The View from Europe: Talking Markets with Christopher Rossbach
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This is Barron's Live. Each week, we bring you live conversations from our newsrooms about what's moving the market right now. On this podcast, we take you inside those conversations, the stories, the ideas, and the stocks to watch so you can invest smarter. Now, let's dial in. Hello, everyone, and welcome to Barron's Live, our weekly webcast and podcast.

I'm Lauren Rublin, Senior Managing Editor at Barron's. Thanks for joining us today for a look at the markets and what a day it is. Stocks are soaring on news of an agreement between the U.S. and China to slash tariffs temporarily and take a 90-day breather in trade talks.

This trade war isn't over, but perhaps the worst of it is. My guests today are Barron's Deputy Editor Ben Levison and Christopher Rosbach, Chief Investment Officer of J. Stern & Company. We'll be talking about tariffs and a lot more. Welcome, Chris and Ben. It is so great to have you both on Barron's Live. Thanks, Lauren. Great to be here.

So, Christopher, I have to start the conversation with this weekend's tariffs news. Investors are celebrating what looks to be some sort of a truce between the U.S. and China. What do you make of this temporary truce? And do you think the market's reaction is the right one?

I think one of the great truths is that what can't happen won't and what must happen will. The U.S. economy is completely intertwined with the Chinese one. And so I think what we're seeing is an acknowledgement of reality.

I think it's a fact that President Trump thinks that uncertainty is something that gives him leverage. He also thinks that there's a re-leveling of trade relations that is necessary and there's a lot of things that should be addressed. And he thinks that by taking extreme positions, he can move the negotiation.

I think what we're seeing now is the fact that he's pushed that far. He's been able to achieve quite a lot of concessions from different countries. He may be able to achieve some from China, but the fact that we were getting to the point where it's not just sentiment, but where there was going to be a real supply chain disruption that was going to affect the US economy is one of the reasons why we're at this point.

And if the landing area is 10% tariffs plus or minus the 20% surcharge, then I think that's a very different and much more positive outcome than what we've been expecting so far.

So what happens now? Do Chinese companies reload the ships and send more inventory to the U.S.? Do U.S. companies buy it? Or do you think everyone is still in a holding pattern? Well, we've seen that the shipping traffic has declined significantly. And what we've been hearing from some of the companies that are affected is that it was either going to be May 15 or it was going to be sometime very soon thereafter when orders would have to be placed again.

so that goods could arrive in time for Christmas. So we were getting very close to a moment where there was going to be a real disruption. I think we're going to see a resumption right now in terms of that shipping traffic. There will clearly be some delays that are going to impact, I think, company earnings over the next couple of quarters. But if things can get going again, and if this is enough to give companies the certainty, then hopefully we'll be in a position where things will look different.

very soon and we can look forward to an economy and to corporate results that are in line with what we've been hearing so far this year. So perhaps more Barbies for Christmas, as it were. Ben, I want to talk to you about the latest stock market rally. Stocks have crossed some important technical barriers today. What should investors watch for now?

Well, I mean, I think what's kind of interesting is that as all this news kind of trickled in over the last week, we kept seeing the S&P 500 try to get to over 5,700. This was at a pretty important level. That was right around where the market was when this all started with Liberation Day. And also below its 200-day moving average, which is up around, I think, 740 or so.

But what we saw today was just that the market just slingshotted above both those levels and is now trading above them. BTIG technician Jonathan Krinsky noted that when you have the SPDR S&P 500 ETF, he's using the ETF rather than the index, when it's opened up 2.5%

or more and above its 200 day moving average. If you go back, that hasn't happened a lot since that ETF came into being in 1993. It's happened seven times. The ETF has closed below its open five out of seven times. It looks like we're kind of heading for that today. We did open up about 3% and it's not up quite that much anymore. And that you see over the next one to three days, you get negative performance, even get negative performance over the 20 days.

And so he thinks that the short term path is this is his quote, the short term path from today's open is lower in our view. But here's the thing. So that's the short term. We had another firm that does sort of a historical look at the markets called Sentiment Trader, and they looked at all the instances where the S&P 500 had fallen from a three year high and then spent 30 days under its 200 day moving average, which is what just happened.

