Transcript

This podcast is intended for audiences who reside in the province of Ontario. The products, services, and securities referred to in this podcast regarding RBC Dominion Securities Inc. as permitted are only available in Canada and other jurisdictions where they may be legally offered for sale. The information presented and discussed should not be construed as an offer by RBC Dominion Securities Inc. to sell specific securities and/or services in any jurisdiction outside of Canada.

All opinions and views expressed by the speakers are not representative of views and opinions of RBC Dominion Securities Inc. All information and opinions provided in this podcast are in good faith, but without legal responsibility.

This is Capital Insights, a podcast from the Chapman Private Wealth Group. Here's Paul Chapman.

Hi, everyone. Welcome to this month's episode for the monthly partner memo. My name is Jack Taylor, and I am a Certified Financial Planner and Associate Wealth Advisor at Chapman Private Wealth Group. During this episode, we will review Paul Chapman's November 2025 partner memo.

Quick note, these are Paul's words, and so when I speak in the first person, I am of course referring to Paul. Here is a quote to start from the legendary investor Charlie Munger. Quote, "Slug it out 1 inch at a time, day by day. At the end of the day, if you live long enough, most people get what they deserve," end quote.

Friends and partners, while at one of the events I participated in last month, someone introduced themselves to me and was interested in my wealth management business. He proceeded to inquire into my thoughts and outlook on things in this tumultuous environment. He went on to tell me his one very wealthy friend had just sold his entire portfolio after it took a bit of a hit on one of the volatile October days.

There is certainly reason to be worried and cautious on multiple fronts, but I noted that one should really be in a position to never worry about money. Money is the worst thing in the world to worry about. There are much better things to worry about than money. And if you structure your portfolio and your life in the correct way will never have to worry about it.

Sure, it was a bit of a plug for what we do at the Chapman Private Wealth Group, but I believe it to be entirely true. We all want to sleep well at night and have enough, whatever that means to you. Most people don't dream of being fancy rich. I dream of being rich enough to say treats on me without thinking twice.

Rich enough to have a home that feels like a hug, fridge stocked like a five-year-old with adult money, and a tray of chocolates waiting for someone to grab. Rich enough to quietly help a friend before they even have to ask to send a care package when someone's too tired to reach out, to buy all the pencils from a kid on the street so that they can go home early.

For me, the real money dream isn't about luxury, it's about having enough to give, enough to comfort, enough to turn ordinary moments into something extraordinary. We do our best to make sense of all the noise and data points out there, hence this monthly partner memo. But this quote I read somewhere recently may sum things up the best.

Quote, "The market doesn't owe us clarity. My job is not to know the future with certainty, but to navigate the uncertainty with discipline," end quote. The market's unrelenting push higher certainly has many scratching their heads. There is a significant bifurcation in the markets under the surface, however.

This bifurcation into haves and have nots and divergence in valuation creates inefficiencies in both equity and credit. Companies that are treated with excessive complacency versus many of the rest, this is most obviously in the US markets, where the Magnificent Seven continues to drive index performance, while the rest of the S&P 493 remain somewhat lackluster.

Companies with AI in the ticker or story trade at meaningful premiums, while those without trade at discounted levels. While the fervor in unprofitable and meme stocks continues unabated so far, fundamentals will matter again at some point you can mark my words, and there's a good chart that shows what's driving US equity market performance. And it isn't profits currently. So it's a good period from December 31, 2024 until September 30, 2025. And you can check those out in the email newsletter as well as on the website.

Investors are generally not rewarding fundamentals in the US market currently. The allure of future profits are enthralling, creating an environment driven by hope and momentum rather than earnings and returns on investment. Narrative driven markets have one distinct problem, strong stories inherently compromise sound decision making.

We may have seen this movie before somewhere. This type of market dispersion doesn't last forever, and fundamentals reassert themselves. The timing, who knows? You can't time the market, I have noted how it marks quote on this front multiple times quote, "You can't predict, but you can prepare," end quote.

We remain astute and aware that this market is fragile under the surface. Concentration in nonprofitable growth can work powerfully in one direction until it doesn't. Markets go up on escalators and down on elevators.

