MARK RIEPE: Welcome, everyone, to Schwab Market Talk. Thanks for your time today. It’s November 11^th, 2025. The information provided here is for general information purposes only, and all expressions of opinion are subject to change without notice in reaction to shifting market conditions. I’m Mark Riepe, and I head up the Schwab Center for Financial Research, and I’ll be your moderator today.

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Our speakers today are Liz Ann Sonders, our Chief Investment Strategist; Kathy Jones, our Chief Fixed Income Strategist; Hayden Adams, our Director of Tax Planning and Wealth Management; and Jim Ferraioli. Jim is a director here, and he’s our cryptocurrency strategist.

So Liz Ann, we’re going to start out with you. The Jobs Report did not come out again last week. But from other pieces of information, I know you’re following, that we’re following, what is your sense as to the health of the labor market right now?

LIZ ANN SONDERS: Sure. And hi, everybody. Thanks. It’s a bit mixed to softer. There are parallel data points that we can look at that are private sector issued alongside what we’re not getting from government agencies like the Bureau of Labor Statistics. ADP is one that people generally pay attention to on a monthly basis, even well before the shutdown came. It doesn’t tend to track payrolls directly on a month-to-month basis, but on sort of a rolling three-month or rolling six-month, ADP actually does track payrolls pretty well, especially payrolls subsequent to revisions. And ADP may be taking advantage of the spotlight on them a little bit more during the shutdown, decided to recently issue weekly readings. In fact, we just got one today that was a little bit disappointing, in that it not only talked about job creation in the past week, but looked at the past four weeks on a rolling basis, and that was back in negative territory. So that unfortunately reversed a bit of what was the most recent monthly ADP release, which showed a pickup in job growth.

You’ve got other measures, like Revelio that’s garnered some additional attention. That’s been a bit weaker than ADP. Then you have non-payroll measures that also go into the health of labor market. Challenger, Gray & Christmas does layoff announcements. The most recent reading there was a jump of about 180% over the past month. It’s pretty eye-popping, but if you were to look at a chart…and by the way I have it in the report Kevin and I wrote that published yesterday where we looked at alternative data sources. There have been several times in the last few years where you’ve gotten this spike, and then ultimately it’s come down fairly quickly. I think maybe why there’s more attention on that Challenger reading this time is number one, just the absence of official government data, but also some of the recent job cuts from the likes of Amazon, UPS, among others. They’re so high profile in nature that I think it maybe, you know, raised the wattage on the spotlight associated with that.

We also add the PMIs, the ISM version of the PMIs, and fortunately that did show a little bit of a pickup in employment, but certainly in the case of manufacturing, actually the case of both services and manufacturing, you’re still below that 50 mark, which is the demarcation between expansion and contraction, although slightly improved.

So I think in sum, the data we have is supportive of this low hiring, low firing, notwithstanding the Challenger data. So soft but not deteriorating significantly.

MARK: Thanks, Liz Ann. It kind of makes me think a little bit about some of the GDP numbers, the most recent ones that have been available. They’ve been good numbers. Do you get a sense that there are some cracks appearing that people should be paying attention to that will help inform their investing decision before we start getting real data again?

LIZ ANN: Yeah, and keep in mind that the latest official GDP report we have is through the second quarter, so that’s a lifetime ago when you think about time horizons by many investors, and we did see a strong reading. In fact, there was an upward revision, the latest revision that we got for second quarter GDP was revised from 3.3 to 3.8. Most of that revision was based on a significant upward revision to the consumption side of the economy. The problem is some of these trackers that track GDP rely on incoming data. Like the GDP Now out of the Atlanta Fed is what’s called the Nowcast. That’s why it’s called GDP Now. So it’s pulling data as it comes in that gets fed into GDP, and then tracks that. I wouldn’t put any validity on that right now because most of the data that gets input in there we’re just not picking up.

You know, some of the cracks already touched on as it relates to the labor market, the business investment side of GDP has been fairly healthy, but as we know, and I’m sure we’ll talk about, it’s very bifurcated. Anything AI-related from a business investment, or let’s generically call it capex, has been booming for obvious reasons, but the non-AI-related capex is still in a bit of a stall mode by virtue of policy-related uncertainty. Obviously, we’ve got compression on the government side of GDP, both on the job front side and the spending side, not sure exactly when that’s going to be alleviated. So it’s a bit messy. We are not getting retail sales data, those traditional consumption measures.

One thing I will say, Mark, in terms of your question to cracks, one of the things I do track, and we get the data on a weekly basis because it doesn’t come from government sources, is through Bloomberg, I can look at weekly retail sales data at the category level. And what we’re seeing… and it’s based on both credit card transactions and debit card transactions. And one interesting thing we’re seeing is that there’s actually been some demand destruction in the tariff-impacted categories. So we often talk about how tariffs feed through into inflation data. It also can feed through into economic data via any signs of demand destruction, which we have seen some in categories like furniture and apparel and toys and appliances. So that’s something we can continue to keep an eye on.

