Market Shift: From Tech Cash Flow to Alpha Generation

Key Quotes

"I have to say in November felt worse than it ended up being you know there was a lot of all a lot of volatility it ended up but it ended up the equity market ended up in the black bond market ended up in the black and if you if you took the month off sometimes I feel like that would have been good but if I took the month off you come back and say yeah it was okay but it was some hand wringing times during during November for sure but you know it's part part of you know I've learned over the years it's like cleanses them you need a bit of a cleansing there's something about year end decade end that sort of marks passages you know the end of the late 90s the millennium I don't know what led Japanese bubble into the 80s it feels like there's something about just year end I I 100 agree with you there's nothing magical about year end but for some reason the passage of time you know on this strange calendar year we have it seems to mark these type of turning points"

Rick Rieder observes that market sentiment and trading activity often intensify around year-end, even if the underlying economic differences between months are minimal. He notes that while November presented volatility, both equity and bond markets ultimately finished positively, suggesting that periods of "hand-wringing" can be a cleansing experience. Rieder agrees that year-end often feels like a marker for turning points, similar to past significant market transitions.

"the fast rivers of cash flow I've never I mean I've been doing this I'm about to do my fourth decade I still can't believe it is the case but I've never seen anything like it at this scale as these companies can create this sort of top line revenue growth this sort of return on equity and throw off free cash flow of this size so you know free cash flow is like the lifeblood of any company because if you have free cash flow you can spend on capex you spend on r d you buy back your stock and it just becomes this self fulfilling prophecy of gosh when you're when you're performing at that level particularly at that scale it just allows you to keep motivating it higher because you're just extending your the your your moat you're building because you can spend more on r d etc"

Rick Rieder expresses astonishment at the scale of free cash flow generated by large companies, a phenomenon he has not witnessed in his nearly four decades of experience. He explains that free cash flow is crucial for a company's operations, enabling investments in capital expenditures, research and development, and stock buybacks. Rieder highlights that this strong cash flow allows companies to continuously strengthen their competitive advantages, or "moats," by reinvesting in their businesses.

"I think it'll be a more normalized return dynamic so you know we've spent some time I don't like small caps I don't like them and I think like the shows we've talked about on past we'll say what do I think of small caps I like not very often because I think digital and the utilization of data is so powerful that I just think it's very hard to compete as a small cap business however I think there's a couple there are a few things that play that could make it a bit different one I think you'll see m a that will be high so you'll see some of these companies that will get through vertical integration otherwise will get taken out"

Rick Rieder anticipates a more normalized return environment in the upcoming year, particularly regarding small-cap stocks. He expresses a general skepticism towards small caps due to the power of digital technology and data utilization, which he believes makes it difficult for smaller businesses to compete. However, Rieder suggests that potential mergers and acquisitions (M&A) could create opportunities for some small-cap companies, as they might be acquired through vertical integration strategies.

"I think the fed has to kind of interest rates is I think all the ordinary you know the ordinary jobs are going you know the lower skilled jobs are going away and I think it's a travesty and I know I don't it's like nobody not anybody's fault I think that is the evolution and it's not ai or today it's not ai it's productivity through inventory management logistics predictive maintenance client procurement like you can go across the board in every area of support so I think what happens these companies say okay my top line revenue is not growing as fast as it used to it's still okay but okay but if I can keep my margins up how do I keep my margins up i get my cost of goods sold down i get my sg a down i get my human capital lower"

Rick Rieder discusses a significant trend where ordinary, lower-skilled jobs are disappearing due to productivity gains across various business functions, not solely driven by AI. He views this as a societal issue, a "travesty," that is an evolution of business operations. Rieder explains that companies are focusing on maintaining margins by reducing costs, including human capital, as top-line revenue growth may slow, leading to job displacement.

"I think the key to investing is everybody talks about the same thing at the same time and it's like predicting where we're going to we're going to be I always say this we're not in the business of being right we're in the business of generate return for clients oftentimes it's not being right it's what do people what do we have to anticipate and what will others think over the next six months a year and if and if you can get in you know think it out at a different level around that it's hugely powerful"

Rick Rieder emphasizes that successful investing is not about being correct in predictions but about generating returns for clients. He suggests that the key is to anticipate market movements and understand how others will perceive them over a specific timeframe, such as six months to a year. Rieder believes that thinking about these dynamics at a different level of analysis is crucial for effective investment strategy.

"I think 2026 is going to be in particular in fixed income more alpha less beta meaning like I just don't think we're gonna ride spreads tighter I don't think we're gonna ride like a surfboard of yield improvement that's gonna really help us I think it's gonna be you know we see it today you are seeing some of the credit quality deteriorate in some areas we talked about lower incomes harder so you know like things like subprime auto tough and some of the underwritten credit markets or some of the they say underwritten not underwritten private credit markets some of the privates like I have to say I've definitely seen a bunch more of lending and things like software uh middle market that is definitely trickier I think 2026 we'll see not shockingly higher defaults that is the systemic problem but I think you're going to be more landmines"

Rick Rieder predicts that 2026 will be characterized by more alpha (skill-based returns) and less beta (market-driven returns) in fixed income. He believes investors will