So currently, the bears and cautious voices point to a wall of worry, including sticky inflation a cooling labor market, a climbing deficit, elevated valuations, a possible AI bubble tariff/trade uncertainty, a government shutdown, and all of the other geopolitical tensions that abound globally today.

On the other hand, bulls make a case for a continued market ascent backed by momentum, rising GDP, sustained earnings growth, strong consumer spending, the start of a fed rate cutting cycle, rapidly advancing technologies, for example, AI, deregulation and stimulus from the one big beautiful bill and $8 trillion sitting in cash or money market funds as future fuel as well. Seasonality matters, and the fourth quarter is historically the best quarter of the year.

As always, both make a strong case, which I dive into detail further in this month's partner memo. This is also why one shouldn't be all in or all out of the market. Getting the timing right on that call may happen once or twice, but no one will make that call correctly with consistency and repeatability. So we position accordingly.

So in this month's partner memo, there are three subtopics, and I will give you a quick intro for each one. And if you would like to dive deeper into one of these topics, then you can check out the full version on our website. The first one is AI will change the world, but beware the hype.

The hype and hysteria around AI is amazing. The narrative is pushing that sector to new levels. Are we in an AI bubble? It's always obvious afterwards and surprisingly difficult during the bubble. But my response would be likely.

It will certainly change the world, but adoption timing remains unclear, as does future profitability versus mind boggling capital outlays being made today. If we are in a bubble, no one knows the timing of a collapse. The music can play longer than we would expect. There are hallmarks reminiscent of the tech boom and bust in the end. You have to actually sell the product.

Here are some of the cautious points below. Bubbles don't form from thin air, they arise from stories that contain both truth and hype. Predicting winners and technology revolutions is nearly impossible. People are confident, but no one truly knows.

The AI companies are in a race for survival. Each must keep competitors from gaining an advantage, but their individually rational choices may collectively produce tremendous overcapacity. Growing debt in the AI ecosystem is making it more fragile and sensitive to external events. It is also problematic that so much capital is going to buy rapidly depreciating hardware.

The next issue for all of this is the amount of sheer power it will all require. Hence the hype around data centers. And there's a great chart that overlays the internet tech dotcom bubble from 1995 to 2002, and then overlaid from 2019 to today with the AI index.

And it shows an even bigger rise over time and future potential drop as the tech dotcom bubble was a 91% drop. So just something to be aware of. And it's good to see these pictures on the website, it helps illustrate these concepts and research.

The next subtopic is reasons to remain vigilant, the cautious data points. Many are fearful of current valuations and for good reason. While valuations tell us little about where the market might go over the short-term, over the long run valuations can be a dependable predictor of forward returns. The S&P 500, forward PE ratio has hung around 23 times recently, and that's deep.

The implication for longer term returns isn't pretty. Retail investors appear to be all in and mostly in the Magnificent Seven/AI names, given the narrow leadership in the markets currently. All this while small business owners are highly uncertain, issues are starting to bubble up in the credit world and inflation remains stubbornly sticky.

And there's a great chart that shows the S&P 500 index, forward PE ratios, and the subsequent 10 year returns. And of course, the higher this ratio, generally the lower annualized total forward 10 year return. And so right now, being at 23 times, it's something to be aware of when deciding to invest in the index and US equity as a whole.

The last subtopic is, but as always, the market can climb the wall of worry and focus on these positives. The market has so far cast aside the doubters, which it always does over the long-term. Pessimists get creamed over time. We are entering the positive fall/winter seasonal period and expect more liquidity in the system soon. Don't fight the fed.

The slowing labor market is giving the fed and the Bank of Canada continued incentive to ease. Dropping bond yields should continue to be a strong tailwind to equity valuations. Key credit indicators are turning more positive.

Current valuations shouldn't be viewed in the same light as markets 25 years ago, and today's version of the tech runup isn't the same as 2000 for a few reasons. And there's a great illustration and chart on the website that shows all of the things to worry about and potential reasons to sell over time, all the way up to today. And as you can see, it goes straight up and to the right over the long-term.

So as always, if you want to contact us to review any topic in greater detail or even request a podcast topic, please feel free to reach out to US via email, at chapmanwealth@rbc/com or through our website, www.chapmanprivatewealth.ca. You'll also be able to see our monthly partner memos, helpful articles, and resources on our website. Take care and have a great month.