MARK: You mentioned inflation. Why don’t you continue to follow that thread? And you had mentioned tariffs as being a contributor. What else is contributing to inflation, and where do you think it stands? Again, that’s a situation where we did get some more recent government data, but certainly not as… it’s still a little patchy. So what’s your thinking there?

LIZ ANN: Yeah, it is patchy, and still being estimated to a greater degree than has been the case in the past, and that’s specific to the Consumer Price Index, that, you know, the government called back workers at the Bureau of Labor Statistics in order to generate a September CPI reading. That wasn’t so much because let’s just get an inflation reading out there, but cost of living adjustments to Social Security every year are based on July, August, and September CPI data, and we were missing the September data. So they pulled people back. They gave us a number, you know, generally fairly accurate, but more categories being estimated. And that is going to continue to be a problem even at the point BLS is back, probably a higher percentage of categories that are being estimated.

You know, there’s lots of ways to slice and dice the inflation data. If we use CPI in the latest reading, we’re still looking at about a 3% inflation rate, both at the headline and the core level. It gets a little bit more interesting when you go subsurface. If you look at the differential between goods and services, the services side is still where you have some of those sticky categories like many of the shelter components. Many of them are coming down, but in level terms, their inflation rates are still higher. A measure like owner’s equivalent rent has been in disinflation mode, but still well above the Fed’s 2% target. If you go into category level, and you look at tariff-impacted goods versus non-tariff-impacted goods, you do see a bit of that inflation differential. If you look at discretionary inflation versus non-discretionary inflation at the items level, so discretionary would be the wants components, non-discretionary would be the needs components, the needs components are running at about 2X the inflation rate of the wants components. And that helps to explain the pressure on lower income consumers, given that they spend a lot more on those non-discretionary items in their consumption basket relative to their income. So I think this is the kind of backdrop, especially when we start getting official numbers again where you have to fine-tooth comb this, You can’t just look at headline readings. You’ve got to go subsurface to get a fuller picture of what is happening.

MARK: Last question for you Liz Ann, and then we’ll bring Kathy into the conversation. What are your thoughts on the large-cap versus small-cap? That was a pretty popular question last week for those of us who were at our IMPACT Conference.

LIZ ANN: Yeah, so obviously large-cap would be defined by cap-weighted indexes like the S&P continue to do quite well. And even within that index you see if you break out the S&P into deciles based on market cap, whether it’s year-to-date, whether it’s the period since the April 8th closing low where we’ve obviously ripped higher since then, the highest decile of market cap is handily outperforming. It’s not a perfect array. Some of the sort of middle deciles are actually doing fairly well, but the largest-cap decile performing the best, the smallest decile performing the worst. I recently looked at the same numbers within the Russell 2000. If you break the Russell 2000, which in itself a small-cap index, the highest decile from a cap perspective year-to-date since the April 8^th low is the best performer by far, and the weakest performer is that 10^th decile.

What is interesting with the large and small space is a little bit of a difference in terms of kind of the factor level drivers of what’s working. Price momentum on a one year basis, that’s a factor we track. That’s the best performing factor within large-caps. It’s the best performing factor within small-caps. But sentiment is working pretty well in small-caps, and interestingly, earning surprise has picked up too.

So I think the way to think about large versus small is notwithstanding some of the lower quality aspects to how the Russell 2000 has been performing. Since the April 8^th closing low, the 40% of the Russell that’s non-profitable is up 48%. The 60% that is profitable is only up about 20%. I would say to investors, you want to fade the lower quality area of what’s been working in small-caps and lean into higher quality. So bring in factors like earning surprise, and strength of balance sheet, and reasonable valuation. But I think that profitability factor is really essential when looking for opportunities within the small-cap space.

MARK: Alright, thank you. Thank you, Liz Ann. Kathy, bond market is closed today. How do you think… when it does reopen, how do you think it’s going to react to the current state and some of the negotiations regarding the government shutdown?

KATHY JONES: Well, yields did bounce up a little bit when we had the indications that a deal was in the making. And I think that the reopening of the government means, you know, a pickup in economic activity, at least for government workers who will start getting paychecks, and activity that has been a shutdown will come back. So the expectation is that the weight on growth has been removed or will be removed when the shutdown ends. But I think that there’s also an expectation going forward that we’ll have time now to assess the economic outlook a little bit more fully. So it also means there’s less incentive for the Fed to cut rates in December because if the economy is back up and running and things are… activity has resumed, then the slump that we might have anticipated from an even longer shutdown would not be as severe. So obviously the terms of the deal matter. If the ACA subsidies are erased and the cost of healthcare goes up, that could weigh on certain segments of the equity of the population, and a hardship for people who relied on those reduced healthcare costs. That going forward combined with ongoing inflation pressures could weigh on consumer spending for those at the lower end of the income scale.

But for now, I think the bond market’s focus is still on this push-pull between inflation and the labor market. And we expect the dynamic to keep yields range bound at least in the intermediate-term yields, so that with 10-year yields staying at 4- to 4-1/4, yield curves should steepen if the Fed cuts rates in 2026. We don’t think they’re going to cut rates in December at the December meeting. We still believe the market is kind of overestimating the degree of easing that the Fed can do with inflation above target.

