Goldman Sachs The Markets
The Three Top Equity Market Themes
Lou Miller, Global Head, Custom Baskets, Goldman
Sachs Global Banking and Markets
Chris Hussey, Goldman Sachs Research
Date of Recording: July 10, 2025
Chris Hussey: This is The Markets. I'm Chris Hussey,
and today is Thursday, July 10th, and I'm here with Lou
Miller, who's the global head of our Custom Baskets
business within Goldman Sachs's Global Banking and
Markets division. Lou, thanks so much for joining us on
The Markets.
Lou Miller: Thanks for having me.
Chris Hussey: All right, Lou, let's cut to the chase
because this market has been fascinating. We had the
April 9th low. We went right through the July 9th tariff
pause. We've talked about a goldilocks market. We've
talked about climbing a wall of worry. What's going on
here? How would you describe the market today?
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Lou Miller: Bulletproof. I would describe it as
bulletproof, and I think there's a lot of really good things
going for the market. Some of it is bad things that didn't
come to fruition. There was a view that uncertainty would
hurt growth. There's been very little evidence of that.
There was a view that tariffs would be passed onto the
consumer. That's happening but much less than people
expected. The AI narrative, people were pretty pessimistic
three months ago and now they're very optimistic. So,
we've had a big rate of change in a narrative that affects
about 31% of the market cap of the S&P, so that's been
very, very supportive.
And then we had a tax bill that passed that is very
stimulative. And instead of causing the rate market to go
bananas, 10-year yields have fallen, and the market
expects for there to be rate cuts. So, this is a very benign
backdrop for risk assets where we're climbing a wall of
worry, there are fiscal tailwinds, there's tailwinds from a
potential cutting cycle, there's tailwinds from AI.
And so we've now had a historic rally in the beta factor.
So, the beta factor is stocks that move more than the
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market when the market's moving versus stocks that move
less than the market. So, over the last three months, that's
been a nine sharp rally, which is incredible. And so that
also shows that maybe there's some cause for pause as
well. But a lot is going right for the market at the moment.
Chris Hussey: Let's dive into baskets because baskets
of course take a collection of stocks, they put it within one
tradable vehicle. Walk us through a little bit what you're
seeing your clients doing with baskets today. What is
attracting attention on the baskets front?
Lou Miller: Yeah, it's really three things. It's AI, it's
policy, and it's rest of world trades. So yeah, basket is just
a collection of stocks wrapped into one line item. It's really
when you have traditional indices like the S&P and
NASDAQ and people know how to trade those, but it's
everything in between that maybe there isn't an efficient
vehicle to trade. So that's why people have baskets.
So, what's hot right now? AI. AI's been one of the best
performing themes in the US market. AI winners, AI power
have been two really popular themes in the market.
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On the policy side, there's been financial deregulation. It's
started to become a big theme, and we're seeing a lot of
activity there.
Then it's the rest of world. So, a lot of folks have a US
home market bias, but the rest of world trade has really
opened up this year. But it's not every part of the rest of
the world that you want exposure to. It's things like
European defense, some of these cheap cyclicals abroad,
and so German fiscal, Japan corporate governance, China
AI, China humanoid robots. So it's been very, like, specific
slices in the market. And those just aren't represented in
traditional indices, so it's been very Trump policy driven,
very AI driven, and very, like, select rest of world driven in
terms of what's been hot.
Chris Hussey: So that rest of world trade, you don't
necessarily look at that as being the question around US
exceptionalism but more just people out there looking to
diversify? Looking for exposures outside the US? Or just
flowing with trends that are starting to develop elsewhere?
Lou Miller: Yeah, I believe in US exceptionalism. I don't
believe in the rest of world trade structurally. But I think
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there's a window this year where the rest of world trade
looks pretty good and looks pretty cheap. Valuations are
always cheaper abroad, so you really need to look at it on a
growth-adjusted basis. On a growth-adjusted basis,
indices like Europe are cheaper, but they're not, like,
amazingly cheaper. They're cheaper.
And so, I still think you want to be selective abroad. And
while the US is expensive, so is Palm Beach real estate and
Palm Beach is a great place to live. The US is a great place
to invest. And earnings and return on capital are huge and
important drivers of return. And I think the macro
backdrop's pretty benign as well, so I don't really think the
valuation's going to go down.
