AI Boom or Bubble? Jay Hatfield on What’s Next for Stocks, Small Caps & The Fed

In this episode of Lead-Lag Live, host Melanie Schaffer sits down with Jay Hatfield, CEO of Infrastructure Capital Advisors, to unpack the market’s next chapter. From AI valuations and small-cap opportunities to rate cuts and dividend ETFs, Jay breaks down where he’s seeing risk and reward as we head into 2025 and 2026.

Topics covered:
• AI and the “Magnificent 8” valuations
• The Fed’s next moves and rate outlook
• Why small caps and value may shine in 2026
• Dividend income ideas: ICAP, SCAP, PFFA
• Where investors are getting the narrative wrong

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Episode Transcript

SPEAKER_00 (00:00):
Small caps are riskier stocks.
So they do well when we'recoming out of a of a tightening
cycle.
So the fact that the Fed'scutting is really bullish for
small caps.
They also have lower valuationsthan their larger cap peers,
even by sector.

(00:21):
So not just because they haveless tech.
So their tech companies arecheaper, REITs are cheaper,
everything trades a lowermultiple.

SPEAKER_01 (00:44):
Now U.S.
stocks are stabilizing afteryesterday's tech-led slide.
Big tech is catching a breath.
Futures are or were a touchhigher.
And the latest private payrollsreport shows hiring picked up
without changing expectationsthat the Fed is likely to ease
again before year end.
Investors are watching AIleaders ahead of the fresh
earnings, while small caps tradeas a lever on the rate outlook.

(01:07):
Gold strength is also a reminderthat caution still exists in
this market.
My guest today is Jay Hatfield,CEO of Infrastructure Capital
Advisors.
Jay, it's great to have youback.

SPEAKER_00 (01:16):
Thanks, Melody.
It's great to be on.

SPEAKER_01 (01:19):
So let's start with AI and earnings.
Nvidia sits at the center of thebuild-out story.
Can you make a case for whyyou're still optimistic on
long-term AI-driven growth andwhat you're watching as you know
those next earnings cribsapproach?

SPEAKER_00 (01:31):
Well, the earnings season was positive for the AI
story in that every company, inthe case of Meta to a fault,
increased, you know, now it'sincreased demand on the cloud
side and increased CapEx tosatisfy that demand.
In the case of Meta, they don'thave a cloud service business.
And so they they use thecomputing power to optimize

(01:56):
their algorithms.
So they did sell off, but it'sstill bullish for the AI
infrastructure trade, for thesemiconductor companies.
I would just make onedistinction.
So I've been asked many times ifwe're in a bubble, and I
emphatically said no.
But what is becoming true now,after this earnings season, is

(02:19):
that most of the what I call theMag 8, so the$8 trillion
companies, which includesBroadcom, are either fully
valued or, in the case of Tesla,ridiculously overvalued.
So we are vulnerable to the typeof pullbacks we had yesterday,
where particularly for really,really expensive companies like

(02:44):
a Palantir, you have a sell-offand that triggers other momentum
trade sell-offs.
So I do think that investorsshould look at valuation.
We have a 7,000 target on the SPfor year end.
We're pretty close to thattarget.
Not saying should be able tomarket, but it's a little bit

(03:05):
riskier than it was really, youknow, after the tariff tantrum.
Of course, that was actuallywildly bullish, but very few
people figured that out.

SPEAKER_01 (03:14):
Yeah, you were.
And just to carry on a littlebit from this, um, where are
investors getting the narrativewrong?
What should they be seeing pastthe current headlines?

SPEAKER_00 (03:23):
You know, there's a notion that there's kind of a
Ponzi scheme where companies arefunding other companies that
then buy their materials, but wedon't look at it that way.
We look at it as an efficientcapital market.
So U.S.
is the most efficient capitalmarket in the world by far.
There's this tremendous need tofinance the CapEx.

(03:45):
And so, really, it's not justgonna come from one company or
from private equity, but reallyfrom all sources, which includes
strategic capital, um, like likeNVIDIA has been investing.
It's gonna include doing equityofferings, IPOs.
So investors shouldn't beconcerned that there's
significant capital demand.