MARK: Kathy, we had a couple elections… well, more than a couple elections last week. What is the state of the muni bond market right now? And maybe if you could spend a few seconds just talking about New York City bonds, given their mayoral election, and some of the interesting policy proposals that have been thrown out there?

KATHY: Yeah, we’ve had a lot of questions come in since the elections. So first of all, the muni bond market is in solid shape in our view. It has underperformed other segments of the fixed income market year-to-date, but that’s largely due to supply. Issuance really picked up this year after being held down for the last couple of years. It’s picked up. It’s expected… issuance is expected to run high into early next year, but we see that as… excuse me, creating value. The interesting thing about munis right now is that you don’t really have to be in a high tax bracket for them to make sense for your clients. The yield that we’re getting, a tax-equivalent basis, is pretty attractive, even as low as, say, a 24% tax bracket for some people, especially if you’re in a high tax state. And for those in high tax brackets in high tax states, tax equivalent yields can run as high as 6-1/2- to 7%. So we still think that that’s pretty attractive, and thus the credit quality is pretty solid. The muni curve also is positively sloped as you go out the yield curve. That means if you are adding duration, you have clients that are willing to take some duration risk, that longer term munis could be a way to… a good option for extending that duration. Because of the higher credit quality in munis, you don’t worry as much about the duration end of things.

On New York City bonds after the mayoral election, my colleague Cooper Howard, he’s our muni expert, and he made some worthwhile points this week, and I’m just going to pass them along. First of all, well, there’s quite a bit of anxiety about some of the proposals of Mamdani for universal childcare, tax hikes on corporations, free buses, rent freezes. The truth is he’s unlikely to be able to implement most of his policies. The power of the mayor, despite the fact that it’s this huge city, and it’s a big budget, it’s still limited because things have to go through the city council, and there are a lot of budget limitations that are in the city council charter. In addition, things like free buses, you would have to go through the Metropolitan Transportation Authority, the MTA, which the mayor doesn’t control that, has no authority to call for free buses, or any other fair changes, or anything like that. It has its own budget, its own board. It’s answerable to the state, largely. So muni bonds yields in New York are holding steady, and I think that the market is smart enough to see that the politics… campaign promises are not actual policies, and the likelihood of implementing a wide swath of major policy changes on the part of the new mayor is pretty low.

MARK: Going back to the taxable side, spreads are pretty tight, particularly for credit… bonds that has some credit risk associated with them. Do you think they’re too tight, or are they about right given the economic outlook?

KATHY: I think in investment-grade, spreads are tight for a reason. Corporate profits have been strong among the bigger companies, and investors have a very strong appetite for yield. And they are pretty attractive yields at this stage of the game, pushing, you know, 4-1/2- to 5%. They are, though, low, so they’re susceptible to some sort of hiccup in economic activity. But given the underlying fundamentals, shouldn’t be a tremendous amount of spread widening. When you go down the credit spectrum into high-yield, yes, spreads are tight, but without such good reasons. It’s true that the high-yield world is a little less junky than it used to be, so the proportion of the high-yield universe in the public space is higher… at the higher end of the rating spectrum than it was before.

But nonetheless, you know, the spreads don’t give you much room for comfort. And we are starting to see the spreads widen a bit, so we have a pretty cautious view. You know, seeing some of the fallout in the leveraged loan market right now, that could be indicative of poor credit quality and some negative development at the lower end of the high-yield market. So we’re just being very cautious. The all-in yields are very attractive, but still being kind of careful there. You know, particularly when some of what’s happening in the leveraged loan market and in the private credit market, it’s very difficult to see, it’s not transparent, and it’s kind of popping up. Those kinds of surprises tend to tell you that there could be some other surprises behind it.

MARK: Final question for you, Kathy, and then we’ll bring Hayden into the conversation. You alluded to this a little bit earlier, you know, the thinking that’s going to be going on with the December meeting. What do you expect?

KATHY: Yeah, I think the market as of last week was… yesterday, was pricing at about a 60% probability of a rate cut at the December meeting. That’s down from nearly 90% prior to the last Fed meeting. So those expectations have shifted a lot based on the comments from Powell, and what we’ve heard from other members of the Fed, who seem to be indicating they’re not on board with necessarily another rate cut, particularly in the absence of solid economic data.

So I think what we’re going to see, we will get a Summary of Economic Projections. That’s going to be very interesting because we’ll want to see where the various members are estimating the Fed Funds Rate to go over time, but we don’t expect to cut at the December meeting. There’s just too much uncertainty about what’s going on in the economy because of the government shutdown, lack of good data, but also the fact that their mandate’s intention, you know, unemployment appears to be slowing down or rising and the labor market appears to be deteriorating somewhat, although from very good levels. On the other hand, inflation is stuck near 3% and that’s 100 basis points from their mandate.

