Know What You Own: Joe Amato on the AI Rally, Mega-Cap IPOs, and the Hidden Risk in Passive

Anu Rajakumar: US equities have been on a strong run lately. Despite geopolitical stress, energy price pressures, and an uneven global backdrop, markets have proven remarkably resilient, and in some corners, they look outright exuberant.

AI enthusiasm has driven outsized returns in a handful of names, a wave of mega-cap IPOs is reshaping how investors think about public markets, and recent earnings growth has been broad enough to give bulls plenty of ammunition. Underneath the headline numbers, questions are building. Are valuations getting ahead of fundamentals? Is the market correctly pricing geopolitical risk or looking past it? With midterm elections approaching later this year in the US, historically a source of elevated volatility for stocks, what should investors be preparing for?

My name is Anu Rajakumar, and today I’m joined by Joe Amato, President and Chief Investment Officer for Equities at Neuberger. Joe oversees equity investing across the firm and brings decades of experience navigating market cycles. We’ll cover the state of the rally, AI’s real versus perceived impact on markets, the IPO wave, and what the equity market landscape could look like years from now. Joe, great to have you on the show.

Joe Amato: It’s great to be here, Anu. I’ve been waiting by my phone for the last two years for an invitation to come on the podcast. I think you’ve gone through every other employee at Neuberger, so I’m the 3000th person on the podcast, but I do appreciate the invite.

Anu Rajakumar: Better late than never, I like to say. Thank you so much for being here.

Joe Amato: It’s great to be here, all kidding aside.

Anu Rajakumar: Joe, US equities have posted meaningful gains so far this year. It’s been driven by AI enthusiasm and broad-based earnings growth. As Chief Investment Officer of Equities, how do you characterize this rally? Is it built on durable fundamentals, or are there parts of the rally that give you pause?

Joe Amato: It’s certainly been an extraordinary year, and markets have performed remarkably well. In your comments, you pointed out how resilient they’ve been. I think, importantly, this has been more of an earnings-driven bull market, as earnings in the US in particular have grown at a meaningful clip. We have very strong first-quarter earnings expectations in the second quarter and in the remainder of the year for double-digit earnings growth, and that is the makings of a more durable bull market.

That said, I think the earnings have been more narrowly focused around technology, and the technology earnings have grown at a massive clip over the course of the last two or three quarters. You did see in the first quarter, and the expectations remainder of the year are broadening out of that earnings. Non-tech earnings are now in the high single-digit percentage growth, versus over the course of last year and the prior year were either declining or growing at a very, very modest level.

Anu Rajakumar: Terrific. I do want to point out that we have seen a broadening out of the earnings growth, and that’s happening within the backdrop of a lot of geopolitical stress, of course, including the conflict in the Middle East and persistent energy price pressures. Joe, what do you think the market is correctly pricing in at the moment, and where do you think it might be getting comfortable in ways that are concerning to you?

Joe Amato: We began the year quite bullish about risk assets and equities in particular, US and Japan being the areas that we’re most bullish about. You had a confluence or a combination of factors, the cumulative effect of a couple of hundred basis points of rate cuts over the course of the last several years. You had deregulation going on in the US and other regions. You had fiscal stimulus in the US and other regions like Germany and parts of Asia. You had a lot of factors that resulted in that level of bullishness. Then March comes along, and you have a geopolitical disruption and conflict break out in the Middle East.

One of the things that has helped the market be more resilient has been the reality of the more energy-efficient nature of the US economy and global economy. We estimate that the global economy is probably 50% less energy-intensive, oil-intensive than it was going back 30, 35 years ago. That’s really important. That’s one of the reasons that kept oil prices from expanding too meaningfully, given the disruptions and meaningful disruptions that occurred with the Strait of Hormuz being blocked. I think the market’s been expecting this conflict to be relatively short-lived.

