To The Moon

The AI rally has left many other deserving stocks out in the cold. The case for Expedia Group, Total, Brink's, and 43 more. By Lauren R. Rublin

Any day now, the artificial-intelligence bubble will burst -- or inflate further. The Federal Reserve will hike rates, unless it cuts them. The Strait of Hormuz will close, or open, or close again. Any day now, the S&P 500 will break out of its two-month holding pattern, but will it soar or stumble? Yes.

What should investors do when the outlook is murky and an inflection point nears? In our midyear checks with the members of the Barron's Roundtable, all offered variations on the same advice: Run like the dickens from overowned, overvalued tech stocks and seek safety and hefty returns among the many promising companies -- in energy, materials, healthcare, and even lawn care -- whose shares have been left in the dust by the latest stampede into all things AI.

The Barron's Roundtable last met Jan. 5 in New York, before the Dow industrials topped 50,000, inflation hit 4%, and the guns of war boomed across the Middle East. In the midyear Roundtable, conducted by phone in the past three weeks, 10 of our panelists weighed in on this year's momentous macro changes and shared their favorite investment ideas -- 45 in all -- for the year's second half and beyond. (Mario Gabelli couldn't participate in the midyear Roundtable, but you can track the performance of his January 2026 and July 2025 picks on Barrons.com.)

Stash the tea leaves and crystal balls. Here is our pros' edited guide to the future.

Henry Ellenbogen

Barron's: Henry, stocks were down, then up, in the year's first half. Where to now for the market?

Henry Ellenbogen: The gains were highly concentrated in stocks associated with the AI buildout. Aerospace and defense stocks also showed some strength.

AI growth has been driven primarily by spending by Anthropic, and to a lesser extent OpenAI. People really want to invest in the LLM [large language model] layer, but these companies aren't public yet, so they are investing through proxies. The only publicly traded LLM, Gemini, is embedded in Alphabet's Google. Alphabet's stock has had a strong year. Other proxies include semiconductor and memory stocks, and stocks tied to the AI data-center buildout.

Anthropic became the leader among LLMs with its release of Claude Opus 4.5 at the end of November. Anthropic's revenue has shot up since then, from around $9 billion to more than $50 billion. It is incredible to see a company add that much revenue in only six months.

Anthropic has filed confidentially with the Securities and Exchange Commission for a proposed public offering of its stock. How will the company's initial public offering change investors' preferences and the market?

That is something I have spent a lot of time thinking about. If the LLMs' revenue continues to grow, and I think it will, two things will happen. No. 1, people will invest directly in these companies. No. 2, the market will become much more discerning about the duration of AI companies' cash flows.

For example, Nvidia's stock has significantly underperformed other AI-buildout stocks in the past year as the LLM companies have lessened their ties to the company and worked more with Broadcom, Google's TPUs [tensor processing units], and Amazon.com's AWS Graviton processors. If intelligence is as powerful as we think, it will start to solve some of the bottlenecks we have seen in memory, semis, and such. Thus, the rate of change in demand for these products won't be as strong as we saw in the year's first half.

Does that mean the stock market will end the year lower?

That depends to some degree on inflation. There is a good chance inflation is peaking now and interest rates will fall, which should lead to a broadening of the market, a positive. Also, the rate of change of inference, or intelligence, will continue to grow rapidly. We expect investors to embrace not only the LLM companies as they come public but other companies that use AI to gain market share, lower their cost structure, and generate longer-duration cash flows than the AI-buildout companies, many of which have nonrecurring revenue and will face technological obsolescence.

That means U.S. gross domestic product will also broaden out, another positive. The U.S. economy benefits from the country's AI leadership and our relative energy independence. For all the fears about AI's impact on white-collar work, there are more positives than people talk about. AI is unlocking productivity growth, which will curb inflation expectations. We are on the cusp of leveraging both AI adoption and energy independence to drive significant economic growth.

Which companies are using AI most successfully to increase their competitive advantage and lower costs?

I recommended DoorDash at the January Roundtable and it hasn't performed well, but we still really like it. After Anthropic's Claude Opus 4.5 release, the market became concerned about digital and software companies. Digital companies like DoorDash sold off as the market incorrectly labeled them as having terminal-value risk.

To remind readers, DoorDash has a 65% share of the food-delivery market in the U.S., and has been growing share consistently, as it did in this year's first quarter. It has been broadening its delivery services to include grocery and retail, which has strengthened its relationship with its customers. Over 60% of DoorDash orders come from the top 20% of past subscribers, which is good from a stability and compounding perspective. While growth has remained strong in the U.S. this year, DoorDash has meaningfully accelerated the growth rate at Deliveroo, the European food-delivery leader that it acquired last year, to 20%.

What concerns the market about DoorDash?

One concern is profit-margin expansion. DoorDash announced at the end of last year that it would invest close to $500 million in its technology platform to drive faster growth and more advertising. We think it is on track to do that, and margins could expand significantly over the next several years.

The market has also been concerned about the disintermediation of digital businesses by AI. But my focus is on the fact that it costs DoorDash about $4 less to deliver an order today than when we first invested in it as a private company in 2020. That's because of the physical moat created by its Dasher [delivery person] network, which compounds with density.

Some of the biggest chains and retailers, including Domino's Pizza and Dollar General, are outsourcing delivery to DoorDash. Grocery is reaching an inflection point as younger consumers start to embrace it. And the international business, which doesn't make any money, is turning around faster than we expected.

The new tech platform goes live in the coming months. We expect earnings growth, which has been in the low 20% range, to accelerate. We see DoorDash earning more than $10 a share in 2028, and growing by more than 30% a year. And we see the stock, now around $188, approaching $300.

How about a new name?

There has been a focus this year on megacap IPOs, starting with SpaceX. We are excited about Bending Spoons, which we invested in first in 2023. The stock came public on July 1. As a private company, Bending Spoons distinguished itself by leveraging superior human capital and culture and a superior technology platform to buy modestly growing but undermanaged businesses at attractive prices.

When we first got involved, the company had just acquired Evernote, a note-taking app. It generated about $90 million of revenue and was break-even. Within two years, Bending Spoons drove revenue to $130 million, and achieved an Ebitda [earnings before interest, taxes, depreciation, and amortization] margin of about 60%, in line with the average across its businesses. When we first invested, Bending Spoons was making under $500,000 of Ebitda per Spooner, or employee. Today Ebitda is more than $1 million per Spooner. That speaks to the investment the company is making in the technology businesses it buys.

Bending Spoons is centralized. Evernote has fewer than 20 people at the application level. We believe Bending Spoons' revenue and Ebitda per employee will continue to compound, allowing the company to drive better organic growth and strong operating leverage. The market's concern about software companies should allow management to buy higher-quality companies that fit its model at attractive prices.

Bending Spoons came public at $29 a share, traded up to nearly $44, and now sells for around $35. What sort of upside do you see for the stock?

Based on our estimates, the stock came public at a low-teens multiple of free cash flow. Between organic and acquired growth, we think free cash flow can compound in the 30% range for the next three years. This implies a price target of around $45 to $55, based on 13 to 15 times 2028 free cash flow.

Flipping to the physical economy, Ferguson Enterprises has many parallels with XPO, which I recommended in January. It is a distributor of residential and commercial building products. It is a durable-growth business and a leader in its end markets. It is a scale leader in a scale business, and it is led by an excellent CEO, Kevin Murphy.

Since Murphy took over the North America business in 2017, Ferguson has compounded value at 18% a year, versus the S&P 500's 13%.

Ferguson's customers value availability, convenience, and price, in that order. Scale matters because it enables better supplier margins and higher inventory availability. The key for us is that Ferguson is investing in technology, which allows it to be more efficient, and it can reinvest its savings in better service and better prices to drive scale, much like XPO. Revenue has outgrown its industry in both up and down housing markets, which we like. We expect it to outperform in an up market as the economy broadens out.

The commercial market also hasn't been strong, but Ferguson is taking significant share there. It has adapted to serve complex enterprise customers, including data centers. The company has invested not only in products but value-added engineering, which has allowed it to win customers. It has grown across the board, and particularly in high-value HVAC segments.

When you visit a Ferguson distribution center, it doesn't look like a warehouse. It looks like an Amazon or Walmart distribution center. Higher inventory levels allow for lower costs per unit ordered. The company has invested in its distribution centers in recent years, which is why it has gained market share in both the residential and enterprise segments. We believe the company will be able to outgrow its end markets by three or four percentage points annually.

