What Would You Do With $3 Million?

SUMMARY

Michael Batnick and Ben Carlson host Animal Spirits episode 451, analyzing the shifting bull market, software stock declines, AI disruptions, emerging market potential, crypto volatility, economic indicators, and personal finance strategies amid rapid changes.

STATEMENTS

The S&P 500 remained largely unchanged last week, masking significant underlying volatility in individual stocks and sectors.
The average stock in the S&P 500 rose nearly 2% last week, with 337 stocks outperforming the index despite negative headlines.
On Thursday, 107 stocks fell 4% or more in a single session, a level historically associated with deep index drawdowns, yet the S&P was only 1.5% off highs.
Equal-weight S&P and small caps hit all-time highs, indicating a broadening market beyond mega-cap dominance.
Sixty-six percent of S&P 500 companies are outperforming the index year-to-date, marking a shift to a stock picker's market.
Every materials stock in the S&P 500 is outperforming, with 96% of energy, 92% of consumer staples, 86% of industrials, and 77% of utilities also beating the index.
Consumer staples stocks are surging due to sentiment rotation from high-flyers to safer names and potential AI-related rerating.
Walmart's forward P/E reached 46 times and Costco's 54 times, with tech and staples valuations nearing parity, which is unprecedented.
The Magnificent Seven ETF has gone nowhere in six months amid the AI boom, highlighting a stall in mega-cap leadership.
Sixty percent of stocks are outpacing the index currently, up from 35% over the prior three years, signaling a market regime change.
Household names like Netflix, Disney, UPS, Target, Coinbase, and Nike are down 40-70% from peaks, underscoring concentration risks even as the S&P nears highs.
Conversations around employee stock options have shifted dramatically, with workers now questioning holding company shares after steep declines.
The Dow Jones Industrial Average ETF saw massive inflows last week, leading all funds despite its outdated price-weighted structure.
Value outperformed growth by the third-largest one-day margin ever, placing in the 99th percentile over six days.
The Russell 2000 to S&P ratio is breaking out while the Magnificent Seven to the rest of the S&P is breaking down, accelerating since four weeks ago.
Most shorted stocks jumped 8.8% on Friday, their best day since April 2025, after prior weakness.
Buying during panic liquidations, like last Thursday's software sell-off, can signal capitulation, though bottoms are uncertain.
Anthropic's Claude advancements have sparked fears of AI disrupting enterprise software, leading to a 33% drop in IGV and 25% in Microsoft.
AI could permanently rerate software stocks by eroding moats, though overreactions are evident in the short term.
Replacing core SaaS platforms is operationally complex, making AI add-ons more likely than full migrations to startups.
Software companies may benefit from AI by writing code more efficiently, but growth stories face pressure as clients cut spending for their own AI investments.
Private credit exposure to software borrowers is high, with 70% of loans and 22% of debt in the sector, risking defaults amid AI disruptions.
Hyperscalers' capex as a percentage of operating cash flow hit 65% in 2025 and could reach 90% in 2026, up from 40% historically.
Amazon plans $200 billion in capex for 2025, the highest among Magnificent Seven, fueling AI infrastructure but raising investor concerns.
Inflows to non-tech sector funds reached a record $62 billion in the first five weeks of the year, exceeding all of 2025.
The dollar's safe-haven status is eroding, with foreign holdings of U.S. debt at a historic low of 13%, supporting emerging markets.
Companies mentioning AI-driven ROI in earnings transcripts rose to 7%, and those citing economic gains to 32%, with outperformers beating the market by 4-5% annually.
AI is enabling efficiency in logistics, like CH Robinson's parabolic stock rise from matching drivers and shipments.
AI tools like Gmail's suggested responses risk homogenizing communication, reducing personal touch.
Claude AI analyzed S&P 500 year-to-date gains, identifying a rotation to industrials, chemicals, staples, and value amid tech carnage.
Crypto sentiment is at historic lows without a recession, with Bitcoin acting like broader tech, down sharply after peaking at $78,000.
Bitcoin's panic sell-off showed spiked put volume and shares traded, prompting opportunistic buys expecting rebound.

