do you think? Is the Fed behind the curve?

Jamie Battmer: The only data-driven idea is that Wall Street’s accuracy in predicting interest rate movements is just as high as its accuracy in predicting anything else. A year ago, they predicted nine rate cuts—and none happened. Interestingly, there’s a misconception about the Fed chair—that they’re all-powerful, the alpha gorilla of the group—when in reality, they’re just one voting member. Like a president, they receive far too much credit and blame, but they’re merely one human voice pretending to know the future. Alan Greenspan served as Fed chair for a long time and even wrote a book called “Maestro,” claiming he was orchestrating everything. Yet, shortly after, the economy experienced the worst recession since the Great Depression, with many policies enacted during his tenure. Conversely, Paul Volcker was blamed in the 1970s and early 1980s for causing a recession and helping Carter lose the 1980 election to Reagan, because the Fed aggressively crushed inflation. So yes, prices have remained stubbornly high, and action seems necessary—but it’s a balancing act. No one knows what tomorrow will bring. Crushing inflation hurts ordinary workers, but higher interest rates also hurt ordinary workers, small businesses, and everyday enterprises—small businesses suffer more than large corporations that can negotiate lower rates. It’s a balance, and future data will tell us the answer. But the fact remains: prices have just kept rising, rising, rising—never falling—and this has gone on too long. It’s a severe hangover from COVID-era policies.

Charlie Bilello: There are indeed many factors—I often talk about the Fed, but clearly it’s not just them. The federal government and fiscal conditions are also significant, but for some reason, the Fed now says, “We’re not talking about that; it’s not our responsibility.” That doesn’t make sense. They must talk about it, and they should talk about it, because it’s a crucial part of the inflation picture. But the Fed also bears responsibility: their prolonged maintenance of ultra-low interest rates, massive monetary easing, and their actions in MBS during 2020 and 2021 were absolutely reckless measures that certainly fueled inflation and continue to stoke it today. So I return to this point: if you have a 2% target, you must stick to it. We haven’t met it for over five years—you should raise rates in response. That doesn’t mean you alone can solve inflation; no, but it’s your job, and you should do something about it. I think we’ll see a rate hike in September; we’ll invite you back then to discuss it further.

Charlie Bilello: Next topic: “Defaming the Drunken Sailor.” The term “sailor” dates back to around the 17th century, when sailors would spend all their earnings from voyages in bars and similar establishments until they had nothing left. I often say the federal government spends like a drunken sailor—but that’s actually an injustice to the drunken sailor. We don’t just spend our $7 trillion budget; we borrow far beyond it. Since July 1, the national debt has increased by over $400 billion—a staggering pace. We are rapidly approaching a $40 trillion national debt. Inflation isn’t just caused by the Federal Reserve; the massive, uninterrupted borrowing and deficit spending since COVID is the elephant in the room, yet few are seriously discussing it.

Jamie Battmer: Yes, it actually started even earlier, after 2008, and has only gotten worse. If any of us lived this way, we’d be thrown into debtor’s prison, kicked out of our homes and apartments—it’s simply not feasible.

Charlie Bilello: Don't try this at home.

Jamie Battmer: Yes. Take drunk sailors again—at least they eventually return to the ship. Even if it’s the Titanic, they’ve moved on; maybe they’ll hit an iceberg, but they’ve left. Government debt, however, has no endpoint. No matter which party is in power, it’s always stimulus, stimulus, more stimulus. It’s like a drug in the medical field: once it enters the body, the economy says, “More, more, more.” The pace of growth is terrifying. I have three children, and just moments ago I was complaining about bacon prices—half-jokingly—but the world’s debt, obligations, and the checks we’ve written will ultimately fall to them to cash or pay when they mature. In my view, this leaves a horrific burden for future generations.

Charlie Bilello: I’ve always said they’ll eventually pay for it somehow—not necessarily through direct repayment, but more likely through inflation, reduced future Social Security benefits, or similar measures. So we must take action. Moreover, the claim made by Scott Bessent that tariff revenues could balance the budget and pay down debt—when the debt was $37.2 trillion—has clearly not materialized, as the debt has now risen to $39.8 trillion. At the start of Trump’s second term in early 2025, many in government argued that economic growth alone could eliminate the debt, discussing real GDP growth rates of 5%, 6%, or even 7%. While this sounds appealing on paper, reality is far more difficult. Growth was 2.8% in 2024, 2.1% in 2025, 2.1% in the first quarter of this year, and the latest GDP figure is only 1.5%. Therefore, the idea of growing out of debt is only viable if you achieve post-WWII levels of growth; if growth remains at just 1% to 2%, the only solution is spending cuts—something no one wants to do until a true crisis forces action. Discipline is essential.

Jamie Battmer: It’s like someone telling you to eat healthier and exercise more—it’s not a big deal until you have a major heart attack, and then it becomes the biggest deal. Will we grow our way out of debt? Maybe AI can do something. Maybe. But historical data says no. Will tariffs be the answer? Maybe. But historical data also says no. I just mentioned the new Fed, Greenspan, Volcker, and now Ben Bernanke—he took these massive debt policies into overdrive during his tenure as Fed chair. He was renowned for understanding the causes of the Great Depression, calling it the holy grail of macroeconomics. Yet, large-scale tariffs implemented during economic collapses have, according to all data, worsened the problem and dragged the global economy into a worldwide depression. So history says no. The future hasn’t been written yet, but adding more barriers to capitalism is unlikely to yield positive rather than negative outcomes.