What are you paying for this growth potential?

The stock trades for around $230 a share, or 18 times next year's estimated earnings, a discount to the S&P 500's multiple. We expect earnings to compound at a midteens rate as the economy broadens out, and the stock to rise to $300-$350.

Thanks, Henry.

John W. Rogers Jr.

Barron's: John, you must be thrilled about the Knicks' championship victory. We know you're a fan of the team and Madison Square Garden Sports' stock. Will the stock market also be a champ this year?

John W. Rogers Jr.: Those games were some of the most amazing I've seen, and the shares of all three companies controlled by Jim Dolan -- MSG Sports, Madison Square Garden Entertainment, and Sphere Entertainment -- are doing well this year.

As for the stock market, it has been the most complex year I can remember. There has been a lot of market volatility. Energy prices have been tumbling, which will be good for the economy and the country. And the Supreme Court ruling against the IEEPA [International Emergency Economic Powers Act] tariffs was a win for American businesses. Some of the tariff refunds will be used for stock buybacks and provide a nice tailwind for the market. Dividends could rise, too.

Many tech stocks have gotten too expensive. Investors feel pressure to own the same names because a handful of stocks have such a profound impact on the major market indexes. People aren't investing in some of these companies for their business fundamentals. I expect AI-related stocks will trade lower as the year goes on. Because these companies account for much of the value of the S&P 500, it will be hard for the index to do well.

I am still bullish about small- and mid-cap stocks, however. I feel confident about the underlying fundamentals of the businesses I discussed in January. I recommended Mattel in last year's midyear Roundtable, and I am recommending it again.

It is a lot cheaper now.

Yes, it has been a disappointing stock. But activist investors are now involved. Southeastern Asset Management sent the company an open letter in May urging management to explore a sale, possibly to Hasbro. Given the current regulatory environment, this would be the time to put these two great companies together.

Mattel's CEO, Ynon Kreiz, has done an excellent job of controlling costs and creating an economically intelligent footprint, but the toy industry is so dependent on the Christmas shopping season. Mattel has iconic brands and intellectual property, such as Barbie, Hot Wheels, Fisher Price, and American Girl. But the popularity of new products is unpredictable.

What really hurt the stock was Mattel's decision to get into digital games more aggressively, and the trading-card business. Hasbro has done well in both businesses, but the market didn't think the investment would enhance Mattel's growth rate. Also, several movies based on Mattel toys were disappointing, but Toy Story 5, which features some of the company's products, could provide a nice tailwind.

Mattel is trading for around $13 a share. What is the company worth?

We estimate that Mattel's private-market value is $25-$26. The stock is vastly undervalued. The company has been buying back stock regularly.

My next recommendation is Jones Lang LaSalle, a commercial real estate services and investment firm. Leasing is an important part of the business, as is buying and selling real estate. They also provide outsourced managed services for property owners and have a money-management subsidiary. Jones continues to diversify its products and geographies around the world.

The stock is roughly flat this year. Why?

People worry that real estate brokers will be replaced by AI. We see no evidence of that yet, especially with regard to complex transactions of the sort Jones handles. The company is using AI to make itself more efficient, and that initiative is going well.

Jones and CBRE Group typically are No. 1 and No. 2 in their business around the world.

Do you own CBRE, too?

We have owned it over the years and like it a lot, but the stock has become expensive. We like the cheaper, smaller Jones better.

Jones is selling at about a 35% discount to the company's private-market value, which we estimate is roughly $450 a share. Historically the stock has traded around 18 times forward earnings, which is reasonable for a company that we think can grow earnings per share by double digits.

Scotts Miracle-Gro is a newer name for us. The company sells iconic lawn and garden products, and is the No. 1 brand in all its key product areas. In the mid-2010s, Scotts moved out of its core markets and got into the hydroponics space. The stock soared, then sank. It didn't work out well.

Jim Hagedorn, the chairman and CEO, stayed on, but stepped down at the end of June. The next generation of leaders is impressive and understands that it is important for Scotts to focus on its core business. We have been impressed with the new CEO, Nate Baxter, through our multiple in-person meetings and conference calls. We are encouraged by his vision for the company and his commitment to innovation.

Scotts is selling for about 14 times next year's estimated earnings, or about a 20% discount to our estimate of private market value.

How will it close the gap?

There is a lot of demand for Scotts products, and the company has a lot of opportunities to cut costs and increase its online distribution.

My last idea is Zebra Technologies, a leader in bar code scanners, RFID readers, enterprise mobile computing, and thermal printing. Earnings are growing by double digits, but investors are worried that skyrocketing memory-chip prices due to AI demand will short-circuit that growth. But Zebra is managing the environment well, with pricing, advanced sourcing, and product redesigns. Demand for its products is growing, as retailers, manufacturers, and logistics leaders seek greater operating and supply-chain efficiencies.

The memory chip concerns have compressed the price/earnings multiple on the stock from well above 20 times to around 14 times today. The stock is selling at a 40% discount to our estimate of private-market value, which is $390 to $400 a share.

Thanks, John.

David Giroux

Barron's : David, what lies ahead for the stock market and your favorite names?

David Giroux: The market is being driven today almost exclusively by AI and AI-derivative stocks. Adjusting for tax reform and euro weakness, and removing energy, S&P 500 earnings grew by 7.1% a year from 2012 to 2023. Making those same adjustments for 2023-26, the annual growth rate of S&P 500 earnings is expected to be north of 14%.

The earnings of the five subsectors related to AI are expected to have grown by 29% annually from 2023 to 2026. They are media and entertainment, consumer-discretionary distribution and retail, semiconductors and semi equipment, software and services, including Microsoft, and technology and hardware. The rest of the market is expected to have grown earnings by 6% to 7% annually from 2023-26, similar to its growth rate in 2012-23. Globally, AI and AI derivatives have added about $27 trillion of market cap since the end of 2022.

There are some good values in the AI space, but there are a lot of great values elsewhere.

You found great values in biotech and utilities in January. Where are you finding them now?

I will probably sound like a broken record for the next couple of years highlighting a unique opportunity in small- and mid-cap, or SMID, biotech. Large pharma companies have a $400 billion to $500 billion patent-expiration hole to fill over the next decade that they can't overcome with internal research and development efforts alone. A limited number of SMID biotech companies have the potential to be $3 billion to $10 billion revenue generators over time. Large pharma is generating strong cash flows, which allows companies to do deals. Their shareholders want them to do deals.

For example, AbbVie recently agreed to buy Apogee Therapeutics, which I recommended in January, for $11 billion. AbbVie gained more than $20 billion in market cap when the deal was announced. It was a win-win. I expect to see a tremendous number of SMID biotechs sold in the next five years for a 50% to 100% premium.

Today I will highlight seven: Ascendis Pharma A/S, MoonLake Immunotherapeutics, Dyne Therapeutics, Vaxcyte, Cytokinetics, CG Oncology, and Denali Therapeutics. I would be shocked if all weren't acquired in the next few years for big premiums over their current value.

Are there reasons to own the group other than the potential for buyouts?

Yes. A lot of companies are conducting Phase 2 and Phase 3 clinical trials for drugs that treat serious diseases and conditions. There is a high probability they could become $2 billion, $5 billion, or even $10 billion [in revenue] products. I recommended Cytokinetics in January when the stock was in the $30s. Now it is in the $80s due to success in a recent Phase 3 trial that doubles its total addressable market.

I'll also mention Alnylam Pharmaceuticals, whose long-term fundamental setup is amazing. While the odds of a takeout are lower given the company's $37 billion market cap, if I were the CEO of Merck or Eli Lilly, I would buy it in a heartbeat -- no pun intended.

Perhaps they will read this and take your advice.

It would be a transformative acquisition. Alnylam is the leader in drugs targeting an underdiagnosed cardiovascular condition caused by TTR, or transthyretin [a protein]. The drug uses small inferencing RNA [SiRNA] to essentially silence the gene causing the problem. It has the best drug today, and will have an even better best-in-class product in 2028-30 that will provide patent-protected growth through 2045. Alnylam also has an underappreciated SiRNA pipeline that could produce multiple blockbusters in the next five years.

