Wall Street Is Demanding Proof For AI Spending

July 27, 2026 | Season 8 | Episode 23

The market is sending mixed signals that are easy to miss if you only watch the headlines. One moment the major indexes look fine, and the next a single theme, artificial intelligence, is doing so much of the lifting that the “index equals the market” assumption starts to break down. We dig into the new reality of AI on versus AI off, where breadth matters, concentration matters, and your portfolio can be taking more AI risk than you intended.

We also unpack two earnings reactions that caught investors off guard. Tesla’s report raises the question of how long the market will pay a premium for vision without execution, even with big promises around autonomy, robotaxis, and robotics. Alphabet posts blockbuster numbers, yet the stock drops as Wall Street zeroes in on massive AI spending, capital expenditures, and the uncomfortable moment when free cash flow turns negative. Along the way, we explain a crucial AI accounting dynamic: chipmakers recognize revenue now while hyperscalers depreciate infrastructure over years, which can make profits look better than cash reality.

Then we zoom out to the real-world drivers that can reset valuations fast: Middle East tension, the Strait of Hormuz, oil prices, inflation expectations, and a bond market offering higher real yields. We cover overlooked medical device stocks that may be “on sale,” clarify what the Social Security trust fund timeline could mean for future benefits, and explain why Treasury Inflation Protected Securities (TIPS) deserve a fresh look as an inflation hedge.

If this helped you stress-test your assumptions about AI stocks, market concentration, and bond opportunities, subscribe, share the episode, and leave a review. What part of your portfolio feels most exposed right now?

** For informational and educational purposes only, not intended as investment advice. Views and opinions are subject to change without notice. 

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Transcript

Today’s Market Roadmap

Alan Eppers 0:00

And now introducing Mr. Lanton.

Keith Lanton 0:03

Good morning. Today is Monday, July 27th. Last Monday in the month of July. Summer pretty much approaching getting close to the halfway point. As this is anything but a quiet summer so far in terms of financial markets. Obviously, a lot going on, especially with the Middle East and energy prices, and we will focus on that to some extent this morning. We'll talk about the developments in the Middle East, the state of progress between the U.S. and Iran, as well as the implications of the higher energy prices, what we saw last week with the oil prices spiking. We'll also talk about the large key companies earnings results last week from Alphabet, as well as from Tesla, and we have more to come this week. We'll talk about those earnings, what they may mean, what the market might be telling us, what's going on with large capitalization stocks, what's going on with market concentration and large capitalization stocks, and we'll move to some other topics as well of importance for investors, the state of Social Security, what is going on with the Social Security Trust Fund, what that may mean for individuals who are counting on Social Security, as well as anybody who's investing their funds and thinking that they're going to get a fixed pent back from the government for all the money they put in and what they may or may not be able to expect. And we will focus on a few non-technology stocks, medical device companies profiled in Barons as perhaps a place to hide out and potentially earn attractive returns on a sector that's been ignored, that used to be a darling, that has gone out of favor. And then finally, we'll talk about interest rates and where the best opportunities may be in bonds. Uh spoiler alert, we will focus on tips, treasury inflation protected securities as we see inflation and inflation costs rising with all the uncertainty taking place with respect to commodities, especially oil, natural gas, , but also concerns about the U.S. deficit and all these factors driving up real interest rates, and what the implications of higher interest rates may be for bond investors and alternatively for stock investors, because you always have the potential for substitution between stocks and bonds. So when the bonds become increasingly high in terms of what they're offering you, then you start, whether it's conscious or subconscious, you start thinking, hey, maybe I don't need to take all this risk in the stock market, and therefore things can weigh on stocks when bonds start getting juicy. Let's take a look at the markets this morning. Uh,

