[Chris Hyzy and Brian Daley speaking throughout]
Please read important information at the end of this program. Recorded on 07/10/25.
Chris Hyzy speaking:
Just past the halfway point of the year, equities have posted a strong second quarter after rebounding from earlier lows. While large technology companies continue to power markets, new leaders are emerging in areas such as innovative infrastructure, domestic manufacturing and cybersecurity. But plenty of questions remain on the road to recovery. What impacts could tariffs have on corporate earnings and consumer prices? How confident are investors that the market recovery has legs? How long will consumer resilience continue, and which industries could struggle amid these uncertainties?
On-screen text:
Chris Hyzy
Chief Investment Officer
Merrill and Bank of America Private Bank
Hi, I'm Chris Hyzy and today I'll be talking with Brian Daley, Senior Portfolio Manager with the Chief Investment Office, about what's working in today's markets, and what may be falling behind.
On-screen text:
Brian Daley
Senior Portfolio Manager
Chief Investment Office
Chris Hyzy speaking:
Brian, thanks for being here today.
Brian Daley speaking:
Thanks for having me Chris.
Let's talk about what's going right, right now off of the big drawdown that we had starting basically in April, but hitting the lows April 7 to 8 and how we've climbed back from there. What's been working?
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What's working:
Industrials
Financials
Magnificent Seven Tech
Artificial Intelligence (AI) supply chain
Brian Daley speaking:
Yeah, it's been a really active first half. We've seen growth stocks and cyclical stocks bounce back led by industrials, financials, the Mag sevens tech and comp services and all the electrical equipment picks and shovels. We like to refer them is in the AI supply chain.
Chris Hyzy speaking:
So this rotation that's happening, it's not just technology like we've seen in the prior peaks, whether it was '21 or 2023.
On-screen text:
What's working:
Industrials
Financials
Magnificent Seven Tech
AI supply chain
Transportation
Defense
Brian Daley speaking:
That's right. We're finally seeing a little broadening out outside of the Mag seven in the Mega-cap tech stocks. When you see financials improving, some hope of maybe deregulation, improved M&A, capital markets coming back to life, the industrial sector also coming back to life as well. And that's even broadening within the industrial sector. It's not just electrical equipment. Now we're seeing machinery. We're seeing transportation stocks come back to life a little bit.
Chris Hyzy speaking:
Defense.
Brian Daley speaking:
We're seeing aerospace and defense exactly coming back to life.
Chris Hyzy speaking:
Is that a sign for a healthier market, in your opinion, when you start to see not just more participants in terms of leading the market higher, but in terms of the types of companies they are feeding into a profit cycle that maybe just get going again.
On-screen text:
What's working:
Industrials
Financials
Magnificent Seven Tech
AI supply chain
Transportation
Defense
Utilities
Brian Daley speaking:
Absolutely. It really is. And because the profit cycle has been led the last two years by the Mag Seven to be able to have the banks, electrical equipment, transports, machinery, utilities even, utilities might see 2 to 3 times the earnings growth rate that they've had in the past decade or two. That's a really good sign for the overall equity market, because it's a broader profit cycle and a broader rally.
Chris Hyzy speaking:
Let's shift to what's not working. We've seen a pretty big rally just in June, though, in the small cap space. We came out of the gates very sharply to the upside in non-U.S. equities. But what's really not working at this point?
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What's not working:
Energy
Healthcare
Brian Daley speaking:
Yeah, what's not working right now is energy number one. Right. We've had a couple of years of really strong energy prices in the energy equities followed through with strong free cash flow, strong dividend growth and good stock returns. But clearly there's been a pivot in the overall global supply and OPEC strategy adding barrels to the market. So, energy is an underweight from our CIO guidance.
Number two. We start to see health care and staples which had a little bit of a boost in April from a defensive positioning standpoint. Now giving that back and actually underperforming the last 4 to 6 weeks.
Chris Hyzy speaking:
Let's talk about investor positioning in the very, very short term. When markets get overextended or sometimes under allocated a lot of it has to do with short term positioning in the market. What are you seeing right now?
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The market cap of the Magnificent 7 grew from 9.8% of the S&P 500 in 2014 to 34.6% in 2024.
Source: National Council of Social Studies, 2025.
Brian Daley speaking:
What we have seen is that positioning was very crowded in the Mag seven, in the growth stocks and in the momentum stocks to start this year. Those growth stocks tech stocks Mag seven all had tremendous outperformance. So they were really crowded from a positioning standpoint coming into the start of this year. Then in April with the rotation out of those, the scare with the tariffs, the worst-case scenario on the table, those positions got taken down dramatically. What that set up was like a trampoline effect for when things turned positive. That positioning is getting put back on right now.
Chris Hyzy speaking:
Let's talk about company guidance that we've heard so far publicly out there in terms of what's been announced, what's going on with tariffs in terms of passing that on to the consumer or not?