So our expectation is the Fed holds steady in December, gathers more data before the next meeting, and takes it from there. I wouldn’t rule out a couple of rate cuts in early 2026, but barring some very sudden positive development on the inflation front or much weaker economic data than we’ve been seeing, I don’t think the Fed has a lot of room to maneuver because they’re already at the lower bound of the Fed Funds Rate. It’s at 3.75. Inflation is at 3%. That’s 75 basis points to work with before you get into negative real rates. That’s not where the Fed wants to go with inflation where it is. So something has got to give, and I think that the easiest path for the Fed now is to kind of stretch things out, and wait and see.

MARK: Alright, thank you, Kathy. Hayden, we’ve got about seven weeks before the end of the year. What are some year-end tax tips that investors should be mindful of as the year winds up?

HAYDEN ADAMS: Yeah, I think there’s some real basic ones that everybody should be considering. One of them, and this is just one that I think everybody takes for granted, is that max-out your tax-advantaged accounts. You would be amazed on how many people don’t max-out or fully utilize the tax-advantaged accounts available to them, whether it’s IRAs, 401(k)s, you name it. In fact, here at Schwab, you know, we’re a financial institution, right? And you would think every employee is maxing out their contributions. Well, only 50% of the employees even contribute to their retirement account. So don’t take it for granted that your clients are actually utilizing all the contributions they have to them. Like if they’re over age 50, are they using the catch-up contributions? Are they doing backdoor Roths? All these are great opportunities to quest away some money to keep it safe from taxes, and let it grow tax-free.

Another one, year-end is an excellent opportunity for tax loss harvesting. And it’s inevitable, we’re all going to have some losses on the books, but we can use those losses to offset other capital gains, and up to $3,000 of our normal ordinary income.

And then finally, one thing that I think a lot of people forget is check your withholding, you know, give yourself a quick update and say, ‘Did I remit enough to the government?’ Because if you didn’t, you could potentially owe a bunch of taxes, and even some penalties, if you didn’t send enough to the government ahead of time. So if you had an unexpected asset sales or something like that, you definitely want to make sure you’ve got the right amount of money with the government.

MARK: Thanks, Hayden. Next question for you is one of the big news items during the course of the year, of course was the One Big Beautiful Big Act. This may be a hard question in a short amount of time, but could you kind of summarize the overall impact of that particular piece of legislation on client taxes?

HAYDEN: Yeah, overall, I think for the vast majority of our clients, we’re going to see positive impacts. And what I mean by that is their taxes will likely go down. Now, there is that one group, the highest net worth individuals, those in the 37% tax bracket, they could potentially see their taxes go ever so slightly up. Now, it’s not going to go up like it was back pre-2017 before the Tax Cuts and Jobs Act. It’s just going to be a little higher than it used to be. So it’s not quite as bad as it was before. The act itself basically made a lot of the stuff in the Tax Cuts and Jobs Act permanent, but it also added some sweeteners in there. There’s some temporary new tax deductions, like the $40,000 itemized deduction for state and local taxes that I think a lot of our clients are going to be interested in.

MARK: Alright, last question for you, Hayden, and then we bring Jim in here. This is our last call before Thanksgiving, and one way of giving thanks is through different charitable giving strategies. Are there any that you would like to highlight that maybe are underutilized from your standpoint?

HAYDEN: Yeah. Oh, there’s definitely some great opportunities, especially our high net worth clients, they’re very interested in making donations. I think the one thing to reassure your clients about is that even with the One Big Beautiful Bill passing, there are no changes to whatever plans clients may have for their charitable giving in 2025. Whatever changes are going to occur are taking place for 2026 onwards. So the two strategies that I think… well, I think most interesting for our clients is giving appreciated assets because you get a situation where you can give and you don’t have to recognize the income, and then you get a tax deduction. Tt’s like double-dipping. It’s amazing. And then the second best strategy is qualified charitable distributions. For our clients who are over age 70-1/2, they can give directly from an IRA to a charity. So that’s another interesting way to reduce taxes, and get that benefit of helping a worthy cause.

MARK: Alright. Thank you, Hayden. Jim, first of all, I think this is your first time appearing, so welcome. What’s going on with Bitcoin? I mean, prices are down from, I think the all-time high was about 121,000. It dipped below 100,000, and then rebounded a bit over the weekend. What’s your sense as to what is driving that?

JIM FERRAIOLI: Hey, Mark. Thanks for having me on. Great question regarding Bitcoin. Over the summer, we hit about $125,000. We’ve revisited that level several times now, but we’ve not been able to sustain a high. If we go back to August, you had several early very large investors that were selling some of their Bitcoin holdings. Within the crypto community, these types of investors are referred to as whales. They control a lot of the outstanding supply of Bitcoin, so obviously when they sell, they can have a pretty big impact on prices. Fast forward to October, on October 10^th, President Trump had ratcheted up his trade war commentary with China, and that actually caused a big flush-out in the crypto derivative space. About $16 billion of leveraged crypto derivatives were liquidated that day. So that’s the largest one-day crypto liquidation on record. Since then, you’ve had about $1.5 billion of outflows from the spot ETP products.