AI On Versus AI Off

Keith Lanton 2:46

we were talking about, of course, artificial intelligence. Uh Barron's highlighting AI stocks and how AI stocks are really the factor that is swinging financial markets, and pointing out that we used to talk about risk on and risk off, meaning that suddenly we were going long into equities, whether it was the SP 500, the NASDAQ 100, or international stocks, we were getting bullish at the same time. If we were getting bullish, we were probably considering diminishing exposure to bonds, lightening up commodities. That was the traditional risk-on, risk-off trade. Buy stocks, sell bonds, buy bonds, sell stocks. But now we have something else. It is the AI on and the AI off trade driving the stock market. Gentleman in Barons, his name Rocky Fishman points out that of the 11 sectors that make up the SP 500, five had a zero or negative correlation with the index over the past five months. It's the same story on a single stock level. If you take a look at the average stock in the SP 500, it has moved in a different direction than the index in 52 out of 135 days. It's a fascinating statistic. So if the index is moving up, that does not necessarily mean that individual stocks are moving up because the indexes are so heavily focused on artificial intelligence and stocks concentrated on artificial intelligence that the overall index may not be telling you what individual stocks are doing. So far, 52 out of 135 days this year, SP moved in a different direction than the than the than the index on 52 of 135 days. By comparison, more stocks rose on index down days or fell on index up days only 24 times in the first 135 trading days last year. And if you go back into the 2010s, if you're looking at the number of stocks rising versus falling, you only had 15 days where you had a situation where stocks were rising, but the index was falling or the index was falling and more stocks were rising than falling. Here we have a situation where we have 52 stocks moving in a different direction than the index out of 135 days. So you can see the effects of that concentration, you can see the effects of the weight of artificial intelligence. So, speaking about artificial intelligence, Barclays did a survey that showed at the moment that more Americans are using artificial intelligence for personal applications than for work. Just 14% of the respondents to this survey said that they used AI on a daily basis at their work. And this is perhaps why we are seeing lots of volatility in the financial markets and specifically the risk off at times in the AI trade. And we will delve into that a little bit further here as we talk about what took place last week with the earnings from Tesla and Alphabet. And then we'll talk about the market concentration and we'll look at it from a historical perspective what market concentration has historically looked like and what has happened when we've had concentration like we are seeing today. So

Tesla’s Miss And The Musk Premium

Keith Lanton 6:01

of the of the hyperscalers or the mega, let's call them the Magnificent 7 stocks, we had Tesla come out with earnings last week, and so far the assessment is those numbers didn't look too good. In fact, you could say they were lousy. Operating profit tumbled to $398 million, missing Wall Street's expected $1.7 billion by a long mile. 480,000 vehicles were delivered, but price cuts, higher costs, and lower regulatory credit sales dragged profitability down. Now, historically, earnings missed at Tesla wouldn't necessarily rattle investors. Uh, you got lots of folks who believe in the vision of Elon Musk. After all, Tesla stock has never been about short-term vehicle deliveries. It's been a bet on Elon Musk's vision of the future. And that's why Tesla trades at about 175 times earnings, while traditional car giants like Toyota traded a fraction of that. But when shares plunge 14% following the report, it signals something deeper. Perhaps investor patience with Elon Musk's vision or his hyping up of the future may be wearing thinner than it has in the past. Also on the earnings call, Musk, who was subdued, said he was recovering from not feeling well. He did nevertheless double down on the future. He teased big promises for robotaxis, robots, and even modular AI data centers called megapods. Wall Street analysts aren't panicking yet. At the moment, analysts holding the line, most viewing the spending spike that's taken place at Tesla, as well as at other big technology companies, is a necessary transition towards autonomous technology. But the market's reaction shows the stakes are getting higher. Uh, for Tesla to hold on to its massive Musk premium, at some point promise must turn into execution. So Musk must deliver on full autonomy for self-driving cars, robotaxis. That is what analysts are saying, in order to restore the narrative and demonstrate that he can deliver. So markets at the moment, at least at the end of last week, , voting with their dollars and seeing a meaningful sell-off in Tesla stock. The other big