Brian Daley speaking:
What we're hearing from companies is that the tariff or higher cost, where they're where they're actually being implemented, is not going to be passed to just one segment of the supply chain.
Chris Hyzy speaking:
So just not the consumer.
Brian Daley speaking:
Correct.
Chris Hyzy speaking:
Just not the importer or exporter across the board.
Brian Daley speaking:
Correct. From the manufacturer to the importer exporter, to the retailer, to the consumer. And then when you break apart that higher tariff cost across the board, that's not as big of an impact to A the consumer for consumer spending, or B to the companies and their for their more profit margins.
Chris Hyzy speaking:
And you could see some of that picked up in the currency markets as well.
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The dollar has fallen 11% since the beginning of the year.
Source: U.S. Dollar Index. July, 2025.
Brian Daley speaking:
Absolutely. With the dollar continuing to move lower, like you've been talking about recently, that is a tailwind for the multinational earnings. And we all know the S&P 500 is full of multinationals.
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Asset light: Businesses that do not rely on physical assets such as property or machinery to generate revenue.
Chris Hyzy speaking:
Let's talk about what is the foundational principle of our long-term theme. This asset light era meets this innovative infrastructure renaissance, which we've discussed in our mid-year outlook. Talk about what the bright spots could happen as relates to production of a new profit cycle in that theme.
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2025 tax policy allows companies to write off 100% of research and capital expenditures.
Brian Daley speaking:
Yeah, the key thing I think for that is to understand there's going to be multiple phases of this asset light cycle that's going to develop. And I still really think with high conviction, we're in the early innings of this. And the reason why there's a couple examples. One, we haven't even powered up and plugged in one of these super high powered data centers for AI applications.
We're still trying to fill the demand for cloud computing data centers, never mind the next generation of bigger, more powerful data centers. Number two, the industrial and utility companies that we speak with are a great indicator because that's a non-technology group that's telling us that they have strong demand for their products and services, and their backlogs are going 12 to 24 months.
Chris Hyzy speaking:
That's the asset heavy side.
Brian Daley speaking:
Correct.
Chris Hyzy speaking:
Of the equation.
Brian Daley speaking:
And that's still the first phase. I don't think people realize this first phase could take 24, 36 months for the infrastructure side to be built out with the hard assets before we transition to the asset light.
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Cap Ex: The amount of money companies spend on acquiring, upgrading and maintaining physical assets.
Chris Hyzy speaking:
Is that the essence of a capital expenditure boom that we've been talking about?
Brian Daley speaking:
Absolutely. I don't think people realize how big the CapEx boom will be for this. There's massive, to the tune of hundreds of billions and CapEx, they're being spent just in 2025, another hundreds of billions in '26, just those two years alone.
Chris Hyzy speaking:
As you look out into the second half and into '26, any final comments that you want to leave the clients with in terms of what to watch for and some signals to make sure that the train stays on the tracks of what our bullish and base case theme is.
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Investors should keep an eye out for earnings reports in July and October.
Brian Daley speaking:
Yeah, I think earnings and margins right. If the earnings growth continues to be mid-single digit or high single digit, that's still constructive for a bull market that can continue. I think there's a very high probability we'll see high single digit earnings growth. I think margins are going to stay within a pretty tight range of where they are today. And that bear case of margins are going to take a big hit down is not going to play out. So, if margins do take a big hit or earnings growth slows that's those are flags we're looking forward to see if our call is wrong or if our view is wrong on that. But again, earnings revisions already moving higher and I think they'll be higher for the full year. I think that's a pretty constructive set up for a grind higher in equities.
Chris Hyzy speaking:
Brian, thanks for joining me today.
Brian Daley speaking:
Great. Thanks for having me Chris.
Chris Hyzy speaking:
Thanks for joining us today. We hope this video helps you better understand some of the mixed signals in today's markets and helps to identify potential opportunities and risks to watch out for. Keep in mind that investing is first and foremost about your long-term goals. If you work with an advisor, they can help make sure that any decisions you make in response to short-term events and long-term trends fit with your overall investing strategy.
Thanks again for watching.
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The opinions expressed are as of July, 10, 2025 and are subject to change.
Magnificent 7 refers to Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA and Tesla.
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[End of transcript]
Midway through a year of conflicting signals affecting the stock market, bright spots and warning signs are emerging for investors. What's working? "A new profit cycle is building, with new leaders emerging in areas such as innovative infrastructure, domestic manufacturing and cybersecurity," says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank.
What's not? "Energy equities, for one," says Brian Daley, senior portfolio manager for the Chief Investment Office. "Clearly, there's been a pivot in the overall global energy supply." Continuing inflation, geopolitical tension and policy uncertainty could continue to affect this and other vulnerable sectors. In the video above, Hyzy and Daley highlight more potential new winners and losers, as well as the key indicators they're watching, and suggest short- and long-term ideas that could help you prepare for emerging trends.