On this episode of Full Signal, I sat down with Todd Sohn. Todd is one of the smartest people in finance that I've ever met. He works at Strategas in asset management and research. In this conversation, we talk about ETF inflows hitting all-time highs, tech concentration in the S&P 500, the risks of Nvidia's weight in all these index funds, contrarian trades for your portfolio, and much more. I hope you enjoy this conversation.
Okay, Todd. Right now the tech sector is making up 36% of the S&P 500. We're probably getting more rate cuts. A lot of people are talking about bubbles.com comparisons. Give us your lay of the land on markets right now.
So, I'm using three key words into 2026: concentration, participation, and sensation. Okay, there's a little bit to dive in there. You mentioned tech, 36% of the index. Top 10 weights are 40-41% on any given day. That's the concentration aspect. That's not necessarily a bad thing. It's more of a here's the condition. Understand what's in your portfolio. If you have too much ownership of it, are you not diversified? Right? Take stock of that. That's the concentration aspect.
Participation. And this is where the technicals can really come into handy is how many stocks are contributing to the move. Is it really just the top 10 weights or is the equal weight indices also participating? I think the equal weight indices will be really important for 2026. Not that they have to outperform, but as long as they're rising with the cap weight index, that tells you that participation's robust. Right now, they're a few percentage points off the high. We'll keep an eye on that. You do not want to see that diverge.
And then sensation, I do think sentiment's getting pretty hot here. That's going to happen after the monster rally we've had since April. I just want to be mindful of equity flows are getting hotter. Investor surveys are very much more bullish. Put calls are very skewed to the call side. When sentiment gets a little bit too aggressive, that sets you up for a speed bump. Kind of like what we saw in April, even though that was more, you could say, tariff induced, but that's a setup for 2026. It's still a global bull market. There's no doubt about that. But I am just worried about people getting a little bit too enthusiastic right now in markets.
Do you think that enthusiasm warrants the discussions about dot-com levels of exuberance here?
Not to my knowledge. Right. I think on one hand, yes, the S&P's three-year percentage change, right? October 2022 to October 2025 is in the top decile historically. So, we've run pretty hot. But then you look at companies like the Mag 7 and they are cash flow rich, right? They're producing profits. Of course, they have an outsized influence on the index, but back in the tech bubble, and it's not like I was a veteran back then, but you had all these companies that weren't making any money, right? It wasn't necessarily fraud. So, I'm not quite in the bubble territory yet.
Is it odd to me that you had some random nuclear names and quantum names who may not have been producing revenue run up a couple thousand percent? Yeah, that's peculiar behavior, but that's more on the sentiment side to me than on a massive bubble, right? And I think that's where even if we are in a bubble, taking a diagnostic of the equal weight indices is going to come in really handy to understand if there's this massive divergence or not.
Can you explain that a bit more? Why watch the equal weight as opposed to the market cap?
So indices can lie. All right, if you have a name that's 8 and 10% of the index and you have another name that's 8 and 10% of the index, right? These Nvidias, Apples, Microsofts, and especially in some of these sectors like you have Amazon, Alphabet, Meta, they can skew a lot of what's going on. And so if we put everything on an equally weighted basis, right, make everyone average, we're all the same stock, that gives you a better sense of what the typical company is doing rather than the behemoths.
And you know, the best analogy I can make is sports, right? Best team in baseball this year is the Dodgers, right? They won the World Series. Ohtani, amazing. The rest of the Dodgers, let's just say the rest of the Dodgers are fine. If Ohtani starts to slump, you need the bench to keep the rest of the team afloat, right? So, think about it. If the mega cap heavyweights start to slump, you need the rest of the index to keep everything afloat. If the bench deteriorates, that creates a big problem.
So my understanding of, let's say, the last few months, we have seen this broadening out and this pretty healthy rotation. Is that something you think is, let's say, a blip of exuberance and people are just buying everything, or do you think it's genuine, let's say, a strengthening of the market?
Strengthening of the market, right. And the best reflection of that was back in May when you had one of the better expansions in the new high data. So the number of stocks making a new high on any given day tells you how durable a bull market is. As long as that's expanding, things are in good shape. Now, it has been a few months since that data has expanded, but the trend of the market is still very much higher.
