Transcript:

CAROLINE WOODSJoining me now, Liz Thomas, Head of Investment Strategy at SoFi. Liz, so good to have you at the desk. Thank you.

LIZ THOMASYes. Thank you for having me.

CAROLINE WOODSAll right. So let’s get your broad view of what’s going on with this market, because November is typically the best month of the year for the stock market. And we’re not seeing that play out, at least not yet. What’s going on?

LIZ THOMASYeah I mean allegedly November is good and that continues into December. And then we have this nice year end rally. Call it whatever you want, year end Santa Claus, all the things. Right now, it doesn’t appear that that’s what’s happening. We’ve had this big rotation in factors. So you’re seeing factors like low volatility, dividend yield, value really come into the forefront right now.

So far, since there hasn’t been this huge drawdown in yields, we don’t necessarily see investors moving wholesale out of equities and into bonds and freaking out. But there’s clearly somewhat of a beta breakdown going on. So a lot of the high-flying names that were in that momentum camp — growth, liquidity, the large-cap names that get traded so often — giving a lot of it back.

And then the beneficiaries have been some of the other sectors. So you’re seeing some other sectors come in and try to pick up the slack. But the reality is they’re just not big enough or strong enough right now to make up for some of the drawdown in those momentum names.

CAROLINE WOODSHow are you looking at the weakness that we are seeing specifically in the AI trade? Do you look at it as just the market catching its breath after such a substantial run higher, or is it the start of something bigger?

LIZ THOMASWell, there’s a lot of questions being asked right now of AI companies. All of this spending that’s going on, all of the funding that’s happening in concert with the spending — there’s a little bit more scrutiny on where is all that money going, what are we going to do with it, where’s the productivity, where are the revenues going to come from?

So there’s a little bit of pressure, maybe new pressure, on those names right now because of that. But there hasn’t been anything that was proof positive of something to worry about yet. So I’m looking at this more as everybody got pretty extended. We all were talking about everything getting extended, and a lot of times you just make that a self-fulfilling prophecy, right?

We’ve all talked about we’re at these high levels of valuations that can’t go on forever. And then we have these, like I mentioned before, mini breakdowns in beta. I frankly think they’re healthy. I think it’s what keeps us out of that extremely exuberant camp. So I think this is okay. And when you’re seeing names that have run up so much give most of it back, I think it’s that momentum and maybe some of the later entrants of those trades just sort of saying, okay, you know what, I don’t want all of that anyway.

So we’re shaking out a little bit of the risk. Maybe there’s a rotation, a little bit of positioning that’s going to get better matched up. And then I think this is still a pause in an uptrend that can continue.

CAROLINE WOODSSo it’s healthy. Is it a buying opportunity specifically when you think about big tech?

LIZ THOMASI think it probably is in some places. I don’t necessarily think we just buy with a broad brush at times like this. I mean, still, even today we’ve bounced a little bit. The drawdown isn’t nearly as deep as it was earlier in the day. So things can change very quickly. And we’re anticipating Nvidia earnings tomorrow. So there’s a lot going on that could change even by the end of the week.

We get a jobs report on Thursday. We haven’t had a jobs report for a long time, so there’s still a lot of data that’s coming in. To figure out what you should buy here, I don’t know that we’d be looking necessarily directly at mega-cap tech and saying, that’s the spot. Now, if you’re underexposed — I don’t think most people are — but if you’re underexposed, you can probably find some good opportunities in that space if you want to get exposure to this AI trade.

But I think we all have to set our expectations a little bit longer term. So we’re buying even in a correction right now — you’re still buying at a high level. And you have to look at this over the entire cycle of what AI might become, rather than hoping to buy today and have a profit by January.

CAROLINE WOODSI want to dig into that a little bit more. But before we do, I keep hearing this notion that we’re one Nvidia miss away from a market crash or from a recession. Is the market that fragile? Are you worried about this market?