Charlie Bilello: There are two more topics. This is a big one—so much depends on the AI infrastructure boom. Are we going to keep dancing until the music stops? Everyone remembers Chuck Prince’s 2007 comment—he was CEO of Citigroup, saying they’d keep dancing until the music stopped. Back then, the big banks were all dancing, and when the music stopped, it led to the financial crisis. Now, the big tech companies are still dancing. If you look at the Q1 earnings reports from Amazon, Google, Microsoft, and Meta—the four hyperscalers—Oracle hasn’t reported yet—all of them exceeded their capital expenditure guidance. Together, they spent $165 billion in Q1, an astonishing figure, up 87% year-over-year and up 393% compared to three years ago. I’ve been asking: Are we at least nearing the peak of capital expenditure growth? Are we nearing the moment when the music will stop? I suspect that when the music does stop, it’ll be because of this chart. Let’s talk about free cash flow. Last week, I mentioned Google—this is the first time in the company’s history it has posted negative free cash flow, due to massive spending on property and equipment related to AI infrastructure. Meta’s stock was hammered this week, with free cash flow plummeting 91% to just $784 million, down from $12 billion last quarter and $14 billion the quarter before that. Jamie, these companies were once light-asset businesses—that was one reason for their valuation premiums—but now they’re rapidly transforming into capital-intensive operations. At some point, will investors say, “Wait a minute—I didn’t sign up for this kind of bleeding”? A few years ago, they were among the world’s strongest free cash flow generators; now some have turned negative. These companies are pouring all their money into semiconductor firms. How long can this continue? Is today’s growth rate sustainable? What will cause them to pull back on spending plans?

Jamie Battmer: First, personally, I consider Facebook one of the most evil companies on Earth, so I don’t mind seeing it burn through cash. But more broadly, infrastructure—we’ve actually invested heavily in infrastructure. Like any asset class, you must avoid chasing trends. Yes, there are these hot elements, but there are also companies building roads, bridges, maintaining bridges, recycling centers, and water purification plants. So don’t throw out an entire asset class, nor should you dump everything into a rapidly growing industry. Yes, it may continue to grow, but we seem closer to a peak than to the beginning. Interestingly, either, as this chart suggests, they’ll run out of money; or, as has always happened throughout history, massive amounts of capital and resources flood into something, making it expensive or depleting its funding, until the next revolutionary innovation makes it more efficient. Perhaps someone in a dorm room has already come up with that brilliant idea that will increase efficiency and reduce demand for this kind of infrastructure. Hopefully, it’s at Stanford or the University of Montana—not a North Korean government facility. But history has shown this pattern: when oil prices surged, it drove more efficient extraction technologies. Using history as a guide, the outcome may be that they run out of money, gradually fade away, or AI truly delivers stunning advances for many years to come. Technological breakthroughs might span our lifetimes, but they come with volatility—and right now, with so much capital flooding into this space, these are historically signs of irrational exuberance and red flags.

Charlie Bilello: Yes, these companies were originally asset-light, which was one reason for their high valuations, but they are now rapidly transitioning into capital-intensive businesses—and historically, capital-intensive businesses have delivered poor shareholder returns. I’ll also quickly note that this isn’t even the latest financing arrangement: Nvidia announced $250 billion in financing for OpenAI’s data centers. We’re seeing more and more of these circular transactions—companies running out of cash, resorting to issuing debt or equity, even Google has issued equity, which shocked me. They can no longer finance themselves through free cash flow. OpenAI also doesn’t seem to have enough money to do what it wants to do, and now it’s tied to Nvidia, which is essentially guaranteeing financing for this project and using that funding to purchase chips. I find this circular structure dangerous; in hindsight, Nvidia’s need to resort to such measures at this point will likely be seen as a warning sign.

Charlie Bilello: Let’s end on a positive note—there are two very positive trends. First, at the end of last year, we frequently discussed a weakening labor market, rising unemployment, and even job losses outside of a recession—I called it the most confusing labor market in history. But over the past six months, we’ve seen a reversal: employment is growing again, and initial jobless claims have dropped dramatically. While fears persist that AI will cause widespread job losses, and that may still happen in the future, right now people aren’t filing for unemployment en masse. Initial jobless claims have fallen to their lowest level since January 2024. On the other hand, when it comes to capital expenditures—a potential concern—the number of new companies being formed in the information technology sector is so high that the chart barely fits. As this graph shows, an unprecedented number of new businesses are launching; never before has it been this easy to start a tech company, requiring fewer employees, and we’re seeing a surge in one-person businesses. Regardless of market movements or returns, this will drive more innovation and competition. As you said, innovation is ultimately what will resolve the high capital requirements and high memory prices. What are your thoughts on the labor market and this surge in new business formation?

Jamie Battmer: I think this is great. It shows that someone had a good idea. You’re right—the barrier to entry has dropped dramatically. It’s wonderful that the barrier has been broken for people who are stuck, tired of the routine, and want to try something new. I’m also glad fewer people will have to go home and tell their families they’ve lost their jobs. AI may and will take away some jobs, but history shows that every technological quantum leap has created more jobs, greater well-being, and higher productivity. If this time is different, it would be the exception to the rule. Of course, what works and what doesn’t will change—but what works and what doesn’t has always changed. I think this is fantastic: people with ideas, people who want to make a change, can now truly take a leap and chase the American Dream. Many say the American Dream is gone, but the data shows the exact opposite.

Charlie Bilello: Great. Jamie, thanks so much for an excellent show today.

Jamie Battmer: Thank you, Charlie.

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