IDEAS

The bull market is morphing from mega-cap driven to a broader rally, with rotations into value, small caps, and cyclicals signaling diversification opportunities.
Despite index stability, individual stock volatility reveals a hidden fracture, where 107 names dropped 4% in one day yet the S&P hovers near records.
Consumer staples' surge defies intuition, blending defensive appeal with AI beneficiary potential, like enhanced supply chain efficiencies.
Valuations in staples like Walmart and Costco rival tech, suggesting a fundamental shift where "boring" sectors command premium multiples.
Magnificent Seven stagnation amid AI hype underscores that even winners can pause, freeing capital for laggards like industrials and materials.
Concentration risks amplify both upsides and downsides, as seen in 40-70% drops for brand names while the index ignores them.
Employee stock plans are evolving from "never sell" mantras to urgent diversification debates, reflecting real-time wealth erosion.
The Dow's inflow surge highlights enduring appeal of "sleepy" industrials in rotation plays, despite its archaic design.
Value-growth outperformance at 99th percentile extremes could mark the end of momentum dominance, ushering in cyclical leadership.
Russell 2000 breakout versus Mag 7 breakdown accelerates a long-awaited small-cap revival, boring no more after years of underperformance.
Short squeezes in beaten-down names offer tactical entries post-panic, but waiting for stabilization avoids knife-catching pitfalls.
Anthropic's AI agents threaten SaaS moats by enabling custom coding, potentially commoditizing software and slashing growth narratives.
AI disruptions may cause software layoffs mistaken for recession signals, breaking traditional economic indicators.
Enterprises resist full SaaS swaps due to operational friction, favoring AI copilots, preserving incumbents' stickiness.
Software firms could thrive by leveraging AI for internal productivity, turning a threat into a cost-saving edge.
Private credit's heavy software exposure risks a credit crunch if AI erodes recurring revenues, hammering BDCs and PE managers.
Hyperscalers' capex frenzy at 90% of cash flow tests investor tolerance, potentially triggering the fastest market correction ever.
Amazon's $200 billion capex lead illustrates AI's insatiable infrastructure hunger, but questions linger on monetization paths.
Record non-tech inflows reflect investor rotation, with flows driving performance in overlooked sectors like staples.
Dollar weakening cycles, sans reserve challengers, bolster emerging markets by easing export pressures and attracting flows.
AI mentions in transcripts correlate with market outperformance, proving tangible gains beyond hype.
Logistics firms like CH Robinson exemplify AI's unsexy wins, using it for matchmaking efficiencies that propel stocks parabolically.
Gmail's AI suggestions erode email's personal nuance, risking a world of generic responses.
Claude's market analysis via S&P data reveals a late-cycle value rotation to asset-heavy businesses fleeing momentum traps.
AI boom ironically disrupts tech first, reshuffling winners from Microsoft to Anthropic and Google.
Crypto's bearish sentiment without economic distress highlights its sensitivity as a risk-on proxy, amplifying tech correlations.
Prediction markets enforce skin-in-the-game pricing, outperforming opinion polls for efficiency in uncertain events.
Parents' doubled child time investment fosters helicopter involvement, but over-structuring youth sports breeds unnecessary competition.
$3 million portfolios offer invisible freedom, yet homes provide tangible utility, challenging status symbol biases.
Southwest's operational edge surprises, proving budget carriers excel in reliability metrics despite discomfort.

INSIGHTS

Market broadening with small caps and value outperforming reduces reliance on mega-caps, fostering healthier long-term rallies.
AI's code-writing prowess commoditizes development but elevates architects, shifting software value from raw code to ecosystems.
Software overreactions stem from moat fears, yet incumbents' integration services and compliance ensure enduring demand.
Private credit's SaaS tilt exposes lenders to AI volatility, demanding diversified underwriting beyond recurring revenue assumptions.
Hyperscaler capex escalation signals conviction in AI payoffs, but 90% cash flow allocation risks shareholder revolt and growth skepticism.
Dollar erosion without rivals creates cyclical EM bull markets, as reduced safe-haven flows redirect capital globally.
AI transcript mentions predict alpha, validating productivity claims and guiding investors to real beneficiaries like logistics.
Rotation to tangibles like industrials reflects late-cycle dynamics, where physical assets trump intangible growth amid uncertainty.
Crypto's tech mimicry during downturns reveals it as a high-beta sentiment gauge, not an independent store of value.
Prediction markets' efficiency in sports betting underscores potential for broader applications, pricing collective wisdom accurately.
Helicopter parenting doubles child engagement but risks over-competition, potentially stifling independent development.
Portfolio wealth's intangibility versus home utility explains status preferences, prioritizing lived experiences over abstract security.
AI ironically self-disrupts tech, accelerating internal efficiencies while challenging external growth narratives.
Employee stock reevaluations highlight behavioral shifts, from loyalty to pragmatism in volatile equity compensation.
Inflows confirm performance drives rotation, with non-tech sectors absorbing capital fleeing momentum exhaustion.