LIZ THOMASI don’t think the economy is that fragile. So I don’t think that an Nvidia report, or even just a couple stocks, can take us fully into recession. I think what would happen is you see some of the sentiment come out of the market — and the sentiment is fragile at these levels, and we’ve seen that already, right? I think investors were looking for a reason to give some of this back.

So yes, I do think sentiment is fragile — maybe less so today than it was two weeks ago, because we’re not at those lofty levels anymore. But I don’t think it can cause a recession. Am I concerned? When somebody asks me if I’m concerned, I always think about what is the underlying strength of the market like? I’m not concerned about that at this juncture.

We’ve still got the technical levels not screaming oversold. Crypto got into an oversold position just yesterday and now has sort of stabilized. We saw the Russell 2000 start to get near oversold conditions, stabilizing a bit today. So even if we started to knock on that oversold condition in the S&P, that’s okay. And considering how far we’ve run, it wouldn’t be that far down from the peak.

So there’s nothing under the surface yet that says there’s broad weakness, we should be concerned. There’s still more than 50% of stocks above their 200-day moving average. There’s support under some of this. So I’m not concerned today broadly.

CAROLINE WOODSOkay so talk to me about the playbook for 2026. As you know, as we head into year-end and we think about what’s going to happen next year, the price targets are starting to come out. They look pretty good from a lot of the big shots. There’s a lot of optimism about next year.

Is it time to think about continuing to lean into growth next year? Is it time to think about playing defense? You mentioned small caps — actually Russell technically outperforming today. Do we start to see value come back even more next year? What are you expecting? How are you positioning?

LIZ THOMASSo a couple things going into 2026. We have to remember 2026 is a midterm election year. That is usually a tough year for the market, meaning there’s typically a larger drawdown in a midterm election year than in an average year. Now, we never really hit those averages, right? The market doesn’t ever hit that exact annual average return or that exact annual average drawdown. But be expecting a year that is fraught with a little bit more political uncertainty.

And obviously some volatility surrounding those midterms, especially coming off of the longest government shutdown in U.S. history. So looking into that, when we look at history in midterm election years, health care tends to do really well, partially because it’s a defensive trade. But we’re also going into the end of this year, as of right now, with health care having pretty strong momentum — it’s been a beneficiary of some of this rotation.

So investors have taken money out of some of those growth names in tech, discretionary, communications, and rotated into things like pharma and biotech. So that’s caught a really good bid. Now it looks overbought right now. But health care is coming off of — at some point this year — it was in the first percentile of valuations compared to the S&P. So it couldn’t get much cheaper than that. And it was just attractive from a valuation standpoint.

I still think health care is a good place to be. I think you can look at financials because I do still believe that there is upside in the financial sector, especially with some deregulation that could be coming more so in 2026. And some of the things that happened in 2025 that are still creating a supportive environment for that sector.

And frankly, they’ve trailed more than I think most people thought. Most of us came into this year really bullish on financials. And still, tech and communications ended up being the darlings. So at some point, right — if the handoff occurs and tech hands it over to somebody else to be the winner — I think health care and financials are positioned well for that in ’26.

When I look at market cap size categories, thinking about the Fed — if the Fed gets this right, and if they get it right in the sense that this is just an adjustment cutting cycle, we’re just trying to get back to neutral, we’re not doing this because there’s a recession in the wind — that usually means that large caps do better afterwards.

So most of the time, in a cutting cycle that’s paired with a recession, you see small caps rally out of that. If it’s just an adjustment cycle and we need to get back to neutral, large caps continue to be stronger than small caps. So small caps could play some catch up here, of course, because they’ve been trailing so much. But I still think large caps outperform.

CAROLINE WOODSOkay, we’ll leave it there. Liz Thomas, I always appreciate your insights. Thanks so much.

LIZ THOMASThank you.

CAROLINE WOODSThat’s Liz Thomas, Head of Investment Strategy at SoFi.