If Merck or Lilly buys the company for $80 billion, that would be a great outcome for both Alnylam's and the acquirer's shareholders, similar to AbbVie and Apogee. Even if they don't, this will still be one of the best-performing large pharma companies over the next decade.

My next idea is Cencora, a pharma distributor. It is a compelling opportunity for longer-term investors, especially on a risk-adjusted basis. Cencora will be one of the biggest beneficiaries of the coming patent cliff for pharma, as distribution of biosimilars is where it earns the highest margins and absolute profit dollars per drug. The company has a decadelong tailwind from the same patent cliff mentioned before. The stock is down about 15% this year after a strong performance in 2024 and '25.

What happened?

Drug distributors were probably over-owned coming into the year, and price/earnings multiples were elevated. This year, a weird confluence of factors created near-term uncertainty for Cencora. The company had weather issues in the first quarter and tough first-half comparisons. Also, it made an attractive oncology acquisition that was dilutive in the first half but will be accretive in the second half and into 2027 and 2028. The stock has derated to 14 times 2027 estimated earnings from 20 times not long ago.

Cencora, formerly known as AmerisourceBergen, should be able to grow earnings at a midteens rate through the end of the decade, with accelerating growth in 2028-29 from a series of blockbuster Medicare Part B drugs going off-patent. That will drive massive adoption of biosimilars. Businesses that routinely grow by low double digits should increase to more than half of earnings in 2027 and 60% to 65% by 2030, up from the mid-30s back in 2018. We expect Cencora's earnings per share to double in the next five years, while the P/E multiple returns to the high teens.

Cencora is one of the most defensive stocks in the market. It has generated positive returns 48% of the time on days when the S&P 500 has been down 1.5 percentage points or more. Lately there has been some insider buying and a pickup in share-repurchase activity.

What do you like outside the healthcare sector?

I have recommended Aurora Innovation in the past. It specializes in autonomous trucking technology. We expect Aurora to lead the first large-scale deployment of long-haul AV trucks.

The stock has performed poorly since it came public in 2021, although it is up sharply this year. What does the market see now?

There have been fits and starts in this space in the past 10 years, but we believe the inflection point for AV trucks is imminent. Big fleet operators like FedEx believe self-driving trucks are ready for prime time. Volvo has outlined targets for 25,000 AV trucks on the road by 2030 and 220,000 by 2035.

AV trucks offer a compelling labor arbitrage. They are roughly 30% cheaper to operate than trucks with human drivers. They offer fuel efficiencies and medium- to long-term savings on insurance. In addition, AV trucks can run at twice the utilization rate of driven trucks. On routes of 600 miles or more, which account for 60% of the market, AV technology can lift trucking-company margins by seven percentage points to more than twice current levels in many cases.

Aurora is led by industry pioneers who have left their fingerprints on Waymo, Tesla, and smaller start-ups. It has commercial partnerships with every original equipment manufacturer except Daimler, and its hardware strategy deepens its competitive lead.

Alphabet's Waymo is valued in the private market at more than $100 billion, and Tesla arguably gets $500 billion of AV credit in its stock price. In Aurora's case, think about AVs having 20% of about a 200-billion-mile market, and Aurora having a 50% market share by 2035. That implies $20 billion of revenue, with software-like margins. If Aurora trades for 15 times sales, it could be a $300 billion company in eight or nine years, and a 25-bagger from here.

We don't hear about many of those. What else is on your mind?

The market is mispricing many companies within the AI ecosystem, given how the next five years are likely to play out. We see three mega-themes.

No. 1, we expect to see a big slowdown in the growth rate of AI capex, given the law of large numbers, balance-sheet constraints, and potentially regulatory issues. No. 2, the mix of AI capex will shift more toward short-cycle spending from long-cycle spending. That is negative for companies tied more closely to long-cycle spending.

No. 3, we foresee a diversity of compute. Nvidia's monopoly in chips is ending. Anthropic has shown everyone what the future looks like. It has been able to build the world's best LLM on low-cost ASICs [application-specific integrated circuits] from Google and Amazon. As the market evolves more toward inference workloads and away from training, ASICs and CPUs [central processing units] will become much more competitive with Nvidia's GPUs [graphics processing units].

What does this mean for AI-related stocks?

The market is putting very high multiples on 2029-30 AI earnings per share that will likely be viewed in two to four years as peak-ish. This is negative for companies such as Caterpillar, GE Vernova, and Eaton. Caterpillar traded for 16 times earnings over the past 10 years. Now it trades for 38 times next 12-month earnings due to enthusiasm for its data-center power business. The market is putting a P/E multiple of 230 on the current data-center power business and a multiple of 70 on 2030's peak data-center earnings. A lot of capacity is being added by Caterpillar, Cummins, and other industry participants. This won't end well.

Neoclouds' business model was renting out Nvidia GPUs. In a multi-silicon-orchestration world, their value proposition disappears. Most of their large customers, such as Microsoft, Meta Platforms, and Amazon, will in-source this business over time. This is negative for Dell Technologies, Super Micro Computer, Hewlett Packard Enterprise, Caterpillar, and Nvidia.

We also see a diversity of compute winners, including Advanced Micro Devices, Broadcom, and Taiwan Semiconductor Manufacturing. Microsoft, Amazon, and Alphabet will be winners, too. The market will be shocked by how much free cash flow they will generate in the 2030-32 period. Some of the rents accruing to Nvidia will accrue to the hyperscalers [giant cloud service providers] as they work more with their own custom silicon. It is also possible they will start benefiting from lower-cost internal LLMs.

What does this mean for the broader market?

This year S&P 500 earnings are expected to grow by 20% or so, driven principally by AI and AI derivatives in the index. Next year, they could grow by 18%. But then, the rate of earnings growth will slow dramatically. Earnings could grow by 11% in 2028, and growth will head toward high single digits by the end of the decade.

The good news is that the deceleration in AI earnings will make other parts of the market more attractive.

That sounds like your kind of market. Thanks, David.

Abby Joseph Cohen

Barron's: It has been an exciting year for investors. What's next?

Abby Cohen: The U.S. market has performed well -- better than I had expected. Investors have been momentum-focused, emphasizing a relatively small number of stocks to the detriment of other good opportunities. Some of those opportunities are AI-adjacent, and some are in different areas. The rotation away from the AI trade has already begun.

Some AI beneficiaries have been very profitable and have had good earnings momentum. They have also had outstanding share-price momentum, and their valuations aren't as appealing as they were.

Do you expect the major stock indexes to end the year higher from here?

I am uneasy about the macro outlook because of two problems that will be hard to address simultaneously. One is inflation. Even if you strip out the inflationary pressure coming from higher energy and food prices, core inflation is running much hotter than the Federal Reserve has indicated it would like. The Fed has an annual inflation target of 2%, and core inflation has been running north of 3%.

The other concern is the economic backdrop, which offers a mixed picture. There has been a dramatic slowdown in job creation in the U.S., even though, for mathematical reasons, the unemployment rate hasn't changed much. Ultimately, long-term economic growth is related to growth in the labor force, and that has moved to a much lower trajectory than we are accustomed to seeing. The intermediate- to long-term consequences for consumer spending and housing could be pronounced.

I am particularly concerned about middle-income consumers. Inflation is running faster than increases in wages, which means that many households aren't keeping up with inflation. If you look at household balance sheets, there has been a big jump in the use of credit.

How will the Warsh Fed tackle inflation?

Fed officials will scratch their heads for a while. I agree with [Fed Chairman] Kevin Warsh that U.S. economic statistics aren't keeping up with what is happening in the economy. Our inflation and GDP data are based on statistical samples. In the 1990s and early 2000s, the U.S. was shifting toward a technology-based economy from an industrial one. Yet the younger, faster-growing industries were underrepresented in the samples. When the actual data, not samples, became available a few years later, they made clear what had happened.

The economy is undergoing another structural change now, and we don't have up-to-date statistics to measure it. I hope that one of Warsh's task forces will address this issue and the need for more funding for the country's statistical agencies.

Let's have a look at the investment opportunities you mentioned.

Three AI-adjacent companies that haven't done well are software providers ServiceNow, which I recommended in January; SAP; and Monday.com. I don't believe software companies will be AI losers. Most enterprises want someone else looking after their ERP [enterprise resource planning] and CRM [customer relationship management] systems. Perhaps companies like ServiceNow and SAP didn't move quickly enough to introduce their client bases to AI products, but that has changed in the past six months. Both companies have released new suites of products.

