Lead-Lag Live

AI Boom or Bubble? Jay Hatfield on What’s Next for Stocks, Small Caps & The Fed

• Michael A. Gayed, CFA

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In this episode of Lead-Lag Live, host Melanie Schaffer sits down with Jay Hatfield, CEO of Infrastructure Capital Advisors, to unpack the market’s next chapter. From AI valuations and small-cap opportunities to rate cuts and dividend ETFs, Jay breaks down where he’s seeing risk and reward as we head into 2025 and 2026.

Topics covered:
• AI and the “Magnificent 8” valuations
• The Fed’s next moves and rate outlook
• Why small caps and value may shine in 2026
• Dividend income ideas: ICAP, SCAP, PFFA
• Where investors are getting the narrative wrong

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SPEAKER_00:

Small caps are riskier stocks. So they do well when we're coming out of a of a tightening cycle. So the fact that the Fed's cutting is really bullish for small caps. They also have lower valuations than their larger cap peers, even by sector. So not just because they have less tech. So their tech companies are cheaper, REITs are cheaper, everything trades a lower multiple.

SPEAKER_01:

Now U.S. stocks are stabilizing after yesterday's tech-led slide. Big tech is catching a breath. Futures are or were a touch higher. And the latest private payrolls report shows hiring picked up without changing expectations that the Fed is likely to ease again before year end. Investors are watching AI leaders ahead of the fresh earnings, while small caps trade as a lever on the rate outlook. Gold strength is also a reminder that caution still exists in this market. My guest today is Jay Hatfield, CEO of Infrastructure Capital Advisors. Jay, it's great to have you back.

SPEAKER_00:

Thanks, Melody. It's great to be on.

SPEAKER_01:

So let's start with AI and earnings. Nvidia sits at the center of the build-out story. Can you make a case for why you're still optimistic on long-term AI-driven growth and what you're watching as you know those next earnings cribs approach?

SPEAKER_00:

Well, the earnings season was positive for the AI story in that every company, in the case of Meta to a fault, increased, you know, now it's increased demand on the cloud side and increased CapEx to satisfy that demand. In the case of Meta, they don't have a cloud service business. And so they they use the computing power to optimize their algorithms. So they did sell off, but it's still bullish for the AI infrastructure trade, for the semiconductor companies. I would just make one distinction. So I've been asked many times if we're in a bubble, and I emphatically said no. But what is becoming true now, after this earnings season, is that most of the what I call the Mag 8, so the$8 trillion companies, which includes Broadcom, are either fully valued or, in the case of Tesla, ridiculously overvalued. So we are vulnerable to the type of pullbacks we had yesterday, where particularly for really, really expensive companies like a Palantir, you have a sell-off and that triggers other momentum trade sell-offs. So I do think that investors should look at valuation. We have a 7,000 target on the SP for year end. We're pretty close to that target. Not saying should be able to market, but it's a little bit riskier than it was really, you know, after the tariff tantrum. Of course, that was actually wildly bullish, but very few people figured that out.

SPEAKER_01:

Yeah, you were. And just to carry on a little bit from this, um, where are investors getting the narrative wrong? What should they be seeing past the current headlines?

SPEAKER_00:

You know, there's a notion that there's kind of a Ponzi scheme where companies are funding other companies that then buy their materials, but we don't look at it that way. We look at it as an efficient capital market. So U.S. is the most efficient capital market in the world by far. There's this tremendous need to finance the CapEx. And so, really, it's not just gonna come from one company or from private equity, but really from all sources, which includes strategic capital, um, like like NVIDIA has been investing. It's gonna include doing equity offerings, IPOs. So investors shouldn't be concerned that there's significant capital demand. Even if you just look at your own experience. Uh, last night for the first time, my called Hertz, and I actually had a good automated AI bot to talk to versus sort of the old joke of you know, screaming agent at the phone. So there is tremendous developments going on, more on the corporate side, but even as retail consumers, we can see it. So I would give up on the AI skepticism and try to find more reasonably priced companies, like we might like Marbell, for instance, and um just be a little bit cautious about these momentum stocks. Uh, Bitcoin is a momentum gambling stock. Try to find companies trading at reasonable multiples of their growth rate. Palantir seven times, Marbell's closer to one and a half times. So just the risk reward, not that you can't make money on Palantir, maybe, but if they miss earnings, they could be down 50%, whereas a more reasonably priced company might only be down five or 10%.

SPEAKER_01:

Yeah, and I want to shift now to rates, something that you and I have talked a lot about in past podcasts. Can you give us your outlook uh for the path of policy and a 2020 five and into 2026? If the Fed stays on a gradual easing path, how do you see that rippling through uh equities?

SPEAKER_00:

Well, first of all, it's pretty clear that the Fed chair signaled they're not gonna cut in December. There's there's probably not gonna be a lot of data. Um, the data is gonna be mixed. There was stronger employment data. The um Fed is incompetent, so they can't properly adjust the CPI numbers. But there's one thing about the Fed or the CPI and the Fed is that the last CPI reading, shelter did come down, or actually owner's equivalent rent, which is the biggest part of shelter, came down to 0.1. So it's only 1.2% a year, whereas the last 12 months number is over four. So the current Fed is not good enough to make these kind of judgments. They're they're um use flawed models, their targets are way too tight, and they can't forecast it all. So we're probably gonna get a pause. Then the CPI data is likely to continue to be cool. It has been cool over the last six months as well. And so that should support cuts next year, and particularly even if we miss January, we're gonna get a new Fed share to probably be on the board as early as March. So as long as we're on track to get four more cuts down to 275, that'll keep the tenure around four. That'll support equity prices, that'll allow the housing market to recover. So we don't actually need a cut every every meeting to still have a bullish environment for stocks.