So essentially what’s happened is a lot of the positive momentum that’s been building up over the past few years, it’s losing steam. And you can point to the large investors, you can point to the trade war commentary, but one thing that’s also important to realize is that at $126,000 Bitcoin was up almost eight times from its 2022 low of about $15,000. And so I think it’s natural to start to see investors taking profits on this position after a pretty big run in a short amount of time. Beyond that, Bitcoin’s really starting to see more traditional adoption, and it’s certainly less volatile these days. And so to make a sustained high past $126,000, it really needs a fundamental catalyst. Beyond that, the macro environment is relatively attractive for Bitcoin. You and Kathy had talked about spreads, they remain low, and so ultimately I wouldn’t be surprised to see some of this range-bound trading until we get more of a fundamental catalyst.

MARK: Thank you. Thank you, Jim. You mentioned that the volatility in Bitcoin, it’s not news that it’s volatile, but the degree of volatility does fluctuate over time. Do you get the sense that as more of these ETFs have been launched that have attracted a lot of assets and spot Bitcoin, and then we’ve got these Bitcoin treasury companies, do you think some of that long-term kind of buy and hold money, do you think that’s having an influence on the volatility?

JIM: Absolutely. To say Bitcoin is volatile is an understatement. I mean, it’s famously volatile. If you go back over the past 15 years, every four years, the block reward that’s rewarded to miners for validating the blockchain is reduced by 50%. And what we’ve actually seen is that in each of these new cycles, volatility is falling about 20% each cycle. And so that’s only accelerating as the market cap for cryptocurrency is getting larger. You have less base effects from starting at a low point and moving to a high point. But absolutely as ETFs and digital asset treasuries have welcomed new buyers into this market, it’s created a more steady environment of demand, and so we’re continuing to see volatility drop. Now that said, Bitcoin is still three times as volatile as the S&P 500, so by no means is this a low volatile investment.

MARK: Thanks, Jim. Last question to you, kind of a two-part question here. Maybe talk a little bit about some of the drivers of these Bitcoin price movements that we see. What are some of the short-term drivers and what are some of the longer-term drivers?

JIM: Sure. So there’s 10 fundamental drivers that I track. They’re broadly followed, really, in the cryptocurrency industry. So if you think of the three long-term drivers, this is what lends to the idea of Bitcoin being a secular growth asset. The first is money supply. If you look at global money supply, it’s been growing at about 6% since 2010, 6% a year. And when you hear people say Bitcoin is a hedge against inflation, they’re specifically referring to monetary inflation. So as the total amount of money in the economy grows, Bitcoin can maintain its value against that. The other thing, the next long-term driver would be adoption. It’s a technology. It’s a currency. It’s a commodity. And so as people start to use Bitcoin, as new investors come into this, you have this natural step-up in demand as you get new adoption. And then finally, bitcoin’s diminishing supply. Every four years, the block reward is reduced by 50%. And so as money supply grows, the available new Bitcoin that gets put into circulation grows at a slower rate. And so ultimately those three factors combined really impact the long-term trajectory of Bitcoin.

In the short-term, it’s impacted by things like market risk, right? If you look at credit spreads, it has an inverse relationship to them. Interest rates and the dollar in the short-term can have an impact on them. This is a non-dollar-denominated asset. So in periods where you get sharp moves upward in the dollar, that’s going to impact non-dollar assets. One measure that’s closely tracked is, and I talked about this earlier, whales. So whale wallets are wallets that hold more than 1,000 bitcoins. There’s only 2% of outstanding wallets that are whale wallets. However, they hold 50% of circulating Bitcoin. And some of these are exchanges or exchange-traded funds, but some of these are also early investors, so they can have a big impact on prices in the short-term. A common measure that’s followed is what’s called Fed liquidity, and this is an attempt to track the flow of funds throughout the economy. And what we’ve seen is that in periods when this is accelerating, it’s been a positive for Bitcoin prices in the short-term, when it’s been decelerating, it’s a negative. And then finally, financial contagions. So Bitcoin was born out of the financial crisis. It’s a long-term view that these fiat systems, the US dollar, are not sustainable. And so in periods where we’ve seen issues specifically related to the banking sector, Bitcoin has actually performed well. And so the reference period, the most recent reference period would be in 2023, you had several regional banks go under. And Bitcoin had been in a bear market leading up to that, and then as those banks started going under, it started rallying.

So if you think about the long-term and the short-term drivers, you can have a view on where you think it’s going to go in the short-term by balancing what’s kind of working in Bitcoin’s favor with what’s working against it.

MARK: Fantastic. Thank you. Thank you, Jim.

So let’s start taking some live questions here. And Liz Ann, let’s send the first one to you. ‘A great deal has been discussed about a potential AI bubble since the last market update session. We are seeing the massive debt related to capex with circular nature, revenue flowing between firms, SoftBank has liquidated their Nvidia holdings. What are your thoughts regarding a bubble?’