Alphabet’s Beat And CapEx Fear

Keith Lanton 8:17

company to report earnings last week was Alphabet, and despite a blockbuster second quarter earnings report, revenue soaring 24%, cloud revenue jumping an astonishing 82%, headline earnings per share crushing expectations. We'll talk about that headline number versus the backed out number. Yet the stock tumbled 7% on the announcement. On the surface, the Alphabet earnings looked flawless. But when you pull back the curtain, Wall Street focusing on what they are saying were potential red flags. Number one, massive AI spending. Number two, cash flow pressure. So let's take a look at the the earnings, the massive headline beat where Alphabet earned $9.11 per share pre-tax versus $288 expected. Well, one factor there was that that 9-11 number included a roughly $98 billion in unrealized paper gains from Alphabet's equity holdings in SpaceX. Strip away those paper profits, core operating results were solid, but a lot less eye-popping. But perhaps most importantly, Alphabet triggered severe CapEx anxiety. What does that mean? It means that they increased the amount of money that they're gonna spend to build out artificial intelligence to a staggering figure of around $200 billion, they're saying this year. Wall Street very focused on the fact that in the second quarter alone, capital expenditures, again, building out that artificial intelligence, building out those data centers. So in the second quarter alone, capital expenditures doubled year over year to almost $45 billion. Because of this aggressive spending spree, Alphabet's quarterly free cash flow flipped to negative $5.9 billion. First time that Alphabet has had negative free cash flow in a quarter. So the takeaway is investors aren't doubting Alphabet's or Google's growth or its AI cloud demand. Its cloud backlog is massive. But right now, Wall Street is demanding immediate return on investment, and they are unnerved by how much Alphabet is burning to stay, how much burning, how much cash they're burning to stay ahead in the AI arms race. So keep in mind Wall Street is fickle. If you go back about a year ago, Wall Street was super unhappy that Apple, for example, was not spending aggressively, you may remember, on artificial intelligence in the cloud. The focus was on that Apple was way behind in the artificial intelligence race. Folks like Alphabet and Amazon and Microsoft were spending ferociously, and that was viewed as a good thing. Here we are, fast forward a year later, and Apple is being viewed as very shrewd, very wise, keeping their cash and their powder dry. And on the flip side, the hyperscalers like Microsoft and Alphabet and Amazon and Meta, the spending that they're doing is something that is now viewed as a negative. So things do turn quickly, keep that in mind. You have to make your own determination, your own decisions on whether or not you think that these investments are going to be high return investments, and that will ultimately determine the path of these individual stocks going forward.