(04:07):
Even if you just look at yourown experience.
Uh, last night for the firsttime, my called Hertz, and I
actually had a good automated AIbot to talk to versus sort of
the old joke of you know,screaming agent at the phone.
So there is tremendousdevelopments going on, more on

(04:28):
the corporate side, but even asretail consumers, we can see it.
So I would give up on the AIskepticism and try to find more
reasonably priced companies,like we might like Marbell, for
instance, and um just be alittle bit cautious about these

(04:48):
momentum stocks.
Uh, Bitcoin is a momentumgambling stock.
Try to find companies trading atreasonable multiples of their
growth rate.
Palantir seven times, Marbell'scloser to one and a half times.
So just the risk reward, notthat you can't make money on

(05:08):
Palantir, maybe, but if theymiss earnings, they could be
down 50%, whereas a morereasonably priced company might
only be down five or 10%.

SPEAKER_01 (05:19):
Yeah, and I want to shift now to rates, something
that you and I have talked a lotabout in past podcasts.
Can you give us your outlook uhfor the path of policy and a
2020 five and into 2026?
If the Fed stays on a gradualeasing path, how do you see that
rippling through uh equities?

SPEAKER_00 (05:35):
Well, first of all, it's pretty clear that the Fed
chair signaled they're not gonnacut in December.
There's there's probably notgonna be a lot of data.
Um, the data is gonna be mixed.
There was stronger employmentdata.
The um Fed is incompetent, sothey can't properly adjust the

(05:57):
CPI numbers.
But there's one thing about theFed or the CPI and the Fed is
that the last CPI reading,shelter did come down, or
actually owner's equivalentrent, which is the biggest part
of shelter, came down to 0.1.
So it's only 1.2% a year,whereas the last 12 months
number is over four.

(06:18):
So the current Fed is not goodenough to make these kind of
judgments.
They're they're um use flawedmodels, their targets are way
too tight, and they can'tforecast it all.
So we're probably gonna get apause.
Then the CPI data is likely tocontinue to be cool.

(06:39):
It has been cool over the lastsix months as well.
And so that should support cutsnext year, and particularly even
if we miss January, we're gonnaget a new Fed share to probably
be on the board as early asMarch.
So as long as we're on track toget four more cuts down to 275,
that'll keep the tenure aroundfour.

(07:00):
That'll support equity prices,that'll allow the housing market
to recover.
So we don't actually need a cutevery every meeting to still
have a bullish environment forstocks.

SPEAKER_01 (07:13):
Yeah, and that leads me to ask you again about uh
small caps.
You've argued that small capsand value could have their
moments in 2026.
Can you walk me through thedrivers then that matter most
for that, Colin?
What wouldn't validate it?

SPEAKER_00 (07:25):
Well, there's really two key drivers.
The first is small caps areriskier stocks.
So they do well when we'recoming out of a of a tightening
cycle.
So the fact that the Fed'scutting is really bullish for
small caps.
They also have lower valuationsthan their larger cap peers,

(07:47):
even by sector.
So not just because they haveless tech.
So their tech companies arecheaper, REITs are cheaper,
everything trades are lower,multiple.
And I do think that we're gonnahave a theme next year where
valuation starts to matter more.
And so people are gonna belooking for cheap small cap

(08:09):
stocks, looking for valuebecause a lot of the big
companies, the the moves havebeen played out.
So it's really those twofactors, the Fed easing and uh
the large cap stocks getting,particularly on the tech side,
close to fully valuative.

SPEAKER_01 (08:28):
Yeah, and so you you just mentioned you know the the
the new theme sort of aroundsmall caps, uh, maybe for next
year.
As well, income is back infocus.
For investors looking to captureyield.
Can you make the case forcorporate bonds and and
preferred in a volatile, youknow, easing environment?

SPEAKER_00 (08:44):
Well, the first thing is really critical to
differentiate between equityincome and fixed income.
So we have ICAP as our large capequity income fund, it's going
to trade more like the stockmarket, somewhere close to at
least the equalated SP.
Um, and but you still get goodyields and better long-term

(09:05):
growth.
But if you want true fixedincome with lower volatilities,
so volatility of PFFAs ofpreferred stock funds about 0.5
of the market as a whole, as theSP.
And B and DS is even lower riskabout 0.3.
So for more conservativeinvestors, and it's really could

(09:26):
be a cash alternative as well,or a CD alternative, you can get
both equity upside, because ifthe market does continue to
rally next year, like we'reprojecting, we have a 7,700
target next year, then higherrisk fixed income like BNDS and
PFFA will outperform, obviously,CDs, outperform investment grade