LIZ ANN: Boy, there’s a lot in that question. I’ll try to provide a bit of a summary answer as best I can, with an important caveat that I don’t cover individual stocks and companies, so I’ll speak somewhat more broadly. Obviously, we’ve had a boom. Whether we ultimately will view it as a bubble is TBD, but I think the concerns are valid, certainly the concerns around the circularity of financing. It does harken back to the late 1990s, when you had the vendor financing loop that ultimately went kaput, and took the likes down at the time of Cisco.

This loop this time has, depending on what version of a visual you might look at, Open AI kind of in the center, and NVIDIA and AMD closely related, and then the circularity of financing. I think what has raised concerns, maybe rightly so, is that so far this boom has largely been financed out of cash flows. But to sort of pick on the Mag 7 as a proxy for AI, and it’s a little bit broader than that, but free cashflow growth in year-over-year percentage change terms has gone from more than 60% for the Mag 7 six quarters ago, and now the most recent two quarters we’re actually in slight negative territory. And that’s part of the reason why you’re seeing more debt financing get announced.

I’ve only looked at some of the headline details around SoftBank, and their liquidation of their Nvidia position. They talk about it as being strategic, and wanting to open up investments more broadly into kind of the broader ecosystem of AI, as opposed to just keeping that investment concentrated more on the chip side of things. So I think that’s a factor.

The other issue is valuation in an environment where although the growth rate of AI baskets or the Mag 7 is still higher than the remainder of the S&P 500, you have a decelerating pace of growth on the part of the Mag 7, and actually an accelerating pace of growth in the kind of other 493.

And then the last thing that’s generating some attention that I think everybody is going to start to do some more work on is a pretty quiet shift in server depreciation by some of the major leaders extending depreciation from three years to six years, which, you know, analysts would argue could mean you sort of have an inflated earnings outlook relative to what actual earnings are going to be.

So the story changes and gets more details to it every day, but I do think the caution is warranted, and why we want to be mindful of not allowing portfolios to get overly concentrated in just a small subset of names tied to the AI story.

MARK: Thank you. Thank you, Liz Ann. Let’s see, Kathy, this one is for you. ‘Would you like to comment on Jamie Dimon’s comments on bond market concerns?’

KATHY: Oh, okay. So his comment on cockroaches, I assume, is what’s being referred to here.

MARK: Yeah, I think that’s what it’s about.

KATHY: Yeah. Yeah, so he made the comment that when you see one cockroach, there’s usually more. And he was referring to the collapse of First Brands and Tricolor, who were companies involved in autos and auto financing. And there was significant amounts of bank exposure, I mean manageable compared to the size of the major banks, but the market did not know that these problems were going on, and there was accusations of fraud and money just disappearing. And what it suggests is weak underwriting standards, weak monitoring of these riskier credits. And I’m not surprised, and I think what Jamie Dimon is referring to is when you have a long bull market, which we’ve had, in credit, easy financial conditions, people chasing some of these low-quality credits to do lending because they’re chasing for higher returns, we’ve seen this tremendous amount of capital flow into leverage loans and into private credit, and that’s when underwriting standards get weak. People assume they can refinance. They’re not paying attention. I think it was a junior analyst who found the holes in the story in First Brands. So I think there’s complacency in the market. Spreads are very tight. That suggests demand has exceeded supply. And I wouldn’t be surprised to see more fallout.

That being said, so far, this is not of the magnitude that should hurt the major banks. Major banks have been forced since the Basel III regulations to hold a lot more capital than they actually want. And this has actually encouraged some flow in the private credit area because they are not constrained by those bank regulations. And banks have loaned now to private credit. So a little bit of circularity there. But I think relative to the size of the banks and the amount of capital they hold, it’s not a huge concern. It just adds to our caution on the lower end of the credit quality spectrum. I don’t think the banking system is at risk, but I do think investors in low-quality fixed income credits in the taxable sector should be pretty careful when looking at these credits. I don’t think the spreads are rewarding you for the risk that you’re taking.

MARK: Thanks, Kathy. Hayden, this one is for you. ‘Is there a need/urgency for charitably-inclined high net worth clients to implement a charitable bunching strategy in 2025 due to less advantageous scenarios created by the One Big Beautiful Act? And said another way, is it less advantageous to give in 2026 than it is to give in 2025?’ So what do you think?

HAYDEN: That’s actually a really good question because here are going to be… to kind of give everybody a bit of background. There’s going to be some new limits on charitable giving next year. There’s going to be an overall limit to the deduction… for all itemized deductions for anybody in the 37% tax bracket. Basically, they’re only going to get 35 cents on the dollar instead of 37 cents on the dollar like they previously get. And then specifically for charitable giving, there’s a .5% floor on any donations you make. So you have to pass that limit first before you actually can get a charitable donation deduction.

So the short answer is yes, I think there is an opportunity to do some bunching this year when it comes to charitable giving in order to get the maximal tax benefit this year and without having to worry about those limits next year. But I’ll be writing some articles about this next year. I don’t want to confuse people when it comes to some strategies when it comes to 2026, but there is going to be some ways to work around some of these limitations potentially next year. So I don’t think it’s a must, but if a client is worried about potentially being hit by those limits in 2026, concentrating their giving this year could be a good strategy.