Monday is a newer company that operates a modular software platform. It recently took advantage of the weakness in software stocks to repurchase shares. The stock sells near the bottom of its 52-week price range of $58 to $315 and has been buying back shares at an average price of about $73 a share.

Since July 1, 2025, Monday is down 74%, and SAP and ServiceNow are each down 48%.

Both ServiceNow and SAP are heavily covered by analysts. The consensus earnings estimates for 2027 are roughly $5.00 a share for ServiceNow and 8.50 euros [$9.70] for SAP, with resulting P/E ratios of 20 times and 14 times, respectively. Monday is less well covered; it currently trades for roughly 13 times 2027 earnings estimates. Most analysts are providing "adjusted" earnings estimates in this sector, adjusting for factors like acquisitions and foreign exchange.

What else do you like?

My other theme concerns energy use associated with AI. We now recognize that data centers have enormous energy needs and must be placed where they have appropriate access to energy. I have looked internationally for opportunities, and have two recommendations, both spinouts from China Three Gorges. These companies generate power using cleaner alternative-energy sources, not coal or oil.

China Three Gorges is a government-owned entity that built a massive and controversial hydroelectric dam on China's Yangtze River in the early 2000s. The project flooded out communities and caused extensive environmental damage, which it has since remediated. Since then, it has spun out two publicly traded companies that I find interesting.

China Yangtze Power, traded in Shanghai, operates a number of large dams in China. The company doesn't have notable capital needs because its capacity is already largely built and its operating expenses are well controlled. This hydroelectric power is just one of the alternative sources that China has been emphasizing. China Yangtze Power isn't dependent on carbon-based fuels and has become more cost competitive with hydrocarbons than in earlier years.

The other spinout, China Three Gorges Renewables, also trades in Shanghai. It is engaged in additional forms of alternative energy, such as tidal power, solar, and wind, and is building facilities in China and other countries. It isn't as profitable as Yangtze because it has a lot of capital expenses for these newer projects, but it offers interesting growth opportunities.

China Yangtze has a profit margin of about 41%, which exceeds that of most U.S. utilities by 10 or 15 percentage points. The stock trades for about 18 times earnings, and the dividend yield is about 3.5%. Three Gorges Renewables has a profit margin of about 13%, impeded by its substantial capital costs. The stock trades at a multiple of roughly 25 times earnings, bolstered by its strong growth profile. The dividend yield is 1.1%.

China Yangtze's stock has done reasonably well in the past few years, but the Renewables stock hasn't. What are the prospects for a turnaround?

The stock roughly doubled in price at the time of its 2021 IPO, declined in the subsequent two years, and then flattened out. Some of the projects now under way include hybrid solar and wind facilities in two Chinese deserts expected to be completed in 2027-28; a solar plant expansion in Spain scheduled for completion in 2027; and hydroelectric facilities being upgraded in Brazil and Peru, expected to be completed by 2028. There are other activities in more than three dozen countries. You can buy China Yangtze for the cash flow and China Three Gorges Renewables for the growth opportunity. And let's not forget that both have a powerful parent in the original China Three Gorges, which is owned by the Chinese government.

My next idea, Kao, is a consumer company in Japan, where middle-income consumers are doing well. Japan was a global laggard for several decades in economic growth, but the economy has been perking up, real incomes are growing, and consumer confidence is better than in the U.S. Kao trades in Tokyo, and via American depositary receipts under the ticker KAOOY. The company reminds me of an early-stage Procter & Gamble. Both started in the 19th century as soap companies.

About 50% of Kao's customer base is Japanese, but it has been building out other geographies. Core household products, such as detergents, account for about half the business. The company has seen significant growth in brands outside Japan, such as Molton Brown, a British maker of bath and body products. Other Kao brands include Oribe and John Frieda, in hair care, and Jergens in skin care.

Kao is selling for 20 times consensus 2027 earnings. Annualized revenue growth of 4% in 2025-26 has produced earnings gains of above 12%, although earnings-per-share growth is likely to slow. There is a 2.4% yield. Return on equity is 12.5%, not as high as P&G, but not bad. The stock has been flat this year, but the company's international diversification is promising and should be an additional source of growth.

Speaking of international markets, you recommended two India ETFs in January: iShares MSCI India and iShares India 50. Both have struggled this year. What is your view of India now?

India has been disappointing from a macro perspective. Some of the reforms that people had expected to occur haven't yet happened. Also, the IPO market has been flat, so there has been a dearth of new capital coming into India. Then there is the geopolitical situation. Like other lower-income nations, India is much more dependent on energy than the U.S. as a percentage of total spending. Rising energy prices and supply disruptions have raised costs for fertilizer and food. All this has harmed India, but let's wait to see what happens in the second half of the year.

I have one more international pick: Hanwha Aerospace, a Korean aerospace and defense company. It competes with the other prime defense manufacturers but is focused on manufacturing products in a shorter time frame, which will become more important across the industry. Current military conflicts and the plans for several nations to increase their spending will bolster demand.

Hanwha has production facilities not only in Korea but also in Australia and Europe. At about 15%, it doesn't have the profit margins of some of the big defense contractors, which benefit from longstanding contracts, and its dividend yield is only 0.6%, compared with the 2% to 3% yields of some U.S. and European defense companies, but revenue is growing rapidly.

The stock sells for about 24 times 2026 estimated earnings and about 17 times '27 estimates. It is selling for 2.5 to three times book value. Hanwha has a return on equity of about 21% to 22%.

Thank you, Abby.

Scott Black

Barron's : Scott, let's start with the big picture. How do the economy and market look to you?

Scott Black: The S&P 500 closed yesterday [July 1] at 7483.23. Based on my 2026 earnings estimate of $340, the index is trading for 22 times earnings. The Russell 2000 small-cap index has a price/earnings multiple of 29.5 times. The Nasdaq trades for 26.3 times this year's earnings. The S&P is expensive based on historical norms, but earnings are expected to rise 26% this year and the fundamentals are favorable.

It is a concentrated market: The 10 largest stocks in the S&P 500 account for 39.2% of the value of the index. The top 10 in the Nasdaq account for 47.5%. But with the exception of Broadcom, at 32 times earnings, and Advanced Micro Devices, at 78 times, the biggest stocks are reasonably priced in light of their growth. Nvidia sells for 22 times this year's earnings. Alphabet is at 25 times, Microsoft at 22 times, Amazon at 27 times, and Meta Platforms at 17 times. It is an unusual market. The speculation lately has been in small-cap stocks.

Do you expect the S&P 500 to keep climbing?

I think it's possible, as earnings growth materializes. Also, the U.S. economy is healthy. Gross domestic product should grow about 2.1% to 2.2% this year and 1.7% to 2.1% next year. But many households can't afford the basic necessities because of inflation and decelerating growth in real wages. More people are defending their living standards by using credit cards. Total credit-card debt hit $1.35 trillion in April, a record.

Monetary policy, contrary to assumptions, was expansionary even before Kevin Warsh became chairman of the Fed. M1 is up 5.8% year over year, and M2 is up 5.6%. [Both are money-supply measures.] The Fed's balance sheet has increased in the past year, to $6.79 trillion from $6.14 trillion. If you believe Milton Friedman, the change in the inflation rate is a function of the change in the money supply over time. Annual inflation is above 3%. We are light years away from the Fed's 2% target.

If higher inflation persists, I wouldn't be surprised to see the Fed increase interest rates by a quarter of a percentage point at year end. Barron's and others have written that Warsh wants to emulate Alan Greenspan, but when Greenspan served as Fed chair in the 1990s, we had a balanced federal budget. That is hardly the case today.

The projected U.S. budget deficit for this fiscal year is $1.85 trillion, or 5.8% of GDP. The interest expense on our debt is over $1 trillion a year, which is larger than the defense budget. Projections show that by 2030, the public debt will be $40 trillion. These are unsustainable numbers.

But the stock market isn't worried, and the bond market is fairly calm, for now.

The stock market reflects expectations for corporate earnings growth. At some point, we will have to pay the piper.

To change subjects, which stocks intrigue you these days?

At Delphi we seek to invest in companies with high returns on equity, absolutely low P/Es, strong free-cash-flow generation, and sustainable earnings power. Expedia Group, a global travel marketplace, fits the bill. The stock closed last night at $264.54. The market cap is $31.7 billion. The company pays a dividend of $1.76 a share, for a 0.7% yield. Earnings have risen for the past five years.

