You look historically, so much of the total return comes in just a few days over the market cycles. And so the risk of not being in when you're trading at, I think we're now at 18, 18.5 times forward earnings for the S&P with 30% earnings growth. The risk of not being invested, I think, outweighs some of the risk we're seeing on the horizon. So I agree with you. We shouldn't be cavalier about the risks, but I think you're being paid for them and I think it's a good time to be stepping in.
Welcome to Prof G Markets. I'm Ed Elson. It is October 20th. Let's check in on yesterday's market vitals. The S&P 500 and the Nasdaq rallied as traders bought last week's dip. The Dow was flat. Meanwhile, Brent crude remained above $109 per barrel. The dollar climbed and the yield on 10-year Treasuries rose. Okay, what else is happening?
Yesterday was the 39th anniversary of Black Monday, the worst single-day stock market crash in history. And this week, investors were bracing for something similar. Tech stocks were coming off their worst week since April 2025, and there was little sign that the selling was over. But then Monday rolled around and investors decided that it was time to buy. Chip giants rallied 1.6% yesterday and the Nasdaq gained 1.2% as investors bought the dip. Still, CoreWeave fell another 4% even after Goldman Sachs upgraded the stock to a buy. That was on top of a 20% drop last week. So, were last week's fears overblown? Here to help us answer this question, we're speaking with John Mawji, chief investment officer at NFJ Investment Group. John, thanks for joining us on the show. So, last week was very bad for tech. It was generally brutal for any stock that was related to the AI trade. There was a lot of speculation that it would continue into this week. When I was scrolling on Twitter, that's all I saw over the weekend is we might see Black Monday once again. That is not what happened. Investors bought. What do you make of what we saw in the markets?
Well, I think there's a couple different things going on. And I think the concerns around, you know, what was happening with the credit markets with CoreWeave's bonds is definitely something that investors need to take very seriously. And, you know, I think that that's had a, you know, major impact across the space. You know, these companies that are very exposed to kind of the neocloud buildout, which are the specialized data centers, you know, those have a lot of debt and if you have a slowdown in the economy or a little bit of a slowdown in, you know, capex spending, those are going to be the most exposed, Ed. So I think that the market's rightfully concerned about that and some of those CoreWeave concerns have kind of woven their way into the market.
When we just look at the price action that we saw on Monday, it seems like CoreWeave might have been ring-fenced a little bit because the Nasdaq rose, tech stocks rose, but CoreWeave continued to slide. Do you think of this as a specifically CoreWeave neocloud problem that isn't a problem for the, I mean, one, the rest of the stock market, but two, the rest of tech stocks? Is this sort of contained?
I really think it's about the credit markets. I go back to, you know, where we're seeing, you know, interest rates today when you've got the 10-year, you know, over 5%, that's going to have a direct impact on the cost of capital for the companies that are the most exposed to debt financing. I mean, the hyperscalers, if you remember, you know, those can, you know, self-finance a lot of this. They're not as impacted by those higher rates. So, I think that you're going to have companies like CoreWeave that are going to be more exposed. But I think that it does provide a real opportunity because you've got a lot of companies that are now trading at some of the lowest multiples in six months. I mean, you know, if you look back at kind of the AI trade and the companies more exposed to that, a lot of these have been dead money now for six months. People are now starting to pay attention to it because of additional volatility. But the reality is a lot of these stocks have not had a very good return now for almost half a year.
What are some of the stocks that you think are undervalued or some of the places in the market where at least some of these companies, some of these names have been overpunished when it comes to the AI trade?