Concentration Risk And Accounting Reality

Keith Lanton 11:31

Now, going back historically, which we like to do, let's talk about the market concentration in these big name Mag 7 hyperscaler stocks. And we are living through an extraordinary moment right now where market concentration of the top 10 companies in the SP 500 is approaching 40%. So we've talked about this before, but important to put this in historical context. Similar levels of concentration took place in Japan in the 1980s during their boom. In the United States in the 1960s, during the era known as the Nifty 50. In the US, if you go back to 1964, the top 10 stocks reached 39% of the SP 500 index. If you go back and take a look and say, hey, what were those mega companies back 1964? Well, they were the old favorites ATT, General Motors, ExxonMobil, IBM, and Texaco. Again, reminder that the strongest stocks, if you go back about 50 years, a good question to ask yourself is will today's leaders be the leaders in 50 years? Today's concentration though differs from the 1960s because many of the largest companies like Nvidia, Microsoft, Amazon, Micron are tied to a single theme, and that is once again AI. Go back and look at that list from 1964. We had a computer company like IBM, we had a revolutionary telecommunications company, ATT, automotive company, General Motors, and we had two oil companies, ExxonMobil and Chevron Texaco, making up five. Here we are concentrated in one theme. But historically, regardless of the theme, prior episodes of intense concentration eventually broke down, sometimes painfully, before returning to more balanced levels. Now that doesn't mean a crash is imminent. We're not predicting one. Concentration is not a timing tool, but it does remind us that trees don't grow to the sky. Market concentration is not limited to the United States. The seemingly insatiable demand for specialized chips has launched technology companies in South Korea and Taiwan to new highs. The top 10 firms in the MSCI Emerging Markets Index account for 41%. There's that number again, about 40% of market capitalization. Three of them, SK Heinex, Samsung, and Taiwan Semi, make up 29% of that index. And as Capital Group points out, the US gross domestic product is relying as well heavily on artificial intelligence spending. So if we take a look at concentration risk, not just in the stock market, but in terms of where gross domestic product is going, the data center build out has supported U.S. growth with AI-related investments contributing nearly 1% to real gross domestic product in the first nine months of 2025, or 39% of overall growth during that period, according to the St. Louis Federal Reserve. So company earnings in the broader economy, therefore, may be more vulnerable to an AI-induced slowdown. Shift makers have grown the most because roughly 50% of data centers related costs are tied to semiconductors, but companies that provide heating, air conditioning, electricity, water treatment are also enjoying strong tailwinds. And finally, we're even seeing artificial intelligence influencing the bond market. Another corner of the AI boom that is starting to show some strains is the U.S. corporate bond market. We have seen an avalanche of bond deals that is starting to weigh on debt prices, not only of corporate bonds, but some would argue that is bleeding into the U.S. Treasury market, as there has been a tremendous amount of issuance, and AI data center stocks that are seeking to seek new capital from debt are competing against the U.S. Treasury, while the U.S. government is seeking to raise lots of money to finance our deficit. Perhaps one of the factors affecting interest rates and driving up rates. Hyperscalers, including Alphabet and Meta, account for almost 5% of the total market value of the U.S. Bloomberg corporate investment grade bond index. That is a 78% increase from one year ago. So the market concentration artificial intelligence reveals some of the trade-offs tied to investing in index funds. Capital Group saying that there is a common misperception that index funds are somewhat safer for investors. So, what should investors do? Well, Capital Group suggesting they should make sure their portfolios are broadly diversified behind highly concentrated indexes. Start by evaluating the percentage of your holdings that are in a handful of companies tied to the AI theme, and you may want to consider a more balanced approach after you review your investments and take a look at the risks that you're taking and make sure that you're reviewing the risks that you're intending to take and then focus on the risks that you were not intending to take. As we think about this and we think about concentration risk and we think about market values and capitalization, one of the themes that we've been hearing is that earnings have been holding up extraordinarily well, and that is absolutely true, and that has been one of the reasons why, despite the fact that we have seen significant appreciation in markets that analysts have been citing, that valuations can continue to climb. And we've heard talk of perhaps there being a bubble in artificial engine stocks and technology stocks in the overall financial market. Uh, but earnings have continued to grow and climb. We'll share with you some thoughts from Jim Chanos, who now manages his own money at a firm bearing his name. He's renowned for some of his short calls on overvalued stocks, has a good track record, but far from a perfect track record, , no one does. But Mr. Chanos pointing out that earnings have been rising in the overall financial markets, and earnings have been certainly increasing at the technology companies. But he does point out, and I thought he had an interesting point, that the majority of this earnings growth has been behind the profits boom in technology stocks. And if you look at accounting and the way accounting is done, and this is all being done legally correctly, he's not insinuating that anyone is doing things that they necessarily shouldn't be doing, but you need to understand how the accounting is being done to make an informed decision, and he's saying that the accounting of how capital expenditure is occurring may be making earnings look better. What does he mean by that? Well, sellers of equipment from the artificial intelligence boom like NVIDIA, they book their revenue and their profits today when they make their sales. But when companies like Alphabet and Amazon and Microsoft and Meta and Oracle make those purchases, they don't often immediately expense those purchases in their profit and loss statement. The capital equipment is depreciated over its presumed useful life. So NVIDIA makes a billion dollars in sales, that's revenue of a billion dollars today. Alphabet buys a billion dollars of chips from NVIDIA and says, hey, these chips have a useful life of five years, they depreciate that over five years. They're only expensing 200 million dollars today. So what you are seeing is you're seeing the revenue showing up all at once, but the expense is being shown up over the course of many years, creating a situation today where you're seeing on the aggregate higher earnings than you might see if things were being expensed at the same time as the revenue is being recognized. Furthermore, if equipment is not plugged in, in other words, you buy artificial intelligence equipment and you don't necessarily use it until the factory is built in six months or a year, well, that expense isn't recognized until it's put into service. So this could also be further adding to the fact that not all of these expenses are being recognized. So the markets are starting to come around to recognize this accounting effect, he says. This year, chip stocks are up sharply even after a recent correction, while the hyperscalers have flatlined at the moment. As we just mentioned, the reaction to Alphabet's earnings this past week is one example of this. Investors focusing on the negative free cash flow, not necessarily the earnings, because again, you're spending all the money, you're not necessarily expensing all the money, and that's something that markets are taking into effect. The other thing that they're taking into account, he says, is something else that we just mentioned, which is that they need to finance all of this growth because they can't just take it from cash flow. They're issuing equity, they're issuing debt, and interest rates are increasing, and therefore the cost of financing this is increasing. And that is another concern to the financial markets as the debt costs go up. Well, the cost to build out artificial intelligence is also climbing as well. So these are factors that we need to be very mindful of, especially if we're concentrated in indexes which are heavily weighted to these to these hyperscalers. So we just need to be aware, it's not it's not a situation where we're suggesting that this is good or bad. It's a situation we're suggesting you just you need to understand you cannot fly blindly. You have to make intelligent, informed decisions on what is potentially best for you. So