I think as long as you're seeing participation and good earnings across the board, which so far has been the case, you've got industrials working, big banks are working really well, it's hard to get in too much trouble when the banks act really well. Yes, of course, there are some issues in other parts of the financials, like the private asset managers. They've been a little bit lethargic. But I pair that off with credit spreads which are still in their bottom decile historically, right? Credit spreads are super tight and you rarely get in a lot of trouble with tight credit spreads.
Okay. The signal that you're seeing in credit markets, how does that tie to what you're seeing in equity markets? Can you explain that a bit?
So, it is rare that with tight credit, stocks get into trouble. I would get more worried if you started to see equities rise and different layers of the credit market, right, from triple C, triple B, when those spreads widen out. So widening credit, deteriorating credit backdrop with rising equities is a red flag. And it's possible. We've had clients ask us, you know, is private credit skewing that? Maybe. It's not my wheelhouse necessarily.
But as long as you don't have widening credit with rising equities, it's okay, right? And credit spreads remain. One of the characteristics of a bull market is credit staying in this bottom decile, these super tight levels for quite some time.
Real quick, we'll get right back to the interview. Just wanted to pop in and say if you like this content, I write a newsletter every single morning called Opening Bell Daily. I cover macro, the stock market, asset prices, why things are going up, why they're going down, and if you want to get that for free, you can sign up at the link in the description. Let's get back to the interview.
Speaking of the bull market, I know that you've done a lot of work on what year three of a bull market does and year four and so forth. Where are we in this cycle and what comes next?
So, I have two angles to this, right? We have just entered year four, right? October 22, 23, 24, 25. The year three turned out early to be matching up with what typically happens, which is a very choppy corrective market. That was October through April, honestly. And then the back half of that blew out any sort of historical comparisons. Year four is still pretty robust. The sample size shrinks because sometimes bull markets can end in year three. Not very frequently, but it's happened. Year four is another robust year. I'm okay with that.
Now the other side of this though is in April 2025 during the tariff correction, 70-something-odd percent of stocks went down 20%. All right? And 20% is an arbitrary level, but that's what the industry goes by. There's no doubt about that. And so, if you had three-quarters of stocks in the S&P 500 down 20% from their 52-week high, that's a pretty good reset as fast as it happened. So, is it year one now? You know what I mean? And I'm struggling with that. I'm struggling with that. I don't know what the right answer is. By traditional metrics based on the S&P, it's year four. But internally, that was a really good washout.
Wow. That's, I haven't heard anyone talk about that before, if we're almost resetting the cycle based on politics or macro.
So something that I wonder could also maybe influence this cycle is we're seeing this huge ETF demand across every sector. ETFs are getting tons and tons of inflows. I think in October, and you wrote this in a note, we saw $100 billion of inflows into ETFs for the fourth time ever. Does that skew the market in any way?
So ETFs, they do two things, two great things. One, for you and I, all the listeners, everyone out there, they are low-cost, long-term investing vehicles and they're great for that. Great for saving for retirement, for building generational wealth. On the other hand, what I like to use them for is a lens into the psychology of the market, right? A temperature barometer because I can measure every day where flows are going, into what kinds of products, where you're seeing elevated volume that maybe hasn't seen it. We had that with gold recently. And then the types of products that are coming out because ultimately whenever there's a hot asset or a hot category, most issuers rush to launch something.
It makes sense because you want to get all the assets, but at some point that trend can end. So, back to what you said about $100 billion in October. That's part ETF adoption because it's becoming so important for portfolios, but it's also rare to see that level eclipsed, especially just in October. Usually, it's in December at the end of the year. And so I'm fully aware that the pace of equity flows per day has picked up. And that's part of that sentiment that folks are getting a little bit more confident about the market rally. That's a good thing, but can set you up for a little speed bump when things get a little too exuberant.
So I think part of that data is also 2025's on track to beat past years' records of ETF inflows.
And so I spoke with Mike Green on the show and he has a lot of concerns about passive investing and what that does to inflate asset prices over time. And if we're seeing all these inflows into ETFs, is there a connection between that?