MARK: Alright. Thank you. Thank you, Hayden. Jim, this one is for you. ‘What happens when Bitcoin is no longer able to give a reward to miners?’

JIM: Great question. In 2140, the last Bitcoin will be mined. So first, it’s not something we will have to deal with in our lifetimes, but there’s about 20 million Bitcoin that have already been mined. There’s a total amount of 21 million that can be mined. So between now and 2140, there’s about a million more Bitcoin that can be mined. When you send Bitcoin to someone, you get charged a transaction fee. And so in addition to the block reward, these fees are also paid out to miners. And so the idea is by 2140, with over a century’s growth of the network, these fees alone should be able to serve as an incentive to miners to continue to validate the blockchain.

MARK: Alright, thank you. Thank you, Jim. Liz Ann, this one is for you. ‘It feels like there’s an uptick in prices for discretionary goods. Why is that?’

LIZ ANN: Well, I’d have to know more detail about the specifics, but if you do go at the sort of micro category level, many of the discretionary goods that are tariff-impacted have seen both the combination of some upper pressure on prices, but in some cases those haven’t stuck because demand has been coming down, so… in segments that are most impacted by tariffs. So, you know, as I mentioned earlier with regard to demand destruction, so toys, appliances, apparel, furnishing. But I’d say it’s important to look not only at how long term these price increases are, but what you’ve seen is an attempt to raise prices, some demand destruction, and then the companies pair back those price increases as they try to judge their own ability to successfully pass on those higher costs. But a lot of it is directly tied to tariffs.

MARK: Great. Thank you. Thank you, Liz Ann. Kathy, this one is a good one for Kathy. ‘The Fed announced they will end QT in December. Does Schwab see them beginning QE in 2026 as we see interbank liquidity drying up? Stated otherwise, does Schwab see a liquidity crunch on the horizon?’

KATHY: No, I think the Fed is very much on top of this. So one of the reasons for ending QT is because of the tightness in the repo market and the Fed doesn’t want to exacerbate that. We had a little bit of a hiccup in the market, in the plumbing of the financial system, and they reacted to it really quickly. And I think that that is something that they’re very focused on. So Lorie Logan, who is the President of the Dallas Fed, used to run the desk at the New York Fed, so she’s really kind of the leading thought person on this. And she’s been talking about this issue for the last two years, and drawing up plans to address the risk.

So I don’t think it will end in QE. I think they will be able to manage it. But they did need to end QT in order to maintain a certain amount of reserves in the system that are necessary to keep the Fed Funds Rate near target. They wanted to go from abundant reserves to ample reserves. They believe they’re now at ample. That’s where they want to stay. If it means adjusting the QT program such as it is, it still exists, a little bit that’s still going on, they could do that. They could do some QE, but I don’t really think that that’s something that the Fed wants to do absent some sort of real need. Also, a mitigating factor is that the Treasury has chosen to issue a lot of T-bills, and not as much in the way of coupons despite the rising deficit. So we’re getting a lot of that absorption at the short end. They’ve kind of managed the system. So I don’t think it produces a liquidity crisis because it’s being so closely monitored and watched.

MARK: Thank you. Thank you, Kathy. Jim, this is for you. ‘I’ve heard that 70% of Bitcoin never changes hands, or maybe it has never changed hands. Do you see that… I guess, do you agree, and how would you look at that as well as the risk should there be a mass liquidation?’

JIM: Great question. I don’t know if the number is as high as 70%, but this goes back to what I was talking about earlier. These whale wallets who were early investors in Bitcoin and accumulated positions in 2010, 2011, 2012, that’s what this is referring to. And they absolutely can have a big impact on price. Typically, what we see is they’ve for the most part been disciplined sellers. When you have longer kind of expansionary periods of Bitcoin prices, they slowly reduce their holdings. As Bitcoin prices had fallen in the past, they’ve stopped those sales. As you can imagine, a lot of these investors, much of their net worth is tied up in these wallets.

Now, no one knows who these investors are, but you can actually look at the blockchain data, and see what wallets hold what. And so if they were to all sell, that could have a big impact. One of the things that Bitcoin investors look for is when one of these wallets will come online. A lot of them are not held at exchanges, what’s referred to as a hot wallet. They’re kept in cold wallets, which is essentially a hard drive. And so one of these wallets, when they come online, that means coins are being moved to an exchange. That can send some jitters to the market.

So they could have an impact. Traditionally, they’ve been more disciplined in their purchases and their selling, but it’s definitely something we watch.

MARK: Thank you. Thank you, Jim. Liz Ann, this one is for you. ‘We used to refer to tariffs as a tax, not inflation, but a one-time adjustment. Why do we now refer to it as an inflationary? I understand your point about the demand destruction related to furniture.’

