Michael Batnick and Ben Carlson host Chris Gallipo, portfolio manager at Franklin Templeton, on February 23rd during a volatile market session. The conversation takes place as financial stocks fall 3.2%, American Express drops 9%, and software names like IBM hit new lows after falling 30% in three weeks.

The discussion centers on the market's dramatic AI-driven repricing, with Microsoft down 29% from highs despite strong fundamentals. Gallipo explains Franklin Templeton's below-consensus S&P 500 target and their successful call for market broadening beyond the Mag7 concentration.

The hosts and guest grapple with AI's dual nature - its potential for productivity gains versus fears of mass unemployment. They examine how this technology shift is creating both opportunities in overlooked sectors and existential questions about traditional software business models.

The Great Rotation: From Mag7 to the Forgotten 493

Franklin Templeton entered 2025 with a constructive but cautious S&P 500 target of 4,400, well below the street median of 4,760, based on concerns about the 22.5x forward PE ratio expanding further to 23-24.5x.

"343 S&P 500 stocks are up on the year. That's 68% of the index. And 41% of the S&P stocks are up more than 10% year to date" - Chris, highlighting the broad-based nature of 2025 gains.

The Mag7's dominance from 2020-2025 was fundamentally justified: "those names had earnings power or earnings growth of about 750%" while they were "up 650%" - not a bubble but fair valuation.

"If you take those names out of the S&P, you know what the S&P earnings growth was over the same window? 32%" - Chris, explaining why concentration made sense historically but is now shifting.

AI Repricing: Software's Existential Crisis

Microsoft's 29% drawdown reflects broader uncertainty about AI's impact on traditional software business models, with investors unable to assign terminal values to previously predictable cash flows.

"The reality is you don't know what the terminal value is of those cash flows" - Chris, explaining why software valuations have become impossible to model with AI disruption looming.

The speed of repricing has accelerated dramatically: "what can happen in two or three weeks used to take a year" with algorithmic trading amplifying moves across entire sectors.

Even tangentially related companies are getting hit, with Schwab falling 10% after small custodian Altruist announced an AI tool, demonstrating how fear spreads beyond direct competitors.

International Markets: The 15-Year Awakening

"I got hate mail" - Chris, describing investor reaction to Franklin Templeton's bullish international call despite showing earnings power equal to the US "for the first time in 15 years."

From 2009-2025, the S&P 500 gained 600% on 250% earnings growth, while emerging market earnings grew only 30% and European earnings slightly more, explaining the valuation discount.

Japanese shareholder reforms have been underway for "five plus years," creating a structural catalyst for re-rating alongside improved earnings fundamentals.

Currency devaluation provided a tailwind but "accounted for almost all the alpha versus the S&P" - the real driver is underlying earnings power improvement.

AI's Dual Nature: Walmart vs. White-Collar Fears

Walmart's AI success story: shoppers using their AI tool "spent 35% more than the shoppers that were in the store that didn't use it," demonstrating revenue-boosting potential.

Walmart expects to "grow revenues for the next five years at the same rate they grew them for the past five years with zero headcount" using AI across procurement, supply chain, and retail operations.

American Express's 8% decline reflects fears about white-collar unemployment hitting the luxury spending segment that the company depends on for growth.

"What would happen if AI becomes so prominent, so powerful, that we do start to see people losing jobs, a lot of jobs?" - Chris, outlining the recessionary scenario that has investors spooked.

Midterm Year Opportunity: Historical Patterns

"Midterm years are rough years. Average returns well below long-term returns. What most people don't know is that 12-month forward returns" are "100%" - Chris on the historical setup.

"Give me VIX over 30, give me the RSI on the S&P under and it's go time" - Chris describing the volatility conditions that would signal a buying opportunity.

"Markets bottom on bad news, guys. Got to remember that" - Chris emphasizing that Microsoft's 30% decline already prices in significant AI disruption risks.

Current unemployment at 4.3% and prime-age labor force participation "essentially at the highs of all time" suggests the AI job displacement fears may be premature.