Expedia Group is the parent company of Expedia, Hotels.com, Travelocity, Vrbo, and Orbitz. The company has 16,000 employees in 50 countries, with 3.6 million lodging properties on its platforms. The merchant model, or direct to consumer, accounts for 70% of revenue. Working with travel agencies or corporate customers is 22%, and the last 8% is advertising. Lodging is 80% of the business. Booking Holdings and Expedia together control 46% of the online travel market. Booking is about twice as big as Expedia in revenue.

Expedia had $14.73 billion of revenue last year and Ebitda of $3.5 billion. I do my own financial models, and am estimating revenue of $16 billion this year and Ebitda of $3.968 billion. I expect the company to earn $20.04 a share, higher than Wall Street's estimate of $19.77. If you subtract $29.78 in net cash from the stock price and divide the remainder by earnings, you get a price/earnings multiple of 11.7. But if you add back $3.40 a share of stock-based compensation, the P/E multiple is 14.1, which still isn't expensive relative to the market.

Expedia is a cash machine. In 2024 it generated $2.23 billion in excess cash, rising to $3.11 billion last year. The company has bought back $4.56 billion of stock in the past 2 1/4 years. I expect Expedia to buy back another $1.15 billion of stock in the remainder of this year, which means it will reduce the share count by another five million shares.

Why do you favor Expedia over Booking?

Expedia isn't as strong as Booking internationally, but there is plenty of room to grow. Earnings will rise by 17% to 18% both this year and next. Booking has a higher P/E of 17.5, or 18.8 excluding stock-based compensation. It is probably a better company, and it is bigger, but its advantages don't warrant such a large differential in P/E ratios. Expedia has an investment-grade credit rating, and it is well managed.

Urban Outfitters is my next idea. It is one of the few companies with unadjusted earnings. What you see is what you get. The stock is $70.57 and there are 85.6 million shares, for a market cap of $6 billion. There is no dividend. The company has 801 stores, including 276 Free People stores, 256 Anthropologie stores, 252 Urban Outfitters, and assorted others. It also has a new online subscription rental business, Nuuly. That business did $568 million in revenue last year and has more than 500,000 subscribers.

Urban Outfitters stores are aimed at young adults, and Free People targets an 18-34 customer who likes bohemian fashions. Anthropologie is aimed at somewhat older women in a higher-income demographic. The Urban Outfitters stores are roughly 9,000-10,000 square feet; the Anthropologie stores are 7,000-10,000 square feet. The Free People stores are small, at 2,000-3,000 square feet. The company plans to add about 39 net stores this year, which works out to about 4.5% growth in store count, and it is budgeting for about 3% to 4% comparable store growth.

What is your earnings model?

I estimate revenue of $6.658 billion, up 8%, for the fiscal year ending next January. The company figures gross margins will improve by a quarter of a percentage point, so that implies gross-margin income of $2.412 billion. We estimate pretax profit of $696 million. Taxed at a 22.5% rate, that leaves $540 million in net income, or $6.14 a share.

Urban Outfitters' return on equity should be 17.7% this year, and return on total capital, 14.9%. The stock trades for about 11.5 times earnings, which is cheap for a company whose earnings are expected to grow by more than 20%. The company makes efficient use of its working capital. Inventory turns are excellent, and free cash flow should total as much as $400 million this fiscal year, up from $315 million last year.

The company is stepping up its capex to $475 million, spending 35% on new stores, 50% on warehouses and logistics, and 15% on IT [information technology]. About 87% of the stores are in North America, and 13% in Europe. Net debt to equity is about 0.34.

You recommended Dell Technologies in January. It was the group's best pick, by far, with a total return of 238.5% through the end of June. Should investors hang on?

Dell shot the lights out. At a recent $409, the stock was trading for 19 times the next fiscal year's estimated earnings of $21.40 a share. That is below the market multiple. The one negative now is that memory costs are going way up, but demand has been hot.

I recently saw a comparison between Dell's hyperscaler servers and Hewlett Packard Enterprises', and Dell won hands down. The cost of ownership is cheaper, and Dell's servers are easier to maintain. The hyperscalers are going to spend $750 billion this year and about $1 trillion next year, and a substantial amount of that money will go into hardware. Dell is still in the sweet spot. It seems reasonable to hang on.

Thank you, Scott.

Rajiv Jain

   Barron's:   Are you feeling more bullish now than in January about the market and the AI trade? 

Rajiv Jain: The data points so far haven't refuted our bearish conclusions. We think the underpinnings of our bearish argument are even stronger now.

This is a capex-driven earnings boom. But there is an accounting issue, which we have written about. When companies spend money on capex, that gets booked immediately by the recipients as revenue and profits. But it gets amortized and depreciated over five, six, seven years. The big spenders are now under pressure. If the Mag Seven underperform, sooner or later they will cut capex. Most hyperscalers look much better, though, as valuations have come down since January.

The more fundamental problem is that the demands of two companies are supporting a significant part of this spending: OpenAI and Anthropic. OpenAI had a loss of about $39 billion last year on $13 billion of revenue, and the loss percentage is increasing.

Meanwhile, open-source AI models are gaining share rapidly. A recent report from the Information, analyzing OpenRouter data, showed that roughly two-thirds of total token consumption now comes from open-source models, up from a one-third share at the start of the year, with much of that growth driven by Chinese models, as enterprises begin rationalizing token spend as frontier model costs continue to rise. If these closed-source model providers don't have enough revenue growth, they won't be able to continue to raise money. Capital needs are enormous for this to keep scaling up.

These things can last longer than we think, but some cracks are starting to appear. The cost of capital is going up across the ecosystem. Bank of America just forecast three interest-rate hikes by the end of the year.

That isn't the consensus view.

I agree. But if inflation continues to run more than 3%, I don't see how the Federal Reserve doesn't raise rates. The two-year Treasury yield is telling the same story. It has been above 4% since mid-May. And that is without oil heading above $70 a barrel, which we expect it to do for multiple reasons.

Even if the Fed hikes only once or twice, it won't be good for the companies leading the market. The S&P 500 has never been led by so many cyclical companies. Hence, the market's price/earnings multiple should be lower. GE Vernova is trading for 50 times earnings. That isn't sustainable.

The good news is that opportunities have opened up elsewhere in the market. Defensive stocks look attractive. They may benefit from multiple expansion, and earnings look resilient. I still like all the defensive names I recommended in January. Now we are also bullish on energy.

Many people expect oil prices to fall when the Iran war ends. Why do you see prices heading higher?

First, there is no end to the war. Second, it seems Iran essentially might control the Strait of Hormuz forever. If that happens, Iran kind of becomes OPEC. It can essentially pick and choose whose oil will be transported and sold. Third, supply isn't going to come back on the market tomorrow, and we don't believe there has been any demand destruction in China. The Chinese have merely reduced temporarily what they bought.

Let's say we are wrong about oil. Most sell-side models assume $70-a-barrel oil, give or take. ExxonMobil Holdings says it can grow earnings by double digits for the next five years at $65 oil. Look at TotalEnergies. At $70 oil, the company can generate a 10% total return, including a 6% dividend yield, buy back 4% of its shares, and trade at eight times net earnings.

What are your top picks in the energy sector?

The biggest companies are the best bets because they have the best assets. You can buy Exxon, Total, Petrobras, BP, or PetroChina, et cetera. Almost any major oil company looks like a buy as most have great capital discipline.

This is among the worst oil crises we have ever seen. It makes no sense that our strategic petroleum reserve is at a 43-year low. Everyone will have to replenish their oil supply.

This is an attractive setup. And, by the way, everyone is underinvested in energy. The shale business is plateauing. Most shale oil companies can't increase their production, and the depletion rate runs around 30%.

The bullish case for oil relates directly to higher interest rates. Two-year Treasury yields are worth watching. If they keep rising, the unraveling [in the stock market] will be painful. Energy would be very defensive, too. It is a good hedge.

Do you want to make any changes to your January recommendations?

No. Keep them all on the list. We particularly like American Water Works. It has nothing to do with power generation. Its underlying growth continues. The stock trades for 20 to 21 times earnings. That doesn't seem like a bargain, but when you consider that earnings per share have grown by 8% to 9% a year for the past five years and can continue to grow at a similar rate, it is almost like a bond.