We have a ceasefire now and negotiations going on. That’s something, obviously, we’re watching very closely. On the back of that, you had this expansion of the AI investment opportunity, which has really driven the market, and we’ll, of course, talk more about that.

Anu Rajakumar: It’s actually quite striking. I’ll repeat that stat that you said in that response, 50% less energy-intensive than it was just a few decades ago. Maybe building on that, midterm elections are on the horizon in the US. How do you think about the potential for policy-driven volatility? Of course, history suggests that midterm years tend to be choppier for equity markets. Do you think that dynamic plays out this year, or is the current backdrop with AI different enough to break the pattern?

Joe Amato: Midterms and the change of leadership in whether House and Senate or both does present policy uncertainty, and historically, as you cite, it’s been a more challenging environment for equity investing because of the uncertainty of the policy developments. I think the market right now is not expecting much at all. Even if the Republicans were to maintain control of the House, I think the base case right now is the Republicans will lose the House, and you’ll have split government in some way.

Whether it’s the House and the Senate, we’ll see. I think the Senate is a close call at this stage. If that happens, you probably have a level of gridlock over the course of the following two years. I think markets are okay with gridlock. Markets are less okay with policy uncertainty and meaningful changes that occur. I think right now, that’s what the market’s discounting. It then reverts back to what’s the earnings outlook, what’s the level of economic growth, what do we see as risks to the market, and opportunities in the market?

Anu Rajakumar: Shifting now to the most discussed topic of late, artificial intelligence. It’s been the dominant market narrative this year. I want to point out a few numbers because the CapEx data that we’re seeing is absolutely staggering. Hyperscalers spent around $150 billion in this area in 2023. We’re tracking towards $700 billion-plus in 2026. I’ve read some reports that say by 2030, the projected cumulative AI spending could reach $7 trillion. Joe, where do you think the market is ahead of itself on AI, and where do you think it’s underestimating the opportunity?

Joe Amato: The development of AI capabilities over the course of the last number of years has been a remarkable achievement on the part of individual companies, on the part of economies that have promoted policies and have helped develop these tools. This is going to be transformational in every sense of the word. It is another tech supercycle, if you will. It’s a CapEx supercycle. It has a lot of momentum to it. That’s one of the reasons why you’re seeing such strong demand and appreciation of those stocks that are directly correlated or enabling this massive investment in AI.

The long-term implications, I think, are important. You should see from this investment, this CapEx supercycle, meaningful improvements in productivity. That allows economies to grow at a faster level without the upward pressure in inflation. That’s a positive development in a sense. You have the risk of some labor market disruption. As we have seen, certainly over the course of the last 100 years-plus, when you have these significant technological developments, you see labor market disruptions. That’s one of the things that raises anxiety around it.

The markets have appropriately seen the earnings expansion and the supply-demand imbalances that exist, demand being much stronger than supply right now, whether it’s in memory chips, the semiconductor, the direct enablers of the AI build out, and that’s why you’ve seen massive appreciation in these sectors. It is something we’re getting a bit anxious about. Valuations haven’t necessarily been the driver of our nervousness. It’s more, I would say, the E than the P of these companies. Whether you look at a Micron or an Nvidia, earnings have actually outstripped the appreciation in those stocks, but you’ve got to have continued earnings of that level to support the valuations that exist.

Our thinking is the opportunities are going to migrate more toward the adopters of artificial intelligence. If you think different segments of the economy, as they embrace it, they protect margins, they enhance productivity, enhances the product capabilities, and service that they can provide their respective customers. That’s the diffusion, if you will, of AI into the broader economy as you migrate from enablers to adopters, I think, it’s going to be the opportunity over the next number of years.

Anu Rajakumar: Maybe just quickly on that labor market disruption. I’m just curious if what you’ve been hearing from company executives about how they’re thinking about labor market disruptions or planning for the future in terms of their own employees going forward.