Probably. I still think that there, listen, the actively managed equity mutual fund industry is still bigger than ETFs, right? There's still more mutual funds than ETFs. There's still more assets than ETFs. So I do like to believe that active managers will be the ones who are setting where these prices are going.
That being said, and similar to what Mike talks about, is if I own the S&P and I own the Nasdaq 100 or large cap growth, if I own maybe some theme ETFs that are related to tech, I have a lot of exposure to those top of the index names, you know, the Nvidia, Microsoft, Apple type names. Clearly has worked out, right? That's great for passive. But if I'm a portfolio manager, if I'm an adviser, I just want to know how many eggs I have in that basket. I think that's where the influx of ETF product that's out there, you have to be a little bit careful and diversifying through other means makes a lot of sense.
Yeah, I think that does make sense. Something I know that you're also writing about a lot these days, the types of ETFs that are launching are specific to what's hot right now, as you just said, and we have a bunch of AI-related ETFs, even though if you just buy the S&P, you have a ton of AI exposure. And you also have a lot of leveraged ETFs. I think you said one in four in recent ETF launches uses leverage. What is happening here?
This space is booming. It's booming. If there's something that concerns... So, man, this is a fun topic. So, why do we launch leveraged ETFs? Because the passive space is so saturated. It's hard to compete with BlackRock, Vanguard, State Street, Invesco. And levered ETFs are, they're frictionless. I don't have to open a margin account. I can just go on my phone and whatever brokerage I'm using and buy 2x whatever it is. They're also lucrative for the issuers involved, right? You can charge higher fees if you grow some assets there. That's great for the business just to make a living.
But I'm a little bit deterred by where they're putting leverage on. Right? So leveraged single stocks, for example, came out three years ago due to some regulatory changes. You started with Apple, Nvidia, Tesla, all the big blue chip type names, and then more recently the market cap of the names they're putting leverage on has gone down below, say, $5 billion. So there are levered ETFs coming out where I have to look up the ticker. I'm like, I'd never even heard of that name before.
Is it systemic? I don't think so. Unless there's a lot of this going on off exchange that you and I maybe don't know about. But you inevitably read about some investor or trader who probably is involved with the levered space and maybe the stock misses expectations on earnings, goes down 40%, that means the 2x fund is going to blow up. You know what I mean? That's where I get a little bit worried.
Well, something I know also happened this year, we saw the relaunch of the meme ETF from Roundhill and I think they're a great company, but I was surprised to see it come back given that it shut down previously when they launched it.
So, the Roundhill guys are great. Very friendly with them. Love what they do. Their meme 1.0 launched during the top of the market in '21. I don't think it has to happen again, but I wouldn't rule it out. What they did though is they changed the methodology behind it, right? They changed it up. They said, 'Let's find volatile stocks that are also popular on social media type boards.' So, I like that they changed the methodology and made it more meme-like. But of course, that's the type of names that are getting levered put on there, right? These quick, very volatile type of names that you've never heard of them and all of a sudden they're up 1,000%.
So I guess what a lot of investors might be doing is, all right, they have their S&P exposure, now they're like, how do I... Eric Balchunas, one of the best in ETFs, calls it hot sauce. He coined that term, that they throw the hot sauce on their portfolio just to keep, I think, things busy.
Yeah. Yeah. So, it's kind of fun to watch. I like making the visuals on it, but it's also another poster along with the $100 billion flows we did last month of confidence rising to a point of, hey, maybe just take your foot off the gas.
Do you think there's some type of, you know, macro psychology playing into this? Because when I see a bunch of investors piling into more speculative names, leverage, things like that, maybe it's something to do with, okay, affordability is getting out of hand for everyday items. The economy for, let's say, the K-shaped economy, a lot of people can't afford housing or groceries, things like that. Do you think that's pushing people into more speculative investments?
Oh, perhaps. I guess that's one way to think about it. It's also ease of access, right, via brokerages, apps on your phone, right? You think before you and I were born, to get options, margin, leverage, you had to be high net worth, and now anyone can do it on the street, doesn't matter. So the ease of access.