QUOTES

"The average stock last week was up almost 2%. 337 stocks outperformed the index last week."
"Every material stock is outperforming the S&P 500."
"Walmart's PE is 46 times. Costco 54 times."
"The Mag 7 has gone nowhere for like 6 months, basically since September."
"107 stocks over the previous two-day period that fell 4% on an individual day."
"Value over growth posted the third largest one-day outperformance ever."
"Anthropic tanked the stuff software market."
"What if AI just works right away and we get more productivity."
"Replacing a core SAS platform effectively is open heart surgery for an enterprise."
"The beauty of AI writing code is that it is a nearly perfect match of probabilistic inputs and deterministic outputs."
"Companies, particularly American ones, are very good at focusing on their core competency. And for most companies in the world, that isn't software."
"Hyperscalers capex as a percentage of operating cash flow was 65% in 2025. Expected to be as high as 90% in 2026."
"314 billion of incremental capex spend in 2026 on top of what they've already done from the big five."
"Only 7% of companies are talking about an ROI that they're getting from all of these the capex spending."
"The market is experiencing an aggressive rotation from high multiple growth into tangible capital intensive businesses."
"This is the worst sentiment they've ever seen and we aren't even in a recession."
"Why is a $3 million home a status symbol but a $3 million portfolio isn't?"
"Markets work. Put your money where your mouth is."
"Between 1965 and 2012, the amount of time parents in rich countries spent with their children doubled."
"I would pick the house."

HABITS

Maintain a fiscal year mindset aligned with events like Future Proof conferences to extend positive seasons mentally.
Sign up early for networking opportunities like breakthrough meetings to maximize event value.
Track underlying market data beyond headlines, such as average stock performance, to avoid misleading narratives.
Rotate portfolios toward outperforming sectors like materials and staples during broadening rallies.
Avoid dollar-cost averaging into downtrending stocks; wait for stabilization or panic capitulation.
Use AI tools like Claude for quick market analysis on spreadsheets to identify rotations efficiently.
Rebalance volatile assets like crypto to 4-5% of net worth to manage risk without overexposure.
Book national park trips months in advance due to high demand, prioritizing outdoor experiences.
Involve in youth sports positively by focusing on fun and effort, avoiding over-competition or criticism.
Prepare detailed notes for childcare during absences to ensure smooth routines.
Narrate personal memoirs for audiobooks to enhance listener engagement through authentic voice.
Fly preferred airlines like Delta for reliability, using credit cards to waive fees and build loyalty.
Respond to professional favors promptly but avoid read receipts to respect recipient boundaries.
Lower expectations for media like movies to avoid disappointment from hype.
Diversify employee stock holdings early to mitigate company-specific risks.

FACTS

International stocks outpaced U.S. companies by a significant margin over the past year.
The Pacer NASDAQ International Patent Leaders ETF targets 100 non-U.S. companies with the most valuable patent portfolios.
Future Proof registrations surged, with 47% of advisers attending for the first time.
S&P 500 average tenure for constituents is 25 years, down from 45 years in the mid-1980s.
DIA ETF, tracking the Dow, holds $44 billion in assets and led inflows last week.
Equal-weight S&P spread versus cap-weight is at an extreme, possibly the largest in history.
Most shorted stocks rose 8.8% on Friday, best since April 2025.
IGV ETF dropped 33% over four months before a bounce.
Microsoft lost $357 billion in market cap on one day, second-largest single-session wipeout ever.
Private credit has 22% of $1 trillion+ debt exposure to software firms.
Amazon's 2025 capex guidance is $200 billion, highest among Magnificent Seven.
Non-tech sector funds saw $62 billion inflows in first five weeks, exceeding all of 2023.
Dollar holdings by foreign governments fell from 38% to 13% of U.S. portfolio investments since 2007.
AI-driven ROI mentions in transcripts hit 7%, economic gains 32%.
CH Robinson's stock chart resembles silver's parabolic rise from AI logistics efficiencies.
There are still 67,000 travel agents despite online booking prevalence.
Self-checkout failed to displace 3.2 million cashiers and 4.2 million retail workers.
Bitcoin hit $78,000 last week before dropping to $60,000 lows.
Silver's two worst days in history since 1970 occurred in the last 10 days.