(09:48):
bonds, outperform munis.
So when we're in a bull marketand you still want fixed income,
it's best to be in the higherrisk fixed income with higher
yields and even total returnsthat will lag the market as a
whole, but still be somewhatcompetitive.
So in the high single digits,the market usually does low

(10:09):
single digits.
So you'll be a little bit lower,but not a third.
You know, the investment gradebonds right now yield right
around 4%.
And so there you're lagging themarket by 7%, 8%, 9%.
High yield bonds, particularlyour funds, you're only lagged by
2% or 3%, but yet you get lowervolatility, more safety, you can

(10:31):
sleep better at night.

SPEAKER_01 (10:32):
So just to kind of bring it together for us, we'll
thinking about what your yourbase case and your projections
for the end of 2020 and 2026,which ETFs uh should invest
particular focus to?

SPEAKER_00 (10:45):
Well, so in our ETFs, so ICAP's our large cap
dividend fund, um, that's beendoing um really well this year's
beating the equate SP.
Um SCAP's our small cap dividendfund also has outperformed this
benchmark this year and evenmore so last year.
So we do think that uh if we'reright about valuation mattering,

(11:09):
then those funds will do well.
And we employed a GARPmethodology, so that's growth at
a reasonable price.
So we look at the peg ratio, thePE to growth.
We also adjust for yield.
But so we would um argue thatthat's a great methodology, one
that if you're buying individualstocks, you should employ.

(11:30):
And that's what we do with umICAP, SCAP.
We find a lot of undervaluedstocks.
And if they're performing well,we do monitor them, see if
they're fully valued.
And that way you can get reallygood returns and also limit your
risk so you don't have a companythat was overvalued and then
misses earnings and goes down50%.

SPEAKER_01 (11:50):
Can you talk about any of the stocks within those
funds that you're particularlybullish on or give up some
stock?

SPEAKER_00 (11:55):
Um, we really love the private equity slash
alternative investment managers.
They've been hit hard, Apolloand KKR, our biggest holdings.
They've been hit hard by a fearabout credit, which we think is
totally unfounded.
There were a few frauds in a umfor lower quality companies, uh,

(12:17):
which these private equity firmstypically don't invest in.
But that doesn't mean there's asystemic problem.
They also, it's not even theircapital.
They don't want to lose moneyfor the clients, but it's not
even their capital.
So these are great businesses.
If you look at Apollo's report,really strong momentum, getting
realizations, getting new assetsunder management, trading at
very low multiples.

(12:38):
So we see uh with KKR, it'sabout a 120, we have a 200
target, same target with Apollotrading at 135.
So we think that that'slow-hanging fruit.
And then looking at higher risktech stocks, but ones that
traded reasonable multiples.
I mentioned Marbell already.
That stock did get hit when theyreported earnings, but we think

(13:00):
unfairly.
So it's gonna be a big earningsreport coming up over the next
month, but we think the riskaward is is quite good.
And we've been uh recommendingAmazon uh even when it was at uh
220, but it's rallieddramatically up to the 250 area,
but we still see upside to 300.

(13:20):
So still a reasonably pricedstock.
Was out of favor, and nowinvestors are gravitating
towards it.

SPEAKER_01 (13:27):
What about in this small cap space, Jay?

SPEAKER_00 (13:30):
Um we have a um um a higher yielding idea, which is
GNL global net lease.
They've transformed themselvesinto an investment grade credit.
Stock had done terribly over thelast five years, but they
delevered, sold off their lowquality assets, and now um are
yielding over 10.

(13:51):
We our models show that's asustainable dividend.
It's trading in the mid-sevens,we have an 11 target.
So we think an out-of-favor,misunderstood company that's
really transformed itself, butyet investors haven't given it
credit for it yet.

SPEAKER_01 (14:07):
So, uh Andre, just to wrap up for viewers who want
to follow your research, learnmore about your funds, where
should they go?

SPEAKER_00 (14:13):
Uh Infracapunds.com.
You can sign up for our webinarand also get on our mailing
list, send out uh great economicresearch, historically great
economic research, and uh giveyou all the data so you can come
to your own conclusions as well.

SPEAKER_01 (14:30):
It's great to have you here, and thanks to everyone
for watching.
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Feed Life Live.