Joe Amato: A number of large companies, you’ve seen the Walmart CEO, you’ve seen the Bank of America CEO talk about growth in their business and headcount of their businesses being relatively flat, projecting over the next number of years. That is probably a base case scenario in a sense. There’s certainly lots of voices that have talked about massive labor market disruptions.

There are others that have articulated, as we’ve seen with other technological changes over the course of the last number of years, that labor markets are resilient and they’ll evolve. You think about the current labor market, who would have thought 20 years ago, 15 years ago, you’d have influencers be a job where people make, in fact, a lot of money. No one would have ever thought about influencers would exist. Didn’t even know what the concept was.

Yet the labor market has evolved, and that has, bottom line, expanded the number of jobs that exist in the economy over the course of the last number of years, not reduced them. I remain optimistic, although there will be narrow disruptions and dislocations that we should be all sensitive about and, from a policymaker standpoint, have initiatives and policies that help retrain workers and help make sure that that safety net is strong enough to not create disruptions more broadly in the economy.

Anu Rajakumar: I saw a research from Bank of America, Merrill lynch that said that 65% of the jobs that will be available in 10 years haven’t been created yet. Just that point of influencers 20 years ago, that wasn’t a thing.

Joe Amato: It’s the limits of our imagination.

Anu Rajakumar: Exactly.

Joe Amato: Right now, we sit here today and think about that, and we can’t really think about what that might be, but I’m confident in the human spirit and-

Anu Rajakumar: Absolutely.

Joe Amato: -the ingenuity of labor markets. It’s important from an educational standpoint and other standpoints that we’re training folks in a way that allows that labor market to be resilient.

Anu Rajakumar: Absolutely. Let’s talk about the SpaceX IPO, which has generated enormous attention, and for good reason, given its scale. If we zoom out for a moment, what does this wave of mega-cap IPOs actually mean for how equity indices are constructed and for the trillions of dollars benchmarked to passive strategies? Investors who assume index investing is the low-risk default, what should they be thinking about?

Joe Amato: It’s a super important question for listeners to think through, given that probably every investor or asset owner out there probably has some level of passive exposure. Passive, in its historical context, has meant “I own the market.” The reality is you own a market as defined by index providers. They are making very active decisions about what stocks to include, how much to include, what’s the free float, what are the rules, what’s the timeframe, et cetera.

If you roll forward and think about SpaceX, and soon-to-come Anthropic and OpenAI, these are trillion-dollar or multi-trillion-dollar companies that are going to be at some point included in the indices, at some point included in the full market cap once float, meaning the tradable shares, reach a certain percentage of the total of the company. That’s going to change the nature of the index quite meaningfully. If you look at the S&P 500 as an example, you would have upwards to 50% to 55% of the index in technology stocks once these three big IPOs get rolled into the index.

If you look at the current technology sector, other stocks that are not technically in the technology sector, like Amazon and Meta, that are in consumer discretionary or other segments of the S&P 500, you add that together because they’re really tech companies, of course, that presents just a very different dynamic. When you look back at a period where many investors have anxiety about repeating, which is the tech Internet bubble of 2000, 2001, the S&P had 35% technology at that time. The drawdown from peak to trough for the S&P during that period was roughly 40%, 45%, which is painful, which is significant.

But NASDAQ was 80%, which was, of course, a much more tech-driven index. When asset owners think about their equity risk exposure, they often think about the drawdown or the decline, percentage decline risk in their equity exposures as a determination of how much risk they can take. They look back historically. The historical measures of drawdown risk may not be the right measures to think about, given how the index has changed and will change dramatically over the next number of years.

The lesson is really understand what you own, don’t assume passive is simply the market. The risk in the index is greater today than it was 10 years ago and even 35 years ago. Thinking about diversifiers, thinking about other parts of the capital markets globally that give you an element of diversification protection, is an important element of how one thinks about their equity exposures over the next number of years.