SPEAKER_01:

Yeah, and that leads me to ask you again about uh small caps. You've argued that small caps and value could have their moments in 2026. Can you walk me through the drivers then that matter most for that, Colin? What wouldn't validate it?

SPEAKER_00:

Well, there's really two key drivers. The first is small caps are riskier stocks. So they do well when we're coming out of a of a tightening cycle. So the fact that the Fed's cutting is really bullish for small caps. They also have lower valuations than their larger cap peers, even by sector. So not just because they have less tech. So their tech companies are cheaper, REITs are cheaper, everything trades are lower, multiple. And I do think that we're gonna have a theme next year where valuation starts to matter more. And so people are gonna be looking for cheap small cap stocks, looking for value because a lot of the big companies, the the moves have been played out. So it's really those two factors, the Fed easing and uh the large cap stocks getting, particularly on the tech side, close to fully valuative.

SPEAKER_01:

Yeah, and so you you just mentioned you know the the the new theme sort of around small caps, uh, maybe for next year. As well, income is back in focus. For investors looking to capture yield. Can you make the case for corporate bonds and and preferred in a volatile, you know, easing environment?

SPEAKER_00:

Well, the first thing is really critical to differentiate between equity income and fixed income. So we have ICAP as our large cap equity income fund, it's going to trade more like the stock market, somewhere close to at least the equalated SP. Um, and but you still get good yields and better long-term growth. But if you want true fixed income with lower volatilities, so volatility of PFFAs of preferred stock funds about 0.5 of the market as a whole, as the SP. And B and DS is even lower risk about 0.3. So for more conservative investors, and it's really could be a cash alternative as well, or a CD alternative, you can get both equity upside, because if the market does continue to rally next year, like we're projecting, we have a 7,700 target next year, then higher risk fixed income like BNDS and PFFA will outperform, obviously, CDs, outperform investment grade bonds, outperform munis. So when we're in a bull market and you still want fixed income, it's best to be in the higher risk fixed income with higher yields and even total returns that will lag the market as a whole, but still be somewhat competitive. So in the high single digits, the market usually does low single digits. So you'll be a little bit lower, but not a third. You know, the investment grade bonds right now yield right around 4%. And so there you're lagging the market by 7%, 8%, 9%. High yield bonds, particularly our funds, you're only lagged by 2% or 3%, but yet you get lower volatility, more safety, you can sleep better at night.

SPEAKER_01:

So just to kind of bring it together for us, we'll thinking about what your your base case and your projections for the end of 2020 and 2026, which ETFs uh should invest particular focus to?

SPEAKER_00:

Well, so in our ETFs, so ICAP's our large cap dividend fund, um, that's been doing um really well this year's beating the equate SP. Um SCAP's our small cap dividend fund also has outperformed this benchmark this year and even more so last year. So we do think that uh if we're right about valuation mattering, then those funds will do well. And we employed a GARP methodology, so that's growth at a reasonable price. So we look at the peg ratio, the PE to growth. We also adjust for yield. But so we would um argue that that's a great methodology, one that if you're buying individual stocks, you should employ. And that's what we do with um ICAP, SCAP. We find a lot of undervalued stocks. And if they're performing well, we do monitor them, see if they're fully valued. And that way you can get really good returns and also limit your risk so you don't have a company that was overvalued and then misses earnings and goes down 50%.

SPEAKER_01:

Can you talk about any of the stocks within those funds that you're particularly bullish on or give up some stock?

SPEAKER_00:

Um, we really love the private equity slash alternative investment managers. They've been hit hard, Apollo and KKR, our biggest holdings. They've been hit hard by a fear about credit, which we think is totally unfounded. There were a few frauds in a um for lower quality companies, uh, which these private equity firms typically don't invest in. But that doesn't mean there's a systemic problem. They also, it's not even their capital. They don't want to lose money for the clients, but it's not even their capital. So these are great businesses. If you look at Apollo's report, really strong momentum, getting realizations, getting new assets under management, trading at very low multiples. So we see uh with KKR, it's about a 120, we have a 200 target, same target with Apollo trading at 135. So we think that that's low-hanging fruit. And then looking at higher risk tech stocks, but ones that traded reasonable multiples. I mentioned Marbell already. That stock did get hit when they reported earnings, but we think unfairly. So it's gonna be a big earnings report coming up over the next month, but we think the risk award is is quite good. And we've been uh recommending Amazon uh even when it was at uh 220, but it's rallied dramatically up to the 250 area, but we still see upside to 300. So still a reasonably priced stock. Was out of favor, and now investors are gravitating towards it.

SPEAKER_01:

What about in this small cap space, Jay?

SPEAKER_00:

Um we have a um um a higher yielding idea, which is GNL global net lease. They've transformed themselves into an investment grade credit. Stock had done terribly over the last five years, but they delevered, sold off their low quality assets, and now um are yielding over 10. We our models show that's a sustainable dividend. It's trading in the mid-sevens, we have an 11 target. So we think an out-of-favor, misunderstood company that's really transformed itself, but yet investors haven't given it credit for it yet.

SPEAKER_01:

So, uh Andre, just to wrap up for viewers who want to follow your research, learn more about your funds, where should they go?

SPEAKER_00:

Uh Infracapunds.com. You can sign up for our webinar and also get on our mailing list, send out uh great economic research, historically great economic research, and uh give you all the data so you can come to your own conclusions as well.

SPEAKER_01:

It's great to have you here, and thanks to everyone for watching. Be sure to like, share, and subscribe for more episodes of Feed Life Live.

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Michael A. Gayed, CFA

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