Thank you, Rajiv.

Sonal Desai

Barron's : The Federal Reserve has a new chairman, Kevin Warsh. As a bond investor, are you pleased with what you have heard so far?

Sonal Desai: I was pleased as soon as I learned that he was the president's nominee. I am on record saying that I thought Warsh was arguably the most hawkish Fed nominee -- and now, Fed chairman -- since Paul Volcker. He is certainly the most orthodox Fed leader we have had in this millennium, let's put it that way.

What do you mean by that?

What I mean is that he isn't going to calm the markets' fears every time markets turn wobbly. I welcome that. Since the financial crisis of 2008-09, we have all become Fed watchers instead of fundamentals watchers. Yes, we may see more market volatility under the Warsh Fed, but investors will develop a better appreciation of risk when they try to understand the economic fundamentals.

The Fed has a dual mandate. It has failed to achieve one side of its mandate -- price stability -- for five years and counting. It has handily met the other side. The fact that unemployment has risen doesn't mean the labor market is weak. It is still pretty solid.

Do you expect the Fed to hike interest rates this year to tame inflation?

My baseline forecast is no hike. The Fed could take advantage of market pricing and try to sneak in a hike, but it is likely we are getting close to a peak inflation print. If there is a resumption of upward pressure on inflation from either rising oil prices or the second-order effects of higher energy prices, the Fed will raise rates as needed. I wouldn't have said that in January, but Warsh's arrival has given cover to the hawks on the Federal Open Market Committee.

As I said in January, and for the past several years, I believe the appropriate nominal federal-funds rate is closer to 4%-4.25% than 3.50%-3.75%. Will the Fed get there? I'm not sure, but there is a better likelihood under the current chairman.

As for market rates, I am sticking to my forecast that the 10-year Treasury will yield around 4.75% or higher at year end.

What are the implications for investors?

I want to make changes to several of my January picks. First, I am closing out my recommendation of the SPDR Gold Shares ETF. A more hawkish Fed undermines the dollar-debasement trade. Also, after several years of outsize gains, investors are taking profits. GLD still has some hedge and diversification value, but the environment isn't as favorable for gold anymore.

Broadly speaking in fixed income, we are relatively neutral in duration. Nor do we expect widespread corporate defaults. My mortgage-related recommendations, Annaly Capital Management and AGNC Investment, are generating about a 13% dividend yield, and I am still comfortable with the fundamentals. Annaly is a high-octane carry play on agency mortgage-backed securities [MBS] and residential credit, and its recent dividend increase signals management's confidence in its near-term earnings power. [A carry play refers to the practice of borrowing money at lower interest rates to buy assets that pay a higher interest rate.]

The dividend yield, relatively conservative leverage posture, hedge ratio, and diversified mortgage platform make it worth keeping. [A hedge ratio measures the percentage of a portfolio where hedging strategies have been implemented to protect from macroeconomic and interest rate volatility.]

And AGNC?

It is supported by government-backed collateral, muted refinancing activity, stable funding, and improved net interest spread. The return case is simple: Collect the monthly dividend while agency MBS spreads and funding markets remain reasonably stable.

Also, I still like emerging markets and the Eaton Vance Emerging Markets Debt Opportunities fund, which yields more than 8%. With exposure across local and hard-currency sovereigns plus corporates, the fund is positioned to harvest high income while using active country selection to sidestep weak policy regimes and idiosyncratic blowups.

As for my other picks, I'm sticking with the Lord Abbett Income fund, a diversified income fund centered on triple-B-rated debt. It invests in high-yield bonds, loans, emerging markets, and some securitized sectors, and yields about 5.2%.

I'm also sticking with the Franklin Dynamic Municipal Bond ETF. Its active management allows for flexibility across duration and credit as muni dispersion rises. It has a 4.0% distribution rate, equivalent to about a 6.8% taxable yield as of May 31, which makes it a strong second-half hold.

That brings us to Franklin Income.

Franklin Income remains a core income holding, with one of the longest uninterrupted dividend track records in the business -- 75 years. It currently yields about 5.5%. The fund blends fixed income, convertible bonds, equity-linked notes, and dividend-paying equities, providing both high dividends and equity upside.

Finally, I am swapping the Putnam Core Bond fund for Putnam Ultra Short Duration Income. The Core fund is still a good option, but the Ultra Short fund gives up little yield while reducing duration risk. It has a 0.5-year effective duration and invests in short-duration, investment-grade money-market and fixed-income securities, making it a cleaner carry vehicle than a traditional core bond fund if long rates remain volatile.

Thanks for the update, Sonal.

Todd Ahlsten

   Barron's:   How much further can this market run? 

Todd Ahlsten: We remain positive on the market. We had a target price of 7500 to 7800 on the S&P 500 at the beginning of the year, and the index touched the low end of that range. We now see upside to 8100 or so, which implies a price/earnings ratio of 21 times 2027 estimated earnings of $385. The caveat is that it is a narrow, momentum-driven market with most of the earnings growth coming from AI-related stocks.

We also remain positive on the economy, which we believe rests on four pillars. One is U.S. earnings exceptionalism. Estimates for earnings growth in 2026 have accelerated from 15% in January to around 25% now. Next, the AI buildout remains incredibly robust. Third is economic resilience. Despite tariffs, higher oil prices, and geopolitical chaos, gross domestic product continues to grow by 2%-plus a year. Finally, if the Federal Reserve raises short-term interest rates, that could bring down yields on longer-term bonds, which would be positive for risk assets.

Does anything about the AI buildout concern you?

The market is getting it right that this is a generational investment trend. That said, memory prices have gone through the roof. One question is whether prices reach a point where we can't get enough memory, and outsize memory profits slow down broader AI adoption. A second concern is that all the capital spending on AI is causing some inflation. The broader market has a toppy feeling. Stocks can keep rising, but the but the margin of safety isn't what it was.

Where do you see a wider margin of safety?

I am going to recommend some physical-world companies that will let you sleep well at night -- like Vulcan Materials, which has a $40 billion market cap. Vulcan is really America's tollbooth on concrete. It is one of the country's largest producers of aggregates, or the crushed stone, sand, and gravel that form the literal foundations of roads, bridges, homes, factories, and energy infrastructure.

Rocks are heavy, transportation costs matter, and new quarries are almost impossible to permit. Vulcan owns rocks in the right places, giving it a geological moat, or a 50-year-plus reserve life that is difficult, expensive, and often legally impossible to replicate.

The company is No. 1 or No. 2 in markets representing roughly 90% of its revenue. About 40% to 55% of its products are used in public infrastructure, such as roads and bridges, and the rest go to the private construction market. We like that split, which means the market isn't too cyclical. We have a three-year stock price target of more than $400; the stock is around $313 now. That implies a double-digit internal rate of return.

What will drive returns?

The stock has lagged behind the market for the past few years. Higher interest rates have slowed home-building and construction. But Vulcan isn't tied only to cyclical markets, housing, and GDP. There are multiyear public infrastructure projects ahead, given state funding of highways and new layers of demand from data centers, energy infrastructure, and reshoring. And we expect the cyclical businesses to improve, especially if long-term rates come down.

The micro backdrop is also cool. Vulcan's cash gross profit rose from around $7 a ton in 2021 to $11 a ton in 2025. We expect it to increase to $15 a ton by 2028. The improvement is driven by four factors: price, volume, utilization, and cost.

Because aggregates are locally sourced and expensive to transport, Vulcan can raise prices faster than costs go up, and it is doing a good job controlling costs. Management has guided for annual price increases of 4% to 6%. If annual volume grows by mid-single digits and costs are controlled, that could lead to 14% Ebit [earnings before interest and taxes] growth in the next three years, according to our models.

What could go wrong?

Rising energy prices would be problematic. Higher explosives costs would also be a problem, because the company uses explosives to release rocks. There could also be a temporary air pocket if construction legislation stalls, and there are always environmental issues. But Vulcan's environmental record is good, and its accident rates are the lowest in the industry. These are things we care about at Parnassus. The stock's discount reflects the risks.

My next pick, Linde, is the world's leading industrial gases company. I have recommended it before and it has compounded value. Linde supplies oxygen, nitrogen, hydrogen, carbon dioxide, and other things I should have studied more in high school. Its gases are used in chemicals, refining, electronics, healthcare, data centers, shipbuilding, and so forth.

