ETF Market Inflows and Trends - Year-to-date net inflows into ETFs reach $623 billion, on track for another trillion-dollar year [2] - The industry is potentially heading towards $1.3 trillion in flows for the entire year, driven by low-cost and active strategies [3] - Stronger sector flows observed in the past three months compared to the prior three months, indicating tactical adjustments and improving sentiment [3][4] Communication Services ETFs (XLC) - Increased inflows driven by price and fundamental momentum, with the sector outperforming the broader market [4] - Communication services is the only sector with increased earnings estimates over the last three months, largely due to AI [5] - Beneficiary of the "one big beautiful bill act" due to high R&D expenditure that can be expensed at a higher rate, boosting cash flow [5] - Considered a safe haven due to its service-oriented nature, making it less impacted by tariffs [5] Small Cap ETFs - July saw $2 billion of outflows, contributing to net outflows year-to-date, reflecting a less robust economic outlook [6] - Small caps face challenges due to below-trend growth expected in 2025 and 2026, high interest costs, and significant debt financing [6][7] - Small caps have experienced negative earnings growth over the last three years, contrasting with the sizable positive earnings growth of large caps [7] - Sentiment favors large caps with AI tech benefits, higher cash flow, and less debt service, making them less tied to the economic cycle [8] ETF Recommendations for Current Market - Communication Services ETF (XLC) is recommended due to fundamental momentum, high earnings expectations, cash flow, earnings revisions, and limited tariff exposure [11][12] - Aerospace and Defense ETF (XR) is suggested due to macro momentum from increased defense spending driven by geopolitical conflicts [12][13]

Market Trends & Diversification - NASDAQ hits a record high, with Nvidia reaching a $4 trillion market cap, prompting a discussion on diversification beyond tech and large-cap stocks [1][2] - The narrative of US exceptionalism is considered overblown, suggesting opportunities outside the US market [3][4] - The market may be underreacting to tariff risks, with earnings reports after July 15th expected to provide more clarity [11][12] Investment Opportunities - Opportunities exist in smaller cap companies, particularly those domestically oriented, potentially benefiting from isolated trade impacts and faster AI implementation [6][7] - Small caps are trading at a significant discount, with EV to sales ratios about half that of large caps, indicating potential for earnings growth and valuation expansion [8] - Security-related sectors, including cyber, food, water, and defense, along with AI, present compelling investment themes [10][11] Small Cap Analysis - An active approach to small-cap investing is favored, rather than solely relying on indices like the Russell 2000 [6] - Smaller cap companies may benefit more quickly from declining rates due to their higher proportion of floating-rate debt [7] - Small-cap banks are crucial for the overall performance of the small-cap sector, presenting an interesting investment opportunity [15][16] Alternative Investments - Private credit is highlighted as an all-weather strategy, with interest shifting from direct lending to niche sectors like real estate debt and asset-backed securities [19][20] - A quantitative approach to analyzing markets, especially small caps, is recommended to synthesize data effectively [17]

Market Outlook & Investment Strategy - The firm suggests rotating into value and small-cap stocks, as they have underperformed in the first half of the year [5] - The firm is at target for large-cap stocks but overweight in small-cap and non-US equities, believing there is better value in these areas for the second half of the year [6] - The firm has been bullish on Japan for a number of years due to strong improvements in corporate governance and better returns for shareholders [7] Currency & Economic Factors - The dollar index was down 11% in the first half of the year, marking its worst performance since 1973 [7] - The firm anticipates potential dollar weakness, especially if the Federal Reserve reduces rates by 100 basis points over the next year [8][9] - A softening dollar is seen as a reason to be overweight in developed markets outside the US [10] - Fiscal stimulus in Europe, particularly in Germany, is expected to be beneficial [6] Sector Analysis - There was a rotation out of higher multiple sectors like tech and AI into lower multiple sectors like consumer discretionary [2] - Financials are favored due to the prospect of less stringent regulation and potential capital returns [15][16] - The firm believes that progrowth policies and less regulation will benefit small and mid-cap companies more significantly [13] Risk Factors - Headline risk related to tariffs, particularly with Japan and China, remains a concern [16][17][18]

Market Overview & Small Cap Performance - Russell 2000 is the only index negative year-to-date [1] - Small caps have been struggling fundamentally due to an earnings recession [3][4] - Consensus expects a significant growth pickup in the second half of the year, but estimate revisions and guidance need to turn around for confirmation [4] Interest Rate Sensitivity & Fed Policy - Small caps are increasingly sensitive to rate risk, showing a record negative correlation with longer-term treasuries [6][7] - Bank of America economists are not expecting the Fed to cut rates this year, while the market is pricing in several Fed cuts, posing a near-term risk [5] - Higher rates for longer pose a bigger risk for small caps due to high leverage and short-term/floating rate debt [7][8] Potential Positives & Long-Term Outlook - Potential positives for small caps include the US-China deal, growth-positive provisions in the bill, and a slightly more positive ISM [2][3] - Long-term, there is potential for outperformance of small caps given valuations and multi-year themes like reshoring, peak globalization, and a capex cycle in the US [8] - Near-term selectivity is crucial, with better risk-reward in midcaps; focus on areas with better revisions, stronger margins, and avoid levered companies [9][10]

Let's talk a little bit more on markets right now. Joining us is Peter Krauss. He's the chairman and CEO of Aperture Investors.And Peter, we're coming off a really strong quarter, up better than 10% for the S&P 500, the best quarter since 2023. Um there are questions about whether it can last. A lot of good things that are happening right now.Um but we saw what happened in April with tariffs being put in place that were much higher than anticipated. We're against another deadline now, July 8th and 9th, when ...