And then the AI narrative is a US narrative, and I think
that's full steam ahead for the next few years. There's
obviously going to be moments in time where it over earns
and pulls back, but I think that that narrative you need to
be involved in. And you want some diversification because
there's some pretty exciting themes like global defense. If
the US pulls back on defense spending, it means somebody
else has to spend.
German fiscal. They haven't done fiscal in a long time and
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now they're doing it. That's pretty exciting. And so I think
Japan corporate governance, there's been a huge rate of
change there. Even Asia corporate governance in general, I
think there's been a huge rate of change there, and it's an
exciting, diversifying way to express that.
Chris Hussey: On that AI theme, just one last question
on that because when I hear that AI theme I think of mega
cap tech, I think of market concentration, I square that
with your beta call, and it does seem like we're just back
into a concentrated mega cap tech US call. Is that right?
Or is it expanding beyond the mega cap tech stocks?
Lou Miller: Yeah, so traditional breadth metrics don't
look great, but actually under the surface, especially since
the start of July, there's been a massive laggard rally. And
a lot of unprofitable tech pockets of the market have
actually are now over bought. So, if you look at mega cap
tech, it's actually underperformed non-profitable tech by
25% since the local high, which is pretty significant relative
to history.
And so, yeah, I actually think that some of these higher
quality bigger parts of the market are going to outperform
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and be okay. And while concentration is a bad thing, it can
also be a good thing, especially if these are the companies
that are levered to AI, to autonomous driving, robotics.
These are mega themes, and I think that it's more than
likely that the biggest companies will benefit from it. And I
think that while concentration over the long term could be
bad, I don't necessarily think it's going to be bad over the
next five years.
Chris Hussey: Yeah, it certainly hasn't been bad over
the last ten years. So, let's put a bow around it. What's
your favorite trade?
Lou Miller: My favorite trade, so expectations minus
reality is a big thing for me. And if you look at the AI trade,
a lot of the AI CapEx beneficiaries, a lot of AI power
beneficiaries, there's something in the price. There's
certain companies that have market caps in the trillions, so
what's next?
And what we're seeing is we're seeing corporate America
start to adopt AI. And I think what happens next is there's
going to be margin benefits there. And so, if you look at
the companies and industries that could really benefit from
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AI adoption or are already adopting AI, they haven't really
outperformed at all. And if you compare those companies
to the equal weighted S&P, there's been close to no
outperformance since ChatGPT happened. And so, what I
think over the next 12 months is there'll be a lot more in
the price and that this adoption curve will continue to
accelerate and it has been accelerating to a much more
meaningful level. And you'll see certain sectors, especially
with workers in kind of the white-collar space, you'll see
them get a lot more productive and that'll lead to higher
margins and that'll justify some of the higher valuations we
have today. And so, companies that benefit from higher
productivity and lower input costs, lower labor costs, I
think those will outperform over the next 12 months.
Chris Hussey: All right, next week, big week for us
here. What are you watching out for next week?
Lou Miller: Yeah, I think earnings season. So the bar
for earnings season, if you look at what margins are
expected to be this quarter, it's pretty low. And part of that
is a function of tariffs. I think a lot of companies built up
inventory going up into this tariff episode, so I think
margins are going to be much better than expected. And
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so I think that there's one potential positive this earnings
season is that, hey, like, maybe growth isn't as bad as
expected because it doesn't hit the margins just yet.
So I'm very focused on earnings season. I'm also focused,
as we get to August, is are we going to see the tariff
narrative, the left tail stay removed there? We still have
sectoral tariffs coming. My expectation is the left tail is
removed but so is the market. So, if anything changes
there, I'm definitely worried about that.
And then as we get to September, are we going to see a
cutting cycle? And I think we are. But I'd say, first and
foremost, it's earnings season, and we got the start of that
coming up. So.
Chris Hussey: Lou, perfect. Thanks so much for
joining us.
Lou Miller: Yeah, thanks for having me.
Chris Hussey: That does it for this week's episode of
The Markets. I'm Chris Hussey. Thanks for listening.
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