Transcript:

Caroline WoodsJoining me now, Kevin Mahn, President and Chief Investment Officer at Hennion and Walsh Asset Management. Kevin, always good to have you. Thanks for being back at the desk.

Kevin MahnGreat to be back. Happy New year.

Caroline WoodsAll right. So I was taking a look at your 2026 outlook. And you say that your theme for the new year is follow the money. Tell us, what does that mean? Where is the money going?

Kevin MahnExactly. So when I say follow the money, I don’t necessarily mean flow of funds, but rather, where are all the billions of dollars going to be spent in 2026? And believe it or not, they’re going to likely be in the same area as they were in 2025. First off, AI infrastructure. According to Jensen Huang, the godfather of AI, there’s going to be somewhere between 3 to 4 trillion dollars spent on AI infrastructure investment by the end of the decade, in areas such as data center construction, electrical connectivity, heating and cooling solutions and, of course, power solutions. So that’s an area I want to follow and find the benefactors of all that spending. But it doesn’t stop there. How about aerospace and defense? Certainly the military operations over this past week have reminded us of the need for security across the globe. And countries are spending billions of dollars to upgrade, replenish and modernize their own security capabilities. The defense contractors should benefit from that. I mentioned power. Where do you turn for power right now? To utilities, those utilities that offer natural gas, that offer nuclear, and even some other companies now that are offering small modular reactors to supply data centers with nuclear power off grid. And then finally, here is my, I guess, a little bit more risky pick for the year in terms of following the money. That’s biotech, health care. Health care innovations typically today come from biotech companies, not large cap pharma. But large cap pharma is facing multiple headwinds right now. Congress pushing on them to lower their drug prices and many large revenue-producing drugs coming off a patent and now being subject to generic pricing. So how are they going to replace all that lost revenue potential? They’re going to have to be acquisitive in my opinion. And that brings in the small cap biotech names.

Caroline WoodsOkay. So if you want to follow the money and you want exposure to some of these sectors, what’s the best way to do it? Through ETFs, some thematic ETFs, or do you have any individual stock picks?

Kevin MahnSure. I’ll give you a couple examples in each one of those areas. As it relates to AI infrastructure, one name that we like is Comfort Systems, ticker symbol FIX. They’re an industrials company that supplies cooling solutions to warehouses and data centers, and they were just added to the S&P 500 at the end of 2025. Another tailwind for them. As it relates to power solutions, a couple utility names that currently provide natural gas and nuclear distribution: Duke Energy, ticker symbol DUK, and NextEra Energy, which happens to own Florida Power & Light. Now let’s shift over into the areas of aerospace and defense. One name that jumps out to me is L3Harris. They provide missiles and missile defense capabilities. We keep talking about building our own Iron Dome here in the U.S., similar to what Israel has, or maybe L3Harris is part of that solution. And finally, for a small cap biotech name, one name that we hold that’s more of a small trust is Indivior. Indivior provides drugs for the treatment of substance abuse disorders, and they currently have two drugs in the FDA approval pipeline to treat opioid abuse, something our country and our society desperately needs.

Caroline WoodsOkay, so your theme for 2025 was growth opportunities ahead. How should we think about the typical growth opportunities right now? Because noticeably missing from any of your picks are Mag Seven names. You mentioned Nvidia I guess at the top, but none of the big tech names that we really talked a lot about last year.

Kevin MahnYou know, the influence of those Mag Seven on the S&P 500 and the market as a whole has been diminishing in recent years, and that’s good. That’s good for the sustainability of this bull market. I think back to three years ago when the Mag Seven accounted for 62% of the total return of the stock market, a year after that 54%, last year just under 44%. So it’s good to see a broadening out. Now, I’m not suggesting to abandon some of those Mag Seven names. In fact, I still think Nvidia sits at the hub of the AI ecosystem, and they reminded us at CES yesterday that they’re not just done yet. They’re now moving into autonomous vehicles, robotics, in addition to data centers and chips. They’re trying to take over the AI world, and I wouldn’t bet against them. But I do think there’s other growth opportunities beyond just the Mag Seven, and that’s good for this bull market.

Caroline WoodsAny that you would abandon this year?

Kevin MahnSome that I still question just in terms of profitability—Tesla would be one that is a question mark for me. I like Microsoft. I think Apple will have a resurgence. I like Amazon. I think it’s going to continue to spread its tentacles into the e-commerce world that they already dominate, but they’re going to use AI to become even more profitable. So I guess the biggest question mark at this point in time is Tesla. Do they transition from a car company into a robotics company, and how long will it take that transition to become profitable?

Caroline WoodsSounds like you’re still pretty bullish though. This bull market celebrated its third anniversary. You think it’s going for four?