Middle East Risks And Oil Prices

Keith Lanton 21:08

we are seeing this morning a relief rally, we're seeing stocks significantly higher, oil prices significantly lower, as the potential for a pause and attacks, optimism that perhaps that the pause and attacks that took place this weekend between the US and Iran will lead to a broader understanding. We've seen this movie before, hopefully it'll have a better ending this time, and there will be a deal that is struck that is something that Iran will stick to and that the United States is comfortable with, something that hopefully leaves the Straits of Hormuz open and freely trading. One of the big sticking points is, of course, that Iran is claiming that they have a right to control shipping through the Straits of Hormuz. And we had over the weekend, actually at the end of last. Week, Ray Dalio, well-known hedge fund manager, suggesting that Iran and the control of the Strait of Hormuz, he was saying, in his opinion, is one of the most significant factors going forward for the legitimacy of continued strength of the United States, that if Iran is allowed to control the Straits of Hormuz, it will appear that the U.S. has in effect lost the battle in the Middle East, and it would be a loss of credibility. And he was suggesting that that is something that would undermine the strength of America and the image of America and could potentially damage it for a very long time. So I do agree that it is something to pay lots of attention to, to what happens with who can trade controls the straits of Hormuz if there is any agreements, and that is something that will significantly determine the you know the rest of the world's view of the United States and how effective the United States is as a military and economic force going forward. So a lot on the line right now. We are seeing Dow futures up 600, Nasdaq futures up about 400. We are seeing Brent crude trading just below $90 or at about $90 a barrel. That's down at the end of last week. Last week, Brent crude was up 12%. We saw the NASDAQ drop a little over 2%, the Dow and the SP were down half of a percent. Axios is reporting that Iran and Oman are in discussions for a new arrangement to reopen the Straits of Hormuz. In addition to monitoring events on the geopolitical front, investors have a busy week of earnings, four of the magnificent seven stocks reporting earnings this week. We talked about that a little bit before. Also, , we will have the Federal Open Market Committee with a decision on interest rates on Wednesday, and the probability of a rate increase is up to about 35%. That is on Wednesday. So we will get some insights into the Fed and what their decision is. We'll probably hear less from the Fed than we've heard from the Powell Fed at the Walsh Fed, but we will see what their decision is on rates. And then we get another reading on inflation on Thursday. Individual companies in the news this morning. Apple stock is up this morning a little over two points. Reports that Apple is lobbying the White House to use Chinese memory chips, but Micron Technologies is against it, , for obvious reasons. Nvidia is in discussions to provide a $250 billion backstop for an AI data center in Ohio that is being proposed by OpenAI that according to the Wall Street Journal. In the Asia Pacific region, we're seeing strength in stocks up anywhere between one and one and a half percent. Noteworthy that the Chinese chipmaker CXMT IPO'd on the Shanghai Stock Exchange and soared nearly 500%. So that's five times on its first day of public trading. This is leading to some of the strength we're seeing this morning on top of the news with regards to the situation in the Middle East. Uh, this strength in China for this IPO is another factor affecting technology stocks this morning. Reports that approval rating for Japanese Prime Minister Takaichi has fallen below 60% for the first time. United Nations Ambassador Mike Walsh saying that President Trump ordered a pause in Iran strikes to give diplomacy, quote, unquote, some space. But he also said more military assets are moving into the region. He denied reports that weapon stockpiles are being depleted. NBC News is reporting that Houthis are firing missiles and drones at Saudi Arabia in response to Saudi Arabian airstrikes. And Bloomberg talking about the U.S. power grid straining right now on demands for power as heat waves continue to roll across the United States.