Anu Rajakumar: Absolutely. No, those numbers that you shared about the S&P 500 being down 40% with 35% in technology, but the NASDAQ technology-heavy index being down 80%, double that, is something I think will give folks pause and something to think about. Looking ahead, what do you think global equity markets look like 5 to 10 years from now? Do you think that we’ll see more public companies? Is the tide turning to see more of them? I think we spoke about this a little bit, but does the composition of benchmarks change meaningfully?

Joe Amato: The US markets are the broadest and deepest capital markets in the world. I think that public equity markets will still be a hugely important component of our market-based global economy. The ability for the capital allocation process that public markets drive is super important for economic growth for those savers out there, whether it be pension plans or individual savers, to continue to build wealth and build their respective nest eggs, if you will. I think public markets are still going to be a hugely important part of the investment spectrum.

I think the IPOs of SpaceX and, again, soon-to-be Anthropic and OpenAI are reflective of that fact, that, as companies continue to need capital to achieve their business objectives, they need to have a broader market to tap into to source that capital for growth opportunities. While Anthropic and OpenAI, and SpaceX, for that matter, have raised a lot of capital in private markets over the course of the last three or four years, they’re going public for a reason. Broadening out the ability to raise that capital, I think, is going to continue to be an important part of it.

The benchmark will reflect the economy and the company’s success. As we pointed out earlier, I think benchmarks have gotten ‘growthier’ over the course of the last decade. When you roll forward, they’ll probably continue to be growthier. The asset owners do need to be appreciative and understand the level of tech-driven US growth exposure they have in portfolios, and to look across public and private portfolios to understand what that risk is.

That’s an important element. It’s more of a near-term thing, but also to look out over the course of the next number of years. I think public equity markets are still going to be a fascinating place for folks to invest in. When you look back over the last 100 years plus, public equity markets, US equity markets in particular, have delivered a very attractive long-term return. I think it’s going to be an important component of people’s asset allocations for a long time to come.

Anu Rajakumar: Sure. I think the outlook for active management is particularly compelling at this moment as well. Of course, passive investing continues to grow. I’m curious about what your views are on just price discovery in general, given that the burden of price discovery will continue to fall on active management shops like ourselves. How do you think that works when that burden becomes larger for a smaller number of players?

Joe Amato: Passive is now upwards to 50% of the public equity markets in the US. That has been an important development for individual investors, for asset owners. It’s very cheap, broad exposure to the market. Again, the index may be changing, but nonetheless, it gives you broad exposure. We’re not in the passive business, as of course you know. That said, I’ve always said to clients, there’s a place in everyone’s portfolio for passive. Just understand what you own, understand the risk that you’re taking, understand the pros and the cons of what passive represents.

As it relates to a broader policy question, if you close your eyes for a second and envision a world where passive is 100% of the market, what does price discovery look like? Who’s determining when Anthropic or Nvidia or Apple, or Caterpillar reports earnings? Who’s determining, “Oh, is that a good thing? Is it a bad thing? Did they meet expectations? Should they attract more capital because they’re, in fact, succeeding in their business model, or are they not?” Passive are, as I often use the analogy, sitting in the back of the bus. The bus drivers are active managers driving price discovery to say, “Oh, no, that’s a really good earnings report. That stock shouldn’t trade at X. It should trade at X plus 10%.”

You need that for a functioning capital allocation process, efficient capital allocation process. Where is the point of inflection? Don’t know. If passive were 100%, we know that’s not good. If it’s at 50%, we currently certainly have a functioning capital market today. For active managers, as that passive number goes higher, it, in theory, and I think in practice, allows for more inefficiencies in markets that active managers can exploit. If there were one active manager and 99% is passive, that one active manager would be driving price discovery, and that person would be delivering returns that are probably better than the index, because the index are followers.