Yeah. So, you know, some of the names that I would point to in the semiconductor space, you know, you got stocks like Texas Instruments. The stock is growing at over 50% year-over-year, 2% dividend yield. So, you've got some really attractive names on the semiconductor side. You know, Nvidia is obviously kind of the, you know, the standout stalwart of the group. Trading at, you know, under 15 times earnings on a forward basis. So I think you've got some really attractive opportunities on the chip side, but then also on the industrial side, companies like Generac that are involved in kind of the HVAC systems and the cooling systems needed for some of these data centers and the backup generators, those also have pulled back pretty significantly and Amazon did a deal with them recently, which, you know, I think really extends the pipeline for them. So there are a lot of opportunities, Ed. I just think that folks are going to have to be a little bit comfortable with the volatility you may see in the market. But quite frankly, that's what sets up the opportunity. If we knew exactly what capex was going to be next year, if we knew exactly, you know, where the 10-year yield was going to top out, then that would be repriced quickly in the markets. So I think that these dislocations are what provide the opportunity, particularly as we look out in the back half or in the back quarter of the year.
Yeah. Something that I've been thinking about this market, and it sounds like you might agree, is that all of the fears about the AI buildout and about the amount of debt that has been taken on to finance this buildout, all of these fears are warranted, correct, justified. But it does seem that they're being priced in. It does seem like the public markets at least are recognizing that the futures of a lot of these names are very uncertain. They're pricing that into the multiples. Yes, the stocks went up, but also the earnings went up way, way more than the stocks did. And so the multiples have kind of contracted. And when I think about the extent to which there is an AI bubble, it seems to me that it only exists in certain areas of the market, most particularly in my view, the private markets. Like it seems like Anthropic, OpenAI asking for a $2 trillion, $1.5 trillion valuation. Like it seems like those companies are significantly exposed to the downsides of the AI trade going wrong more so than a lot of the names that we're talking about, like Nvidia, for example, but they're being treated differently as if the risks don't exist. So I guess your reaction to my sort of theory of where the bubble actually is, do you agree with me?
Yeah, I think the private market, I'll answer this in kind of two ways. The first point on kind of the public side. You know, I actually would argue that maybe the tech bubble back in the late 90s and, you know, peaking in March of 2000, may have been the biggest gift that we could have ever given the AI boom today because I think what that did, Ed, is it created some guardrails. I mean, everyone is worried about, are we in '99? I mean, the number of times I see this on X or people, you know, guessing, are we in the, you know, '98, are we in '99, are we in March of 2000. So I think when you have so many people that are investigating, is there circular financing, has the bubble, you know, formed, or is this just a boom that has much longer legs to go. So I think that the tech bubble provided almost kind of a guardrail for the spending that we have today and really when you think about how high interest rates are relative to the last several years, the fact that the AI buildout has continued with those restrictive rates plus the scrutiny from the tech bubble, I think that actually is kind of an interesting setup for maybe it being more durable than folks expect. Your question on the private side, private markets always carry additional risk because of the opaque nature of those setups and, you know, I really am curious and would like to see OpenAI and Anthropic come public because I think that that will provide a lot more clarity to the markets and so I think that will be another important data point for us, Ed. But ironically, the best thing that we could have had for the AI boom that's going on in 2026 was the tech bubble of 2000.
Yeah. I mean, Anthropic is supposed to go public next month. My prediction is that I think they're going to struggle a lot. Because it does seem that public markets investors are actually quite discerning right now and they are concerned. They look back at '99 and they say, "What are the similarities? Where can we draw the analogies?" I think maybe last year they weren't doing that so much. Seems like they definitely are. And it seems like they're going to look at Anthropic and they're going to look at OpenAI and be like, "Okay, this is where the risk is." Like these are the companies that are burning billions of dollars. They're not profitable. They don't seem to be on a path where they're going to be profitable in the very near future. So we're going to slap some slightly difficult multiples on them in the same way that we've done it to a lot of these other names like you mentioned, like we've done with Nvidia. So I guess my question, when those companies go public, when Anthropic goes public, for example, how do you think investors will receive it? Do you think that they will be going crazy for it or do you think that they'll be a little bit more cautious?