Medical Device Stocks On Sale

Keith Lanton 26:04

In Barron's this weekend, , if you are looking for another path other than the Mag 7, Barron suggests taking a look at U.S. medical device stocks. The iShare's medical devices ETF is down 20% this year. Investors have rotated aggressively into AI hardware, as we talked about, while fears over slowing healthcare spending and reduced Medicaid coverage have rattled the markets. But with high-quality device makers now trading at 20 to 30% discounts to the S P 500, offering free cash flow yields of 5 to 6%. Barron's suggesting these fears may be overblown. Some stocks they suggest considering after this big sell-off. First up, Intuitive Surgical, which had earnings last week. Market was disappointed that they didn't raise guidance. The stock sold off. Symbol is ISRG. That company did, though, raise their full year, they held off on raising full year guidance, but core earnings surged 24%. Barron suggesting new competition won't easily dent its market stronghold, making the pullback a prime buying opportunity. Next, Danaher DHR stock plunged last week after orders for biotech processing resins led to a small trim in revenue forecasts, but Barron's saying don't be fooled. Danaher actually beat earnings expectations, raised its full year guidance to $8.53, and they say the underlying lab and diagnostic demand remains completely intact. Next up, Abbott Labs, symbol ABT. They posted strong margins and growth across the board, standing out as a bright spot. They are tapping into hot trends. They just launched a protein product tailored for GLP1 weight loss users, and they are rolling out new heart and diabetes monitoring devices. And let's see 15% upside. Next up is Edwards Life Sciences. Edwards has had a strong year this year, unlike its competitors, routinely beating estimates, and that's because of strong demand for its minimally invasive heart valve. And part of that demand being driven by expanded Medicare coverage, strong trial data, and Barron's saying it remains one of the cleanest growth stories in Med Trittech. On the bargain side, Boston Scientific has been hit the hardest. That symbol is BSX. It's down 50% this year. They trimmed their sales forecast to 8%, but they have some new arterial fibrillation products launching. They have a big share cash buyback. They have a 6% cash flow yield, and the stock they say looks oversold at 13 times earnings. And finally, Medtronic MDT, also trading at 13 times forward earnings, 7% free cash flow yield, expected to hit 7 billion in free cash flow this year. Sales growth is around 4%, making it a value play where investors might want to wait for growth momentum to return. So the bottom line, long-term fundamentals for healthcare innovation haven't vanished. They've just gone on sale. Alright,

Social Security Trust Fund Math

Keith Lanton 29:11

for those who may be approaching retirement, or those who are thinking that they are 35 or 40 but would like to retire earlier than their parents or grandparents, one of the things that you all may be thinking about is Social Security. And one of the things that folks are getting lots of angst about, and this is not something that is new to this generation, previous generations have felt this as well, is that there is a shortfall and concerns that if the shortfall is not addressed, that there may be cuts coming to Social Security. Now, Baron's pointing out that Social Security, while there are potential cuts on the horizon, isn't going away. Even in a worst case scenario, you're going to get some of your promised benefits. How much you'll get depends on what Congress accomplishes to fix Social Security's deteriorating finances. Recent legislation introduced on Capitol Hill aims to provide a framework for addressing the issue. But if Congress does nothing, the retirement trust fund backstopping payments is expected to run dry in 2032. Now, when we say run dry, we don't mean it runs to zero. I'll explain in a minute. If Congress fails to act, current and future recipients could see benefit cuts, not benefit cuts to zero, but benefit cuts. If Congress does act, a different set of cuts may arise, other than a across the board cut. So if Congress does nothing, the fund runs dry, so to speak. What that means is that it doesn't have enough funds to meet demand for payouts. The fund would be about 72% funded, which would mean across the board cuts of roughly 28 to 30%. So to shore up the trust fund and make sure that doesn't happen, lawmakers can raise taxes or they can reduce benefits. The shortfall is large enough that Congress will likely have to do both while sparing current recipients from any cuts. So how would Congress go about doing this? Well, one way is they could impose a cut by raising the full retirement age. When you receive full benefits, folks are talking about raising that age from 67 to 68, but that will not solve the problem by itself. In terms of expectations on what Congress will do and when, many expect or most expect Congress to act eventually. And if they do act eventually, passing legislation would prevent automatic benefit cuts. No politician wants to see seniors' income slashed on their watch. Under current law, Social Security can only pay benefits from the program's dedicated funding sources, which include payroll taxes and the trust fund reserves, meaning money that's been saved up over the years. So if those reserves are allowed to run out in 2032, then benefits would be limited to payroll taxes, which only cover about 70% of payments. So what might lawmakers do? Well, lawmakers perhaps could make changes to the age. They could also make changes to the amount of money that is taken out of our checks to fund Social Security. Most expect that anyone within 15 to 20 years of retirement would not be affected by these changes. That's based on precedent. The last time this happened in 1983, Congress made major reform to save Social Security back then. Among other provisions, back then they raised the retirement age from 65 to 67. Workers who were 45 years old at the time or older were spared from the effects that were put into place. So it's probably safe to assume that if you're under age 45, you're going to see changes to the benefit formula that give you less benefits than your parents, meaning that you're retired may be raised or there may be some sort of income limits put on how much Social Security you could earn. If if you are under 45 to make changes to the program, as the situation gets more and more dire, well, that's probably the time when Congress will finally be motivated to actually get something done and get it across the finish line. That is the expectation. But if you're looking at a worst case scenario, you're not looking at zero, but you are looking at a cut of close to thirty percent. All right. We