LIZ ANN: Yeah, so you’re right. Tariffs are a tax. Tariffs are paid by US companies importing goods from the targeted countries. They’re not paid by the countries. And to some degree, that is what is meant by tariff-related inflation. But a couple of caveats to that. One, the suggestion of the impact being one-time would suggest that the announcement of an implementation of tariffs has been one time, and needless to say, it’s been anything but one time, with announcements, escalations, deescalations, delays, different kinds of tariffs, different purposes behind tariffs, tariffs kind of being this Swiss army knife. It’s at times about reciprocity, at times, about trade deficits, at times about raising revenue, bringing manufacturing back, sometimes for political reasons. So there’s that additive. But maybe the most important part of it is, Mark, we all, particularly on this call, and many of us doing things like I do as a strategist, I live in the weeds of the inflation data, and look at headline versus core, and month-over-0month versus year-over-year, and of course services ex housing, and what are the Fed’s preferred metrics. But the reality is that consumers think about inflation in those kinds of terms. They think of it as stuff is more expensive now than it was, you know, fill in the blank of how long ago, pre-COVID, or a year ago, or two years ago. So as inflation works its way into the psyche of consumers, that is the way most consumers think about inflation. They don’t think of it in rate of change, month-over-month, year-over-year, core versus headline. So that needs to be pointed out as well.

MARK: Thank you. Thank you, Liz Ann. Kathy, yeah, this one is for you. ‘The Fed hasn’t talked about the unrealized bond losses on bank balance sheets. Is that no longer a concern?’

KATHY: On bank balance sheet. So it shouldn’t be a big concern. I haven’t looked at some of the data recently, but I don’t think it’s a big concern. Most of the time, you know, that’s collateral for the banks. And if you’re talking about, say, treasury holdings for collateral, they’re marked, you know, they’re backed by the full faith and credit of the US government. So if they have a mark-to-market decline, it’s taken into account, but it’s not considered a particularly serious issue on the stress test.

But we’re also several years out now from the big jump in interest rates that we saw in late 2022 into 2023. And for most major banks, I would assume their balance sheets have been cleaned up if they were even distressed by that. Many held a lot of their holdings… a lot of their securities are in short-term treasuries, not in longer-term or intermediate-term bonds.

MARK: Alright, thank you, Kathy. Jim, this one is for you. ‘Given current progress in quantum computing and the accelerating role of AI in optimizing qubit error correction and algorithm discovery, how realistic is it that quantum capabilities could compromise existing blockchain signature schemes within the next few decades, if not sooner?’

JIM: This is one of the key risks of investing in cryptocurrencies. Their encryption is key to their value. Throughout history, every encryption has been broken at one point. So yes, that’s the risk. The other part you have to consider is that the network can go through upgrades. As new quantum computing methods are unlocked, presumably security protocols can be upgraded as well. Right now, Bitcoin uses SHA-256, which was developed by the NSA. As computers get more powerful and quantum computing grows, I would expect that the Bitcoin network could also upgrade its own encryption security as well. But that’s one of the key risks that we highlight that investors should be aware of. It’s very specific to Bitcoin and cryptocurrencies versus other traditional asset classes.

MARK: Alright, thank you. Thank you, Jim. So yeah, why don’t we wrap it up here? And last question for each of you, what’s the one or two things you want listeners and viewers to take away from your comments today? Liz Ann, let’s start with you.

LIZ ANN: Yeah, you know, Mark, especially in light of how many questions came in around AI, this is a broad comment, but it’s certainly specific to an environment like this. I think there’s too much thinking that we need to figure out when to get out, get in, get out. Those are gambling on moments in time, and we like to differentiate between gambling and investing. And I think that there are risk mitigation strategies, including real basic disciplines like diversification, but also maybe consider volatility-based rebalancing strategies, where your portfolio tells you when it’s time to do something. Be mindful of not getting overly concentrated in these large contributors to performance, but they’re not necessarily the best performers. Use that factor-based work and screening on top of anything more monolithic like sector-based investing. And I think that helps you navigate what is becoming a trickier backdrop from a stretch valuation standpoint.

MARK: Thanks, Liz Ann. Kathy, you’re next?

KATHY: Yeah, I would just say that the good news is year-to-date, 2025 has been a very good year for bond investors, and it’s mostly because of the coupon. We’ve had positive returns in every sub-asset class that we track, some much stronger than others. But the point is that it’s the coupon income that continues to drive that total return in most cases. And we still have attractive coupons. So for client portfolios, high-quality intermediate-term bonds still make a whole lot of sense for earning that income and compounding that interest over time.

MARK: Alright, thank you. Thank you, Kathy. Hayden, take it away.

HAYDEN: I think the key takeaway I have is you can’t control markets, but you can have significant control over taxes. So don’t neglect tax planning when it comes to your clients.

MARK: Alright, short and sweet. I love it, Hayden. Thank you. Jim, we’ll give you the final word.

JIM: Bitcoin and cryptocurrencies broadly are a new and fast growing asset class. They’re not appropriate for everyone. And so the takeaway here should be you should get educated about them. You should learn what drives their prices. You should learn how they could fit in your portfolio. They are likely to continue growing. And so as that happens, you may have more opportunities to invest in them, and so it’s important to get educated on this new asset class.

MARK: Alright, thank you. Thank you, Jim. And we are out of time. Liz Ann, Kathy, Hayden, and Jim, thanks for your time today.

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