Tech investors tend to focus on the largest and most well-known companies, the so-called Magnificent 7.¹ However, beneath the surface, a more nuanced story is playing out. Small and mid-sized growth companies have been generating impressive earnings growth and are often trading at more reasonable valuations than their larger peers.² But why have these companies lagged behind their larger counterparts, and where are the next major growth opportunities?

To explore these questions, Pathstone’s Michael McGowan, Head of Investment Strategy, recently sat down with Jim Robillard, Founder and Chief Investment Officer of Spyglass Capital Management, to discuss the future of artificial intelligence (AI) and humanoid robotics.

While the full conversation remains exclusive to Pathstone clients, below we share a few key themes from the discussion.

Our July assessment of a “cooling, not cratering” economic outlook is holding, though July’s macro data deluge suggests notably more labor market cooling. In this month’s Market Review & Outlook, we look through the noise to put July’s data in context. Our key takeaways are below.

Tactical allocation takeaways

Will future profit growth support equity valuations? Inflation, tariffs, employment, interest rates, war, tax cuts, regulation/deregulation, technology developments, debt, and deficits… There are many factors to consider in today’s markets, but in the end, it boils down to that one question for equity investors. Valuations may give many investors pause at these levels, but momentum is quite strong.

Constructive on the economy, skeptical on equity valuations. We don’t see a recession on the horizon given the current level of economic activity and fiscal support globally. Our main concern in the near term is whether valuations can be sustained. Importantly, there is a wide chasm between valuations of U.S. large cap stocks versus all the rest (e.g., small caps, non-U.S., emerging markets), most of which remain fairly valued.

Inflation risk. There doesn’t seem to be an end to government deficit spending on the horizon; we expect inflation may persist at levels above those desired by the Fed. As a result, investors may feel the squeeze between low or even negative real returns in fixed income and the alternative of investing in highly priced equities, where further upside potential may be difficult to imagine.