TIPS And Today’s High Real Yields

Keith Lanton 33:20

talked about artificial intelligence stocks, we talked about the build-out of hyperscalers, we talked about the fact that they're issuing lots of debt, we've talked over the months about the uncertainty about the U.S. deficit and whether or not folks are getting concerned about the size of the deficit, and what can you do about all of this if you are an investor? Well, Baron's suggesting that right now you have a lot of reasons to own bonds, and those bonds are bonds known as TIPS, Treasury Inflation Protected Securities. And the reason that they find TIPS so attractive right now is because the real risk-free bond yield that you earn on a Treasury Inflation Protected Security is the highest it's been in years. So, what is the real return? Well, when you are thinking of a fixed income investment, whether it's a certificate of deposit, a CD, a government bond, a corporate bond, that interest rate that you are looking at is constituted of several factors. One factor is inflation. If the expectation is inflation is gonna run at 3%, you say to yourself, I better earn at least 3%. Another factor is a term premium. If I'm gonna go out 10 years or 20 years or 30 years, how much extra yield do I want in order to lock up my money for that extended period of time? Another factor is risk. Do I believe that this bond, that the that this that this entity that I am lending money to will pay me back? And finally, after you account for those factors, there is the real return. So when you're looking at your return on your fixed income investment, there is a real return component as well, which can be positive or negative. And that's what you're earning after inflation, after lending your money for a long-term period of time, and after any risk that you're accounting for in that investment. So if you're looking at a government bond, at least until recently, the general feeling was there was no risk. That could be debated today, but let's for explanation purposes assume and take that out of the equation. So we're going to assume that there is no premium for potential default in a government bond and a treasury inflation protected security issued by the government. So then you've got a term premium, you've got a real rate of return, and you've got an inflation rate of return. And that real rate of return is what you keep after those other factors, and that rate of return right now is the highest it's been in years. In fact, on long-term treasuries, you'd have to go back to the 2008-2009 financial crisis to encounter real yields like you're seeing today of 3%, meaning the real rate of return that you're seeing on tips today is about 3% on long-term treasuries. So it isn't for nothing that the SP 500 suffered its for its first two-week losing streak as real yields, as represented by tips, hit multi-year highs. And that's because investors are being well compensated for owning tips, real yields picking up. What that means is the cost for individual companies and for the government to borrow is rising. So tips offer a way to hedge the risk of inflation because you earn the inflation rate plus this elevated today real rate. So you're getting a higher real rate than you've gotten in a long time. And if you believe that inflation is a risk, well, you can mitigate that risk because you will get paid the inflation rate when you buy Treasury inflation protected securities. You will earn the CBI on top of the real rate. Now, there are certain tax implications to this, which we're not going to delve into here. So talk to your financial professional about the best way to own tips. We're just talking about them conceptually at the moment. So to illustrate, the benchmark 10-year Treasury note yielded 4.68% last week, while the corresponding TIPS maturity provided a real yield of 2.42% for a 10-year tip. So the break-even between those two represents what investors expect from an inflation rate. So the if you subtract 4.68 minus 2.42, which is the real yield you're earning, 2.26 is the inflation rate people are expecting. So if you think that 2.26% inflation is a number that is fairly low and you think that inflation will potentially run higher than that, then you should own a 10-year tip versus a 10-year treasury. Because if you have inflation running at 3% and you're getting 2.42%, your return will be 5.42% versus the 10-year treasury of 4.68%. So if you think that the consumer price index is going to stay higher than that 2.26%, the inflation compensation you're getting for tips will make it a better buy. So this is another quiver that you can put into your arrow as you think about your investing, as you think about your choices, as you think about what's best for you. Again, speak to your financial advisor. There are tax implications to how tips are treated in terms of how and when you recognize income. But like all Treasury securities, also important to keep in mind, tips are not federally tax exempt, but treasury securities are exempt from state, and if you're subject to them, local taxes. So another advantage of tips when it comes to a fixed income investment versus something a certificate of deposit, where there is a safety factor that is super strong, but you have to keep in mind that fully taxable. So just things to weigh, pluses and minuses to each of these different investments and structures. Um, and that's why it's critically important that you understand.

Where To Listen And Disclosures

Keith Lanton 38:58

That's everything I've got.

Alan Eppers 39:02

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Sophie Cohen 39:20

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