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The global financial landscape is currently navigating a series of paradoxes. While headlines warn of geopolitical instability and regulatory overreach, corporate balance sheets tell a story of resilience and adaptation. From the controversial proposal of taxing "unrealized" gains to a significant rotation away from Big Tech into industrial stalwarts, investors are witnessing a reshaping of market leadership.
In a recent discussion, Downtown Josh Brown and Ben Carlson broke down the divergence between economic fears and market realities. They explored why heavy industry is outperforming software, why international markets are finally having their moment, and how Apple may be poised to dominate the next phase of consumer AI.
Key Takeaways
- Unrealized Gains Tax Risks: Proposals to tax paper gains, such as those in the Netherlands, could trigger capital flight and disincentivize long-term investing.
- Corporate Resilience: Despite inflation and high interest rates, S&P 500 companies are posting double-digit earnings growth, driven by efficiency and productivity.
- The HALO Trade: Investors are rotating into "Heavy Assets, Low Obsolescence" (HALO) stocks—industrials and materials that are resistant to AI disruption.
- International Outperformance: For the first time in decades, international markets (Europe, Japan) are significantly outperforming the U.S. to start the year.
- Apple’s AI Strategy: While critics claim Apple is late to AI, their potential "Agentic Siri" could leverage their massive install base to dominate consumer AI utility.
The Economic Danger of Taxing Unrealized Gains
One of the most contentious topics in global finance is the push by certain governments to tax "unrealized" capital gains. The Netherlands has recently introduced a framework to tax financial assets on assumed returns, a move that critics argue attacks the fundamental mechanics of compounding wealth.
The concept involves taxing investors on the increase in value of their assets year-over-year, even if those assets haven't been sold. While politically popular as a method to address wealth inequality, the practical implications are fraught with danger. If an investor is forced to sell assets to pay taxes on paper gains, it disrupts the power of long-term holding and introduces massive friction into the capital markets.
"The one thing we know about the super rich is that their money is more portable than ever. They know how to avoid taxes... The capital flight and the flight of the creative class and asset movement will be real."
A Better Alternative: Taxing Debt Consumption
Rather than penalizing asset growth, a more logical approach to closing the wealth gap may lie in closing the "Buy, Borrow, Die" loophole. Ultra-wealthy individuals often avoid realized gains taxes by borrowing against their portfolios to fund their lifestyles. Treating these loans as taxable events—effectively a consumption tax on debt secured by assets—would raise revenue without punishing the act of investment itself or forcing the liquidation of productive businesses.
The Earnings Miracle: Margins Over Macro
Lost in the noise of AI disruption narratives and Fed watching is a fundamental truth: corporate America is generating money at a historic pace. The S&P 500 has seen blended earnings per share growth of over 13% year-over-year, marking the fifth consecutive quarter of double-digit growth. Perhaps more impressively, revenue growth is up 9%, proving that this isn't just financial engineering or cost-cutting—it is top-line expansion.
Corporations have successfully navigated a gauntlet of challenges over the last five years, including global supply chain fractures, a pandemic, soaring inflation, and an inverted yield curve. Through it all, profit margins have continued to rise.
"Corporations are the last vestige here. They know how to make money. Think about what they've been through this decade and how much money we're still making... The stock market's got you."
The AI Capex Paradox
A major concern for analysts has been the massive capital expenditure (Capex) required for AI infrastructure. However, despite trillion-dollar spending by hyperscalers, profit margins remain intact. The bullish interpretation is that AI is already driving internal efficiencies, allowing companies to do more with less labor, thereby preserving margins even as they invest heavily in the future.
The Rise of the HALO Trade
For over a decade, the winning strategy was simple: buy software and asset-light technology companies. These firms offered high margins and low overhead. However, 2024 has ushered in a distinct rotation toward the "HALO" trade: Heavy Assets, Low Obsolescence.
Why Tangible Assets Are Winning
The market is increasingly valuing companies that own physical infrastructure—industrials, materials, and energy. These sectors are currently viewed as insulated from AI disruption. While a chatbot can replicate code or creative writing, it cannot replicate a copper mine, a construction crane, or a power grid. Consequently, the industrial sector is seeing earnings growth rivaling tech, with some segments posting 26% growth.
This shift is also driven by the realization that AI requires physical infrastructure. Building data centers and upgrading energy grids requires steel, copper, and heavy machinery, directly benefiting the companies that were ignored during the software boom.
International Markets: The "Sell America" Diversification
For U.S.-centric investors, the start of the year has delivered a shock: international markets are crushing the S&P 500. This marks the worst start to the year for U.S. stocks versus the MSCI World Index since 1995. This is not isolated to a single region; Japan, Europe, and emerging markets are all seeing inflows.
Factors Driving the Ex-US Boom
Several catalysts are converging to drive capital overseas:
- Valuation Gaps: U.S. markets are priced for perfection, while international markets offer single-digit PE ratios with higher dividend yields.
- Corporate Reform: Japan has aggressively pushed for shareholder-friendly reforms, while the EU is discussing integrated capital markets to reduce bureaucracy.
- Currency Fluctuations: A potential weakening of the dollar acts as a tailwind for international returns when converted back to USD.
Investors who abandoned international allocation after years of underperformance are now finding themselves chasing a trend that has already left the station. The breadth of this rally suggests it is more than a short-term blip; it may be a structural rebalancing of global capital.
Software in the Pincer Move vs. Apple's "Agentic" Future
The software-as-a-service (SaaS) model, once the darling of Wall Street, is facing an existential crisis. These companies are caught in a "pincer move." From above, hyperscalers like Anthropic and OpenAI are offering plugin capabilities for free that used to require specialized software. From below, AI-native startups are building 80% of the capability for 20% of the cost.
Apple’s Counter-Punch: Agentic Siri
While SaaS struggles, Apple is positioning itself for what could be the definitive consumer AI play. Despite narratives that Apple is "late," their strategy relies on integration rather than invention. The concept of an "Agentic Siri"—an AI that doesn't just chat but takes action across apps—could be revolutionary.
Imagine telling your phone, "Move $10,000 from savings to checking, book a flight to London on Delta, and make a dinner reservation for two." Current LLMs cannot execute these cross-application tasks securely. Because Apple controls the hardware and the operating system (iOS), they are uniquely positioned to act as the secure broker for these actions.
"If the scenario plays out... they become plugins. It's Apple's world, and Apple has the pricing power... All they have to do is drop an agentic Siri into this AI trade. And all of a sudden, people are going to throw themselves out of windows."
Conclusion
The market is currently undergoing a significant transition. The "easy" trade of blindly buying big tech is being challenged by a resurgence in real assets, international diversification, and industrial strength. Simultaneously, the threat of poorly designed tax policies looms over capital formation. For investors, the path forward requires looking beyond the winners of the last decade and recognizing the value in tangible assets, global exposure, and companies with deep, undisruptible moats.
