Welcome to Stocks in Translation, Yahoo Finance’s video podcast that cuts through market chaos to provide the insights you need for smart trading. I’m Ali Cannell, filling in for Jared Blickrey, joined by Yahoo Finance senior reporter Brooke De Palma. Today, we explore the booming world of AI, a driving force behind one of Wall Street’s biggest rallies. With hype and investment surging, we ask: is this AI wave sustainable or just another bubble?Our phrase of the day is “AI ecosystem, ” which we’ll define and unpack by examining key players like Nvidia, Palantir, Microsoft, and Meta. Additionally, our market show-and-tell breaks down PE ratios, focusing on Nvidia’s current and forward ratios compared to Palantir’s to reveal what these numbers suggest about tech and investor directions. Our number of the day is 3: October marked the 3-year anniversary of the current bull market—a milestone that historically signals strength. To discuss this and more, we welcome Henning & Walsh’s CIO and pod friend Kevin Monn. Kevin, thanks for joining us during a volatile week, especially for tech. From a big-picture view, after a year of substantial gains—including a 17. 5% rise in the S&P 500 and 37 record closes so far—what’s your take on the market’s trajectory? Kevin: Many investors are asking that, indeed. Despite elevated valuations—something PE ratios reflect—questions abound about how much longer this bull run can last, where growth lies, and if more volatility looms. Some executives, like Morgan Stanley’s CEO, predict a 10-12% market pullback in the next year or two. Do you view such a correction as healthy? Kevin: That’s a longer-range forecast. I expect short-term volatility during Q4, but declines typically attract fresh capital that often chases overvalued large-cap tech stocks. Investors would be wiser to diversify more broadly and consider the entire AI ecosystem, rather than focusing on a few names. Let’s unpack the AI ecosystem — what do you mean by that? Kevin: The AI ecosystem encompasses everything enabling artificial intelligence: from the chips powering it, cloud systems managing it, to software bringing it alive. Although Nvidia stands at its hub, it isn’t the only player or opportunity. For instance, Nvidia doesn’t own chip fabrication; Taiwan Semiconductor (TSMC) does, commanding a near 60% market share among foundries. TSMC outsources lithography to ASML, its biggest client. Nvidia’s biggest client, Alphabet, relies on these chips delivered to data centers, which require cooling (from firms like Vertiv and Modine Manufacturing) and power (usually from local utilities). This complex network offers abundant investment avenues beyond just Nvidia. With all these interconnections, some warn of a potential AI market bubble, fueling recent volatility. How do you advise clients on this? Kevin: I’d caution waiting for an AI bubble burst—you might miss significant returns. While some companies have lofty valuations, the AI revolution is just starting. Think of it like a baseball doubleheader: we’re still in batting practice. Jensen Huang of Nvidia predicts $3–4 trillion in AI infrastructure investment by decade’s end; currently, it’s under $1 billion. Many firms are investing heavily now without near-term returns, but the greater risk is underinvestment. Strategic partnerships proliferate to avoid getting left behind in AI’s evolution. Valuations matter, but the bigger picture shows strong growth ahead. Speaking of valuations, how do Nvidia and Palantir compare in PE ratios? Kevin: The S&P 500 trades at roughly 23 times forward earnings—above 5- and 10-year averages but not excessive. Nvidia’s forward PE stands around 31–32, somewhat above market averages but in line given its growth potential. In contrast, Palantir’s current PE sits over 400, forward PE above 200—priced for perfection, which is risky despite growth prospects. Typical reasonable forward PE ranges are in the low 20s; values above 30 suggest growth stocks, but hundreds times earnings indicate froth. Michael Burry recently shorted both Nvidia and Palantir. What’s your take on that move? Kevin: Burry’s concern appears to be valuation rather than company viability. Nvidia and Palantir are fundamentally different firms. Nvidia generates 88% of last-quarter revenues from data centers instead of chips, diversifying its base.