Kevin MahnI think it’ll go for four, and we’ll keep that for your anniversary next October. But in all likelihood, we’re going to see a lot more downside volatility in 2026 than we did in 2025. This month we have the expiration of that short-term funding of the federal government. Will the government shut down again, and will that become a campaign issue for the upcoming midterm elections? Midterm elections that certainly could produce some volatility. Debt ceiling debate talks. What happens with the fate of the tariffs in the Supreme Court right now? Do we have to return the money? What’s the process for returning money? All that creates uncertainty. And let’s not forget, we may have a new chair of the Federal Reserve. We assume that new chair will be more dovish, but will that lead to more rate cuts, or will it lead to an expansion of the balance sheet, or both? All question marks, all could lead to more volatility. But overall, yes, the bull market continues in 2026.

Caroline WoodsSo what do we do if you’re expecting more downside volatility? What do you do to prepare for it, and then what do you do once it actually happens?

Kevin MahnSure. I remind all investors to stay true to their risk tolerance. In other words, just because the market is moving higher doesn’t mean your risk tolerance should move up. Just as much as when it moves lower, you shouldn’t become more conservative. You should stay invested and diversify in accordance with your goals, your time frame, and your risk tolerance. The biggest fear that I have for individual investors is when these short-term bouts of volatility occur in the new year—and they will—they’re going to rush to the sidelines and try to time the market. And we all know trying to time the market is an exercise in futility because you don’t know when to come back into the market. So work with your advisor. Position yourself accordingly. If you are less risk tolerant, move to some more defensive areas of the market, such as utilities and health care and bonds. Let’s not forget about bonds for diversification potential.

Caroline WoodsDig into that a little bit more. Where are you actually finding opportunities in fixed income?

Kevin MahnSo one of the areas we like a lot right now is municipal bonds, especially for investors in the high tax bracket because of their tax-free income potential. We know that last year was a record year for new issuance through municipal bonds. It looks like 2026 will set yet another new record. And I think all that new issuance is going to be gobbled up by yield-hungry investors who are looking for attractive levels of tax-free income that look very attractive compared to treasuries right now. So find your municipal bond opportunities. You can get them directly through the bonds themselves or through fund structures such as closed-end funds that employ leverage. And as that leverage cost comes down, you’ll get enhanced returns further. So we like municipal bonds in this new year.

Caroline WoodsOne thing going back to the volatility—and one thing that didn’t cause a lot of volatility that one might have been surprised about—is what’s going on with Venezuela and some of the geopolitical turmoil that’s playing out. Are you surprised that this market seemed pretty resilient? I mean, we saw the Dow hit a new high yesterday despite some of the news.

Kevin MahnWell, to me, to borrow a line from a song in the Broadway show Hamilton, what comes next? Now that we’ve arrested Maduro and he’s in the courts here in New York, what happens next? How does that transition of power unfold, and will they start to abide by some of what the U.S. is looking for? But everyone’s looking at the energy component of this. And right now, Venezuela produces less than 1% of the total world output of oil. And even if we get that ramped up again to add more supply, which could bring down oil prices, that may be years down the road. So I think it has a very short-term impact on the energy market, but longer term it could have a very positive impact on the oil markets, and a short-term positive impact for the people there as well.

Caroline WoodsGoing back to your bullishness, what do you say to those people who say the stock market is overpriced right now? Is it?

Kevin MahnI’d say they’re right, based upon historical standards. They’re trading above their five- and ten-year averages from a current and forward P/E perspective. But that doesn’t mean it can’t or won’t move higher. Last year we had 41 record closes for the S&P 500. Two years ago we had 57 record closes. I’m sure those same investors were saying that back then, and boy did they miss out on quite the ride going forward. But you should factor in valuation to your investment decisions and don’t try to reach for those really pricey stocks. Build a diversified portfolio. Look at valuations, look at earnings growth potential, look at the strength of balance sheets. There’s still growth opportunities available.

Caroline WoodsWhat’s one of those really pricey stocks, aside from Tesla, that you shouldn’t reach for up here?

Kevin MahnIt’s hard to justify where they’re trading right now just in terms of price to current earnings, even forward earnings versus their current price. I like the company Palantir. I like what they’re involved in—national security, AI technology—but that comes at a certain price. I’m not betting against the company. I just think the price is a little rich here.

Caroline WoodsAnd finally, what’s one stock that looks expensive right now but will actually be a bargain down the road?

Kevin MahnI think about some of those names in the industrial sector right now that are part of the AI ecosystem. If you look at a name like Comfort Systems, I mentioned earlier, they’re trading a little bit richer than many would suspect for an HVAC company. But there’s so much money being thrown at those companies right now, and additional spending that will go into data center construction. And they need the cooling component because these data centers run hot and they’re having a tough time keeping up with that demand. So I think they’re priced a little rich right now, but it is relative, and there’s more growth potential there.

Caroline WoodsAll right. We’ll leave it there. Kevin, I always appreciate your stock picks and your insights. Thanks so much.

Kevin MahnThank you.

Caroline WoodsThat’s Kevin Mahn, President and Chief Investment Officer at Hennion and Walsh Asset Management.