Linde builds facilities near customer sites and has long-term supply agreements. This makes the company a mission-critical, over-the-fence, nonregulated utility across different industry verticals. It boils down to a play on global GDP.

Linde is building an industrial backlog and participates in some of the world's key GDP drivers without taking commodity risk. It supplies ultrahigh-purity gases to semiconductor fabs and hydrogen for emerging clean-energy applications. Oxygen and nitrogen are critical in healthcare, food preservation, water treatment, and industrial production. Its gases are even used in space launches, a business that has quadrupled in the past three years. If you missed the SpaceX IPO, there is Linde.

The space business could exceed $1 billion by the end of the decade. In addition, rocket size is growing. The largest rockets use 10 times the gas of the smaller ones, and much of this high-margin gas will come from Linde.

What has been the biggest driver of Linde's growth until now?

The company just compounds high returns on capital. Its business model gives it pricing power, and it has strong operating-margin discipline. Its take-or-pay contracts give it exceptional resiliency.

The catch is valuation. The stock is selling for 28 times earnings. Linde rarely looks cheap because the business rarely disappoints. The stock is selling for around $540 a share, and our year-end 2028 target is $654, which is 27 times fiscal-year 2029 earnings. This is an 11%-plus earnings compounder over three years.

Finally, Danaher is a second-order AI play. It is a picks-and-shovels compounder for the next biotech cycle. Others have recommended it at the Roundtable in the past.

What is the attraction now?

Danaher's end markets, such as life-sciences instruments and bioprocessing, are emerging from a cyclical trough.

AlphaFold is an AI program developed by Alphabet that can predict a protein's 3-D structure based on its amino acid sequence. This breakthrough is making it much easier to understand biological mechanisms. Ultimately, it could expand the number of drug targets, protein engineering programs, and biologic candidates.

AlphaFold doesn't eliminate the need for wet-lab validation and assays, however, and that is where Danaher can benefit. We see AI accelerating biological discovery, which means more customers will need Danaher's tools. A bottleneck may develop in tools for experimenting with and validating AI proteins. If we can invest ahead of this bottleneck, there could be velocity in the stock.

At the same time, Danaher has faced a slowdown due to a decline in biotech funding and rising interest rates. It has been a tough market for biotech IPOs. China has seen a slowdown in demand for biotech tools.

But the stock is trading for only 20 times forward earnings, with consensus expectations for 6% annual revenue growth and 9% growth in earnings per share over the next three years. We think it could rerate to 25 to 30 times earnings as the company beats revenue and earnings estimates due to a cyclical recovery across its biotech, life-sciences, and diagnostics divisions. Danaher is trading for $194. It could trade up to $290 or more in three years.

You made a compelling case for Boston Scientific at the January Roundtable, but the stock has fallen sharply. Should investors hang on or sell?

I am closing out the Boston Scientific recommendation. We misjudged the competitive dynamic in Boston's pulsed-field ablation cardiac business, where new products, especially from Medtronic, have taken share. Also, Boston had disappointing trial results involving its Watchman stroke-prevention implantable device. It had hoped the Watchman would lead to a more favorable outcome than the use of blood thinners, but the data didn't read out as expected. So, 25% of the company that was growing 20%-plus hasn't delivered, and the multiple has rerated lower. We got the industry structure wrong, a trial didn't work, and I am therefore removing the pick.

Good to know. Thanks, Todd.

Christopher Rossbach

Barron's : Welcome to your first Midyear Roundtable. How does the investment landscape look to you now?

Christopher Rossbach: The global economy, especially in the U.S. but also in Europe and Asia, has been robust. We can see this in the investment in technology and computing capacity fueled by the potential of artificial intelligence. There is also ongoing investment in industrial capacity, particularly in power and transmission. And we are seeing a step-up in defense spending, especially in Europe. There are a lot of positive influences on the economy.

Something newer is the armed conflict with Iran, which started in February. It has boosted oil prices and led to higher inflation and inflation expectations. We started the year with a view that moderate inflation expectations would allow the Federal Reserve to keep interest rates stable or even cut them, but now markets are expecting rates to rise. Both corporate and consumer spending have been affected by the uncertainty caused by both the Iran war and inflation, which has had an impact on markets. But we are hopeful that some of the uncertainty will be resolved in the year's second half.

Does that mean stocks will head higher?

Markets are more concentrated than they had been, and some of the largest companies are fully valued. It is hard to see in those cases how there can be much more upside. At the same time, many quality stocks are reasonably valued. A lot of companies have massive catch-up potential in terms of growth and valuation, and that makes me constructive about their potential to perform.

As I noted in January, we look for companies with strong and sustainable competitive advantages in good and growing industries, with strong balance sheets and management that has a record of value creation. We avoid cyclical and capital-intensive companies. I have several new ideas that reflect our positive view of the demand for computing capacity.

Let's hear them, please.

Arista Networks has a market cap of about $218 billion. It is a leading networking company that has historically taken share from Cisco Systems. We think it can generate a five-year compound annual growth rate of 27%. It is trading for 41 times forward 12-month earnings, which we think is justified by the growth it can deliver. It has best-in-class hardware, coupled with software. We expect networking to become increasingly critical in data centers. That represents a significant opportunity.

The hyperscalers are working through permits, construction, chips, and memory in building out data centers. Once they resolve these issues, their attention will shift to the network. Nobody wants latency or traffic bottlenecks, and Arista's equipment and software can solve these problems. Arista has the opportunity to both deepen its leading position with existing cloud customers like Meta Platforms and Microsoft and expand with newer customers, such as Anthropic and Oracle. The company's guidance for about 28% revenue growth this year looks achievable, and revenue growth has been accelerating, supported by a sizable buildup in deferred revenue and substantial purchase commitments.

We expect earnings growth of more than 35% for 2026 , underpinning the current valuation. The risk is supply, because there is evidence of supply-chain pressures across Asian manufacturing, specifically at Taiwan Semiconductor Manufacturing, But Arista is well positioned to meet its expectations.

What's next?

Eaton has a market cap of about $150 billion. It is the global leader in power management. Earnings are expected to grow by 10% this year, but we think the company can do better than that. The forward P/E is about 30. Eaton's AI infrastructure is indispensable. The multiyear expansion of high-density data centers requires a massive amount of power. The company's data-center orders have surged 240% in the past year.

Eaton's business has strong multiyear visibility, and not only in data centers. There is also a need to renew public and private infrastructure, which is as old as it has been since the World War II. There have been decades of underinvestment in infrastructure in the U.S., the U.K., and elsewhere. Also, Eaton will benefit from reshoring and reindustrialization as the world becomes more multipolar. We see a multidecade runway for growth.

Eaton has an exceptional competitive position that drove a 44% electrical backlog expansion in the Americas and a 73% expansion globally in the first quarter. It is a quality compounder that is actively managed. The company is spinning off its Mobility Group in a value-unlocking deal and accelerating its organic growth. It is deepening its architecture integration with Nvidia to co-design power systems to meet the requirements of next-generation ultradense AI factories. And it is disciplined about integrating acquisitions.

My third idea is Schneider Electric, based in France. The argument is similar. Schneider is a European leader in energy management and industrial automation. It plays a key role in the global push for electrification, digitization, and decarbonization. The market cap is $175 billion.

What is the earnings outlook?

We expect earnings to compound at an annual rate of 13.5% over the next five years. The stock is trading for 25 times forward estimates, which we think is justified. Schneider is the global leader in energy management and one of the largest providers of energy management to data centers. It acquired a 75% controlling interest in Motivair, a liquid cooling solutions company, in 2025, and it is an important part of the company's future growth. Schneider's data-center business grew by double digits in the first quarter, led by North America and Asia.

The company also has a residential business and an automation business, both of which are current areas of weakness. But we think there will be a cyclical recovery as confidence improves and interest rates come down, creating a lot of pickup potential. More recently, Schneider announced it will acquire Cognite, a provider of industrial data and AI software, which strengthens its position in industrial AI. Schneider is an attractive stock for the rest of this year and beyond.

How about a quick update on your January picks?

ASML, my most successful pick, is a European company and the leader in lithography equipment for semiconductor manufacturing. Semis have had a really strong year, propelled by AI demand. ASML management raised its fiscal 2026 revenue guidance to EUR36 billion to EUR40 billion from EUR34 billion to EUR39 billion previously. Surging demand for memory translates into capacity expansion for ASML, although its equipment is complex and slow to ramp.