REFERENCES

Pacer ETFs: PTN (Pacer NASDAQ International Patent Leaders ETF).
Future Proof conference: March 8-11 in Miami, with breakthrough meetings deadline February 13.
Duality Research: Tale of the tape on stock market, sector outperformance breakdowns.
Mag 7 ETF: Tracks Magnificent Seven stocks.
Mike Zakar: Charts on stock outperformance and software trends.
S&P Dow Jones: Chart on index constituent average tenure.
Belchunis: Flows into DIA ETF.
Alex Seanova: Value over growth outperformance tweet.
Bespoke Investment: Six-day value-growth percentile.
Goldman Sachs: Cost of home ownership ratios in major U.S. cities.
Wall Street Journal: Article on Anthropic tanking software market; private investment in software; airline rankings.
Pitchbook: Exposure of private credit to software; investor souring on SaaS loans; bespoke software example with GMC parking.
Ben Thompson (Stratechery): Analysis on AI writing code and software future.
Bloomberg: Microsoft shares wipeout post-earnings.
KKR: Classifies 70% of private credit borrowers as software companies.
ARCC (Ares Capital): 24% portfolio in software and services.
Bank of America: Hyperscalers capex as percentage of cash flow.
Matt Vincent: Incremental capex spend projections for big five.
Buco Capital: Tweet on capex irony with Jensen Huang.
The Economist: Dollar's potential further fall; parent time with children study.
Kaiu: White paper on AI-driven ROI and economic gains in transcripts.
YCharts: Comp tables for S&P 500 year-to-date gains.
Claude AI: Analysis of market rotation from spreadsheets.
Adam Ozmeck Substack: Piece on human touch in tech developments.
PolyMarket: Bitcoin price prediction markets for February.
Southwest Airlines: Ranked #1 in WSJ operations metrics.
Kitchen Confidential by Anthony Bourdain: Memoir on restaurant world.
Hits, Flops, and Other Illusions by Edward Zwick: Directing memoir.
Tetris movie on Apple TV: Story of global rights negotiations.
His and Hers on Netflix: Murder mystery series.

HOW TO APPLY

Monitor sector outperformance weekly using tools like Duality Research to identify rotations early, allocating 10-20% to leaders like materials.
During index highs with red screens, analyze average stock moves and equal-weight spreads to confirm broadening before adding cyclicals.
When mega-caps stall, screen for 80%+ outperforming names in utilities or staples, buying on dips with stops at 5% below entry.
Track employee stock via RSU experts; diversify annually if over 10% of net worth, selling post-vesting to lock gains.
For Dow-like rotations, inflow-check ETFs like DIA quarterly, entering if AUM surges 20%+ amid value outperformance.
Use ratio charts (e.g., Russell 2000/SPY) to time small-cap entries when breaking multi-year trends, targeting 15% allocation.
Post-panic, buy shorted baskets via ETFs like IGV on volume spikes, exiting at 10% gain or 5% stop-loss.
Evaluate SaaS contracts yearly for AI add-ons, negotiating fees down 10-15% citing productivity tools like Claude agents.
Assess private credit funds for software exposure under 20%; diversify to real assets if above, rebalancing semi-annually.
Forecast hyperscaler capex via earnings; if over 80% cash flow, trim tech holdings by 25% anticipating corrections.
Scan transcripts for AI mentions quarterly; overweight firms citing ROI by 5-10%, using tools like Kaiu's metrics.
For EM plays, track dollar index; buy iShares MSCI EM ETF when DXY drops 5%+, holding through cycles.
Use AI like Claude on YTD data for rotations; apply insights to tilt portfolios 20% toward industrials or logistics.
In crypto downturns, buy on put/call spikes via ETFs like IBIT, selling at 10% rebound or predefined floors.
For personal finance, survey $3M choices annually; prioritize utility assets like homes if portfolio exceeds needs.
Book travel via loyal programs like Delta, accruing miles for free upgrades while avoiding budget add-on traps.
In parenting, log daily child time; cap structured activities at 10 hours weekly to foster independence.
Avoid read receipts in professional emails; respond within 24 hours to build rapport without pressure.
Lower media hype by reading reviews pre-consumption, skipping if twists seem forced like in His and Hers.

ONE-SENTENCE TAKEAWAY

Embrace market rotations and AI disruptions for diversified growth, prioritizing utility over status in personal finance.