You know, I think that if we look at SpaceX, it's kind of an interesting proxy. I mean, that's more or less a blank check from Elon Musk. I mean, if you look at the market cap that he commanded with that IPO relative to the earnings power, I think the market appetite might be a little bit richer than maybe we're, you know, all assuming to some degree because it absorbed, you know, a very large IPO recently. I mean, a lot of these tech stocks when they were IPOing back in the, you know, late 90s, early 2000s had much smaller market caps, much higher valuations. So, I think the appetite may be a little stronger, but we'll have to see. Anthropic looks like it's the first company to jump out into the ocean and we're going to have to see if it can swim. So, it's going to be scrutinized heavily and I think that's good and I think we need that. It needs to clear some hurdles and that will provide a runway for what are the returns on invested capital because ultimately that's what this is going to come down to as people continue spending. What return are you getting? And I will tell you that as we extend the bull market in AI stocks, that threshold is going to get higher and higher because it's going to be harder to earn those returns that you could have earned four, five, six years ago if you were investing in the space. So the threshold's going to be high and the market needs that clarity. But all this, I think, Ed, is really what's setting up a unique opportunity in many pockets of the market. Whether it's industrials, whether it's technology, whether it's some of the banking stocks, we're seeing really depressed multiples. And last time I was on, Ed, you know, one of the things we talked about was kind of, is the market, you know, narrowing. And I've thought about this, you know, a lot since we discussed that. And, you know, you had asked me the question, you know, is this healthy? Is this a healthy thing going on? And I think that actually one of the things that is driving the narrowness of the market is the repricing of credit. At the beginning of the year, everyone thought rates were going to go down. They thought Trump was going to put someone in the Fed that would want lower rates. We didn't know about the war in Iran at that point. So, I think those elements have allowed credit to reprice and it's really punished some of the smaller stocks and I think that's been less about kind of the AI trade driving the market and Nvidia holding up the market and more about credit being repriced and those companies that are most exposed are kind of the small and medium companies. So I think there's a lot of upside here if we get clarity from Anthropic on an IPO, if we get some resolution with the conflict in Iran, and if we get a little bit of reprieve on the credit markets.
Yeah, it does seem that there are some things that are suppressing the market right now, which if they just turned on a dime, you'd see stocks explode. Like I think you said this last time, like there is kind of a spring-loading mechanism. If for whatever reason, and to be clear, I don't think this is going to happen anytime soon, but if something goes right in Iran, that's a completely different environment for stocks. Like that suddenly changes the entire narrative in a day and it's literally up to the decision of one guy, it seems like. So I mean, again, I don't think it's going to happen, to be honest. I think that this is going to go on for a long time, but it does seem like that is overwhelmingly what investors are pricing in, that we are in for a long-term situation, but that means potentially more surprise to the upside. I guess just final question before you go, what do you expect the market to look like in the next few months? Are you expecting more upside going forward? Where do you think we'll be come, say, end of the year?
Yeah, I would be surprised if markets aren't substantially higher by year end. I mean, there's a couple caveats to that I would make. The first is that if the conflict in Iran continues to be dragged out, that obviously is going to keep pressure on the inflation numbers. So, you were right. That is a definite concern. I think Trump's in a tight spot because Iran knows the political calendar and we all in the US know the political calendar and depending on what happens in the House and the Senate. If Democrats take both, and right now prediction markets show I think a 90% chance that Democrats take the House and a 65% chance they take the Senate. If that happens, he may have a harder time getting funding for the war. So he may look at a little different timetable on how he wants to proceed. So near-term that could, depending on what he does, I don't know what he will do, but that could put upward pressure on oil prices depending on if he escalates things there. So that is a wildcard risk to the downside. The flip side of that is that we do see a little bit easier interest rate environment if oil comes off, if there is some resolution. And I think investors need to be prepared for that because if you look historically, so much of the total return comes in just a few days over the market cycles. And so the risk of not being in when you're trading at, I think we're now at 18 and a half times forward earnings for the S&P with 30% earnings growth. The risk of not being invested, I think, outweighs some of the risk we're seeing on the horizon. So I agree with you. We shouldn't be cavalier about the risks, but I think you're being paid for them and I think it's a good time to be stepping in and I think we'll see some upside here if we get any resolution.
All right, John Mawji is chief investment officer at NFJ Investment Group. John, appreciate your time. Thank you.
Thanks, Ed. We'll be right back. And if you're enjoying the show, be sure to subscribe to the Prof G Markets YouTube channel at the link below.
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