It’s an important public policy question. It’s a bit of the prisoner’s dilemma, though, because if people collectively realize that that’s not good for a market-based economy, but individually, they have the benefit of very cheap beta exposure to markets. That’s a little bit of the challenge that we feel in markets. I know our portfolio managers are working their tails off to deliver good returns and beat the respective indices that they’re benchmarking against.

Anu Rajakumar: Absolutely. Thank you for that. As we wrap up here, I want to get your thoughts. We’re heading into the second half of 2026. Where are you seeing opportunities in equity markets, and where are you cautious?

Joe Amato: There’s still a lot of momentum. The economy’s, in fact, picking up speed. Oil prices have come down from the peak that we saw in March. You have that CapEx supercycle we talked about earlier that continues to drive economic growth in the US. I think there’s good still momentum. We certainly want to watch a little of the frothiness that’s gone on in segments of the market. The ebbs and flows and ups and downs is a natural part of the process.

We remain optimistic about risk assets, about US equities, about Japan. Again, we think those are the two areas we would overweight. Japan, you’ve got a long-term improvement in corporate governance and better returns on equity that policymakers are driving in that market. I think that’s some exciting developments. That broadening out opportunity as you see AI get diffused into broader parts of the economy, I think, is an important theme over the course of not just this year, but a number of years to come.

Anu Rajakumar: Excellent. Joe, those are all of my prepared questions. However, I can’t let you go without a quick bonus question. Joe, you’re on the Executive Committee of Georgetown University’s Board of Directors. Tell me about what that connection means to you personally, and what are you telling students there about navigating markets and careers right now?

Joe Amato: Georgetown’s been an important part of my life. It changed my life. As a kid who grew up in Newark, New Jersey, it really opened my eyes. It was an amazing education. One of the phrases that Georgetown uses, cura personalis, which is educating the whole person, which is an important concept and theme, which I think in today’s world is probably even more important than maybe when I went to Georgetown. It’s a place that I want to give back to. What I got out of it is way more than I’m giving back, as much as I’m trying to give back to the school.

In terms of advice, I think the skills of critical reasoning, of grit, perseverance, determination, overcoming obstacles, high integrity, all those factors will transcend and outweigh any individual narrow knowledge that you’re going to learn at Georgetown or any other college in the world. I think those are going to be the critical things of success, particularly those critical reasoning skills, communication skills, interpersonal skills, and again, that grit and determination, that is important. That’s certainly the kinds of skills that we look for in inviting someone to come work with us here at Neuberger.

Anu Rajakumar: Excellent. I love to see people who are passionate about their alma maters who are also providing important service. Thank you. Thank you for that and for this entire conversation.

Joe Amato: Great to be with you, finally.

Anu Rajakumar: [laughs] Finally. Long overdue, but we’re glad to have had you. I think the theme of what we’ve said, maybe a couple of thoughts were there’s good momentum and there’s resilience in the market. I think we talked about that in a few different ways. We talked about AI a lot and how the momentum has been strong. The demand appreciation, but there are long-term implications. You spoke about your optimism about labor market disruptions. I think one of the key lessons that you’re sharing here is that it’s really important for investors to know what they own.

Joe Amato: Discipline risk management.

Anu Rajakumar: Exactly, because as you said, if there are drawdowns, then folks may be surprised by how those look. Just knowing what you own is really important. Just wrapping up on some of the opportunities that you mentioned, in the US, you’re optimistic, and Japan, you mentioned as well as somewhere where there can be some good opportunities. With that said, I just want to say thank you so much again.

Joe Amato: Great to be with you.

Anu Rajakumar: We’re glad to have had you. I’m sure we’ll have you back on here very, very soon, Joe.

Joe Amato: Thank you.

Anu Rajakumar: To our listeners, if you’ve enjoyed what you’ve heard today on Disruptive Forces, you can subscribe to the show from wherever you listen to your podcasts, or you can visit our website at neuberger.com/disruptiveforces, where you can find previous episodes as well as more information about our firm and offerings.