RECOMMENDATIONS

Diversify beyond mega-caps into small caps and value during broadening phases to capture 4-5% annual alpha.
Buy software dips post-panic but use tight stops, as AI moat erosion could rerate multiples permanently lower.
Monitor private credit for SaaS risks; shift 20% to real assets if exposure exceeds 15% of portfolio.
Cap hyperscaler exposure at 30% if capex hits 80%+ of cash flow, preparing for potential 10% corrections.
Allocate to EM ETFs when dollar weakens 5%+, leveraging safe-haven erosion for cyclical gains.
Screen for AI ROI mentions in transcripts; overweight such firms by 10% for productivity-driven outperformance.
Use prediction markets for binary bets on assets like Bitcoin, gaining leverage with clear upside like 80% returns.
Prioritize portfolio liquidity over home status for under-40s, flipping to utility assets post-family milestones.
Fly reliable carriers like Delta for on-time metrics, using cards to eliminate fees and build free travel buffers.
Limit youth sports evaluations to post-season; focus parental involvement on encouragement, not rankings.
Narrate personal stories in audiobooks or memos to boost engagement and authenticity in communications.
Avoid AI email suggestions; craft responses manually to preserve personal voice and relationships.
Rebalance crypto to 5% net worth after rallies, buying only on liquidation volume spikes for tactical trades.
Book national parks six months ahead, integrating hikes into family routines for low-cost bonding.
Negotiate SaaS renewals citing AI alternatives, aiming for 10% fee cuts to redirect budgets internally.
Track parent-child time weekly; aim for unstructured play to counter helicopter tendencies.
Use Claude for data analysis on holdings; rotate to tangibles during momentum fades for late-cycle protection.
Shun read receipts in favors; respond thoughtfully to foster networks without desperation vibes.
Consume media skeptically, skipping overhyped twists to avoid time sinks like flawed mysteries.

MEMO

In the ever-evolving landscape of global markets, hosts Michael Batnick and Ben Carlson dissect a bull market undergoing profound transformation on their Animal Spirits podcast. Once dominated by the Magnificent Seven tech giants, the S&P 500 now shows signs of broadening, with equal-weight and small-cap indices hitting all-time highs even as mega-caps stagnate. Last week's flat index belied a surge in the average stock's 2% gain and 66% of S&P companies outperforming year-to-date, a stark shift from recent momentum-driven years. Sectors like materials (100% outperformance), energy (96%), and consumer staples (92%) are leading the charge, fueled by rotations from overvalued tech into defensive yet rerated names—Walmart and Costco now trade at premiums rivaling software stocks.

This rotation underscores a stock picker's paradise emerging, where value crushes growth in the 99th percentile over six days, and inflows into non-tech sectors hit a record $62 billion in five weeks. Carlson and Batnick highlight the irony: amid AI hype, software stocks like those in the IGV ETF plunged 33% over four months, triggered by Anthropic's Claude agents promising custom coding that erodes SaaS moats. Enterprises face "open-heart surgery" to swap core platforms, yet incumbents like Salesforce persist through integrations and compliance, potentially benefiting from internal AI efficiencies. Still, hyperscalers' capex—Amazon's $200 billion guidance—tests limits, with 90% of cash flow at risk, possibly sparking the quickest correction if investors balk.

Private credit's vulnerability shines through, with 22% of $1 trillion in debt tied to software borrowers whose recurring revenues AI could commoditize, hammering BDCs like ARCC (24% exposure). Batnick warns of layoffs misread as recession signals, as AI breaks old indicators. Yet optimism prevails: AI transcript mentions of ROI (7%) and gains (32%) correlate with 4-5% market beats, exemplified by logistics firm CH Robinson's parabolic rise from driver-matching algorithms. Emerging markets gain traction as the dollar's safe-haven allure wanes—foreign U.S. debt holdings at 13%—easing export woes without challenging reserve status.

Crypto mirrors tech's turmoil, with Bitcoin's drop from $78,000 to $60,000 evoking player-hater dunks amid historic low sentiment sans recession. Hosts advocate prediction markets for efficient pricing, as seen in sports bets where skin-in-the-game trumps polls—Seahawks' upset validates this over hype. Personal finance pivots to utility: a $3 million portfolio offers freedom, but a home delivers joy, especially for families. Housing costs in cities like San Francisco have ballooned, ratios doubling since 2000, mirroring sold-out national parks—demand outstrips supply.

Parenting echoes market intensity, with millennial dads doubling child time to helicopter levels, fueling youth sports competitions from age six. Carlson shares detailed childcare notes for weekends, crushing routines while Batnick questions over-involvement's toll. Travel rankings favor Southwest for operations, though Delta's reliability suits frequent flyers. Email etiquette irks with read receipts signaling desperation, and AI suggestions homogenize responses—hosts prefer Claude for analysis, not automation.

Bourdain's Kitchen Confidential captivates Batnick with raw restaurant tales, narrated authentically, contrasting overhyped media like His and Hers' comical twist. Zwick's directing memoir reveals Hollywood illusions, while Apple's Tetris film surprises with KGB intrigue. As news accelerates—silver's historic crashes amid everything else—hosts urge embracing rotations for flourishing, blending AI promise with human touch in finance and life. The market, like parenting, rewards balance over extremes.