I think you also read headlines or you go on social media and it says, hey, I just made 10 grand in three hours. Like, there's a jealousy aspect of that. It's human nature to be jealous of, say, oh, my friends are making all this crazy money right now and I want to get a piece of that. So, inevitably, that kind of enforces that behavior, too.
And there's also what is the Federal Reserve. I'm not a big Fed watcher. I don't get into that. But over the last 15 years, they have come to the rescue when needed. So, I think there's a mentality, and maybe that's changing, we'll see, that they will come support markets when a crisis brews, put liquidity into the system, and that's going to again jolt all these types of volatile names higher.
I mean, either the Fed or President Trump will tweet something, support the market.
The stock market has become so important to everyone's wealth, which is great. It's a great way to build long-term wealth. It's almost haphazard though, like every time there's a crisis, they will come in, ideally if there's liquidity that's supported for markets.
So, I know something that you watch, and speaking of liquidity, money market fund yields are drifting below 4%. And to me, when I see that stat, it's like, okay, we have $7 trillion of cash on the sidelines, so to speak, if those yields start to get less attractive, is that more bullish tailwinds here for the market?
So money markets are, they are the most boring instrument on Wall Street, but they're one of the most fascinating psychological instruments as well, right? So from 2009 to 2022, you got 0% on a money market. It just sat there, you know, not getting anything. If you needed cash to buy a house, that's where you put it. Fast forward after the hiking cycle, you get up to 5%, a little bit more than that. And every conversation that we were having at Strategas was, oh, this money market, it's great to have income.
Now we're fast forwarding again. Now you're starting to cut rates and those money market yields have dripped from five to 4.50. Now we're sub four. So what I am watching for, and there's $7 trillion in those funds, is when you get to about 3%. I think that's when a lot of folks realize, hey, after tax, I'm not really getting much anymore.
And if you go back to the mid-90s when the Fed cut from 10% to 3%, money market flows really stalled out for a while, and then they started to hike again in the late 90s, it resumed higher. Same thing in 2007. The only difference is those were massive bear markets. So that's why money, I think, started to come out. So the key point is, all right, 3% I think is probably the level when you see the assets really slow down and maybe start to see outflows.
Now where does it go? The problem with the cash on the sidelines idea is that money markets are completely different instruments than equities, right? There's totally different risk profiles. And if it's still a bull market in stocks, I would guess if you get 3% yields and lower, that some of it will go to different types of fixed income ETFs, right? Maybe it'll go to an active manager who can at least stretch out that yield to get 4% using high-grade corporates or something like that or securitized stuff.
If it's a bear market, then I would think, okay, maybe some of that actually does go to stocks because you want to take on some risk. But so the key going forward here is where is it actually going to go because of the risk profiles involved and demographics too.
Yeah, that's an interesting angle as well, the demographic change. If we start getting, let's say, another couple rate cuts, historically when the Fed cuts rates without a recession, pretty good for stocks. How does that impact the money on the sidelines? And then if there's no recession as well, where are markets going?
Should be higher, right? And as long as we have rates that are just kind of slow, stable, lethargic, and I'm talking like 5, 10, 20-year rates here. Market loves that, right? It doesn't like shocks. The markets do not like shocks. And you've had the 10-year yield for the US rangebound for the last couple of years now. So, stocks have been great.
I think it's been interesting. You've had cuts over the last year and long-duration Treasuries have not performed well. That's actually very different than what happens historically. Usually Treasuries rise. So, we'll see how that plays out.
Where it does seem to be helping is small caps, right? For years, last couple of years, small caps have been terrible. Russell 2000 peaked November 2021. Big decline, big trading range. Frustrated everyone, including myself. People gave up on them. So now we have cuts. You have the Russell 2000 back to a new high and it has a lot of unprofitable meme-type stocks in there.
But I wonder if you get more cuts and maybe some of that money market assets starts to chase small caps instead. People are going to re-engage that asset class because it's been out of the fold for so long and it's another way to help diversify to some extent. All right. So I'm a little more bullish on small caps, I think, going forward. I don't know of the investors I'm speaking with, I don't know that many people who are recommending small caps these days.