SAP, the global leader in ERP [enterprise resource planning] software and systems, has fallen about 30% in dollars since the January Roundtable, and now has a forward P/E of 18 times. The broader software sector has sold off because AI models have raised questions about potential software disruption or displacement. But many businesses run on SAP software. The business has performed well. Cloud revenue grew by 27% in the first quarter, and the backlog rose by 25%.

We view AI as a net tailwind for SAP, rather than a destructive threat. The company's central role in customer operations enables it to develop tailored AI solutions that can improve companies' business performance and processes. Only half of SAP's customers are even on the cloud. The selloff affords an opportunity to buy an industry leader at an attractive valuation.

The picture is mixed for my consumer picks. Consumers have been hit by higher energy prices and concerns about rising interest rates. Shares of Nestlé, the world's leading food company, have done well in dollars and Swiss francs. Organic revenue growth was 3.5% in the first quarter, led by a 9% acceleration in coffee. Full-year revenue guidance is 3% to 4%. The new CEO, Philipp Navratil, is driving product innovation. The outlook is positive, and the stock is selling for 19 times forward 12-month earnings.

As I have mentioned in Barron's, Nestlé could realign its capital by unwinding its 20% stake in L'Oréal, and use the proceeds to buy back stock. Such a move would be value-added.

That leaves LVMH Moët Hennessy Louis Vuitton and Nike.

LVMH is the global leader in luxury, with a $277 billion market cap in dollars. The stock fell in the year's first half, and now trades for 21 times 12-month forward earnings. The underlying demand for global luxury is intact, but some consumers are increasingly squeezed by high inflation, and the conflict in the Middle East also has hurt growth in the short term. A stronger dollar will be a benefit, and sales in Asia, excluding Japan, grew by 7% in the first quarter. The cyclical recovery in luxury has been delayed, but our thesis hasn't been derailed. Louis Vuitton bags never go on sale, but the stock is on sale now.

Nike reported quarterly earnings of 72 cents a share, in line with our underlying expectations, and beat them due to a tariff-refund benefit of 52 cents. The company provided assurance that the turnaround is intact. Performance sports remains a bright spot. The company will introduce a dozen new innovative footwear styles in 2027.

Thanks, Chris.

Meryl Witmer

Barron's: What has piqued your interest in this market, Meryl?

Meryl Witmer: A lot of money has moved over to tech, much of it deservedly so. But that has left some solid, cash-generating businesses in the dust, and there are great values there. When you generate after-tax free cash flow, pay down debt, then buy in shares and pay out dividends, the market ultimately recognizes that. I have a couple of stocks that are trading at extremely low multiples of what we think they will earn in two or three years. Stocks don't trade for five times earnings for long.

Did you say five times earnings? That's a rarity, for sure.

Brink's is trading for $101.50. We have had some success investing in companies that make acquisitions at good values. Opportunities have arisen for operating companies because private-equity investors are slowing their monetization of portfolio companies and thereby competing less for new investments.

Brink's announced in late February that it had a deal to acquire NCR Atleos. The combined company will have about 53.5 million shares outstanding. Brink's has about 41.3 million shares now. We really like the strategic rationale and accretive nature of the deal. So, why did Brink's stock trade down when it was announced?

There were two main reasons. First, Brink's was returning around half of its free cash to shareholders via dividends and share repurchases. That has shifted to building up cash before closing the deal and paying down acquisition debt post-deal. Shareholders unhappy with the shift exited their positions, pressuring the stock. Second, the deal is for cash and stock, with about 12 million shares of Brink's going to NCR Atleos holders. Some risk arbitragers are likely shorting Brink's stock, adding selling pressure, which you see in the increased short interest in the stock. Plus, the company isn't buying back stock.

When did you get involved with Brink's?

We started buying around $100 a share, within the past month.

Brink's moves cash and other valuables for a variety of customers globally, servicing ATMs, businesses, and governments. It has a relatively new service called Digital Retail Solutions, which allows a customer to make deposits into a Brink's Smart Safe on its own premises and receive a credit into its bank account the next day. This is a subscription-based business, which gives Brink's flexibility in how it physically manages the cash, while helping its customers manage working capital more efficiently. At the time of a deposit into the Smart Safe, Brinks becomes the legal owner of the cash, and can borrow against it, rather than waiting to pick up the cash on a pre-scheduled basis.

This business has higher margins for Brink's and it is better for customers. It has been instrumental in gaining the company new business and improving profitability.

What percent of the business has been converted to Smart Safe?

Brink's disclosed that its combined Digital Retail Solutions and ATM Management Business was 28% of revenue in 2025, up from 24% in 2024.

NCR Atleos' customers are banks, fintechs, credit unions, and retailers. The company helps customers manage their ATM hardware , software, and cash management. It also operates one of the largest independent ATM networks, Allpoint, from which it generates interchange and other recurring fees.

Brink's has said it expects about $200 million of cost synergies post-closing, estimated for the first quarter of 2027. With the NCR Atleos acquisition, Brink's will service more of NCR's ATMs, giving it a denser network, which is a big contributor to cost savings.

Using conservative estimates, we keep the 2026 operating income projections for each company flat through 2029, even though we expect continued growth, and add only $200 million of projected synergies. We pay down debt from the combined free cash flow and estimate $15.50 a share in reported earnings and $18 in after-tax free cash flow. In what we term the expected case, we get $21 a share in earnings in 2029 and $24 a share in cash flow. Neither case assumes revenue synergies, and cost synergies may be higher than $200 million.

For valuation purposes, we like to use a multiple of price-to-after-tax free cash flow at the point a company has a solid balance sheet. In Brink's case, that would be 2028 or 2029. Assuming a multiple of only 10 or 11 times free cash, we have a target price of $180 to $250 a share in about two years, up from just over $100 now.

We also like the Brink's management team. Several executives have engineering and M.B.A. degrees, our favorite background.

Interesting. What else do you like?

My next recommendation is O-I Glass. It went up a bit since I recommended it in 2025, and has come back down. It is trading for $9.79 a share. There are 152 million shares outstanding, and net debt totals $4.7 billion. O-I Glass, formerly Owens-Illinois, manufactures glass containers for food and beverages. It is being transformed under the leadership of its CEO, Gordon Hardie, and the team has done a massive amount of work taking out costs and closing capacity. Its turnaround is a little behind schedule, with various effects from tariffs, less alcohol consumption, especially wine, and increased energy costs from the situation in Iran. Meanwhile, its competitors are also taking out capacity, which has changed the supply/demand balance in the industry.

O-I is winning new business with its better pricing enabled by its new cost structure and its better cost competitiveness with aluminum cans. We should see some of this new business in the second half of this year.

With the rationalization of capacity, O-I and much of the industry will be running closer to effective capacity. Since this is largely a fixed-cost business, profitability and cash generation will improve. Management lowered earnings guidance this year from a midpoint of $1.77 a share to a midpoint of $1.25, with a range of $1 to $1.50, largely reflecting the effects of the Iran conflict and higher energy costs. This should normalize in the future. While much of the energy cost is passed through to customers with a lag, some of it isn't and will be reflected in future pricing. The company's stretch target for 2027 Ebitda was $1.45 billion, and that is still possible.

Is there a non-stretch target?

We model Ebitda at $1.325 billion in 2027, growing to $1.4 billion in 2029.

The One Big Beautiful Bill Act has given O-I a helping hand with the change in the percent of its interest expense that can be deducted versus earnings. The company should start reporting a lower tax rate, which was high because of the disallowed/deferred interest expense deduction. On its future tax filings, O-I should be able to deduct interest that it has already paid but was unable to deduct for tax purposes, lowering cash taxes paid. This is similar to a net operating loss carryforward.

This should create a positive flywheel effect, with cash being generated in excess of GAAP earnings [earnings reported according to generally accepted accounting principles]. The cash could be used to pay down debt, which then lowers interest expense and grows after-tax earnings.

We see O-l reporting around $2 a share of earnings next year, growing to $2.70 in 2028 and more than $3 in 2029. We think the stock can trade at $25 to $30 within a couple of years.

Thank you, Meryl.

Write to Lauren R. Rublin at lauren.rublin@barrons.com

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July 10, 2026 21:31 ET (01:31 GMT)

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