Both stocks are in our AI-focused portfolios, but based on valuations, they represent different risk profiles. Skeptics doubt AI’s rapid impact. How would you respond? Kevin: Look no further than the recent partnership between Eli Lilly and Nvidia to build AI factories for drug discovery, showcasing AI’s transformative potential in healthcare and beyond. Now, turning to the bull market itself: October marked its 3-year anniversary. Historically, bull markets lasting that long typically continue for several more years—on average eight—and none ending sooner than five. Kevin, what’s your view on this milestone? Kevin: It’s encouraging. Multiple tailwinds support equities: earnings growth is tracking at 10. 7% year-over-year, potentially the fourth consecutive quarter of double-digit growth. The AI revolution remains strong. Though the Federal Reserve has signaled cautious hawkishness, interest rates are likely to decline gradually. History suggests better days ahead, but growth may broaden beyond the mega-cap tech driving the first three years. Investors should expand into sectors like healthcare, biotech, aerospace, defense, and fixed income, balancing AI exposure with broader opportunities. How is momentum shaping up in healthcare and pharmaceuticals, which lagged last year? Kevin: October saw healthcare as the second-best performing sector, led by small-cap biotech rather than large pharma. Big pharmaceutical firms face pressures like patent expirations and Congressional calls to lower drug prices. Many lack robust R&D, focusing instead on acquisitions to replace revenue by buying innovative biotechs developing treatments in gene editing, obesity, and other cutting-edge areas. This signals growth potential in healthcare’s smaller firms. Market breadth remains a concern, with recent rallies driven by a few top stocks. How sustainable is this, and what about the other nearly 500 S&P companies? Kevin: Market breadth’s expansion is vital for bull market longevity. Technology forms over a third of indices, deeply impacting investor sentiment and performance. Yet, growth must spread to other sectors—healthcare, consumer staples, utilities—that offer defensive qualities and dividend income. Notably, utilities now serve as backdoor plays into AI due to their role in powering data centers’ infrastructure. Investors can gain exposure to growth while mitigating risk by diversifying sector exposure. How is AI fundamentally changing investment approaches? Kevin: AI revolutionizes the landscape beyond traditional tech. For example, Vertiv, an industrial HVAC company specializing in cooling solutions, now thrives by servicing data centers—largely AI-dependent facilities—demonstrating AI’s ripple effects across unexpected sectors. Investors must weigh valuations carefully and avoid chasing overpriced stocks despite promising long-term potential. For investors with long horizons, what timeline and strategy should they consider? Kevin: Align investments with risk tolerance rather than market moves. Timing the market is notoriously difficult; missing just a few of the market’s best days—many clustered close to its worst—can severely impact returns. Patience and consistency serve investors best, especially amid volatility. Regarding the Federal Reserve, how do you see interest rate trends unfolding? Kevin: Recent comments show less dovishness than expected. Economic data through September underestimated growth—the Atlanta Fed now reports Q3 GDP at 3. 9%, well above forecasts. Despite projections of three rate cuts this year (two so far), a third remains possible. The neutral rate lies between 3% and 4%; 2026 may start around 3. 5–3. 75%. Sustained strong data or government developments could prompt adjustments. Lower rates particularly benefit smaller companies reliant on borrowing, like small-cap biotech. The ongoing lengthy government shutdown likely affects earnings and growth. How significant is this? Kevin: Prolonged shutdowns reduce consumer disposable income, potentially slowing Q4 economic growth and corporate sales. Since consumer spending accounts for roughly 70% of U. S. GDP, this is a concern. However, the stock market currently focuses more on earnings trajectories and AI potential than on fiscal or monetary policy uncertainties. To recap, we’ve covered the AI revolution and ecosystem, differences in valuations between Nvidia and Palantir, the importance of expanding market breadth beyond mega-caps, and optimistic projections for earnings and interest rates. Kevin sees one more potential rate cut before year-end. Thank you for joining us, Kevin, and to our viewers, be sure to catch more episodes of Stocks in Translation on Yahoo Finance’s website and app.