And they point out that the index was up more than 10% on average, 12 months after those occurrences. And it was higher 73% of the time. And the only time that it was negative when you had a big bear market like the dot-com bust or the financial crisis. So that was seemed to suggest that the market should be higher or could be higher in 12 months from now. And I think that's probably a decent way to look at things as long as we don't get this big resumption of a

of the tariff battle again once this 90 days is over. All right, short term, long term, we're having a good day today and we'll take it.

So Christopher, I want to go back to you to talk about a couple of other things happening out there. You are just back from the Berkshire Hathaway annual meeting in Omaha and the Milken Institute Global Conference in Beverly Hills. And I consider that pretty much the spring circuit for savvy investors and policy types. So let's start with Berkshire. The big news this year, of course, was Warren Buffett's announcement that he's going to retire at the end of

the year as CEO. But what else did you learn from your trip to Omaha? Well, I think it's an incredible thing to be able to go to the Berkshire shareholder meeting. One, because you get to hear from Warren. And of course, there's the big announcement, too, because you get to meet the Berkshire company so you can get a real sense of what is going on

with US business and by extension the US economy, especially for someone like me who's looking based in London, looking at global companies from a global perspective here. And then it's being with all these investors and exchanging ideas. So it was a really momentous occasion. And both Warren Buffett and Charlie Munger have

all the great quotes. One of my favorites of Charlie's is micro is what we do. Macro is what we put up with. And we certainly are putting up with a lot of macro. But the other one from Warren is we invest in companies, not markets. So with what Ben was just saying, I was just thinking, thank goodness we invest in companies and their fundamentals. And those have so far been looking really strong.

What about your conversations with other investors and with some of Warren's companies, some of Berkshire's companies? What sort of insights did you pick up in talking to people? Well, I think it was really around the resilience, around how these large companies are operating.

operating in the real economy and have a lot of levers to pull to be able to deal with the types of issues that we're facing. The first thing is that they have strong balance sheets. That's something that's definitional in Berkshire. But when we look for quality companies, it's also one of the key attributes we're looking for. And that means that they can act. They don't have to react.

And so some of the really interesting conversations were around businesses that are saying that when there are these types of disruptions, they're able to take advantage of it because in many cases they have limited imports from China. They source from the U.S., from Canada and from Mexico, where we've seen that they've basically been exempted from tariffs.

And because they have the balance sheet strength, they can buy inventory. So what they were talking about was how they were able to do that very successfully during the COVID period and how they're anticipating doing it now because there's a lot of suppliers who've been ordering, a lot of inventory has been shipped online.

in the first quarter to beat the tariffs. If they're now going to go not away, but to a much lower level, there'll be a resurgence of trade. So people who have more stretched balance sheets are going to have issues. And if you then have a company like Berkshire that can extend its financial support to businesses that aren't leveraged, then they can really take advantage. So I think that's sort of a

proper bottom-up perspective that I think is really important as we understand how companies are navigating this environment.

That's good to know. Now let's go west to Beverly Hills and tell me about the Milken Conference. I know you heard Jensen Wong, the CEO of NVIDIA speak, and you heard a lot about AI. Fill us in. What were some of the highlights? I thought it was a really constructive environment in which you had policymakers and company executives really take a very steady perspective. One of the highlights was clearly Scott Besson himself.

who took the opportunity of an interview with Mike Milken to give a message that things would be steady and they would get resolved. And that's arguably what we're starting to see over the weekend and the market reaction we're seeing. But I think the really interesting thing was, especially in companies that you hear a lot from there that include NVIDIA, but it, of course, includes also Intel.

some of the other big digital platforms. It includes entertainment companies, including Disney, which had phenomenal earnings last week. The outlook looks really very positive. And I think that's mainly because AI was what everybody was talking about, the compute that's necessary to analyze the data to get to the different use cases. And it's just so clear that we're at the very beginning

and the amounts of money that are being invested by companies, there's a lot of concern about the capital intensity, but the results that companies are getting already in many cases show that it's an investment that is going to generate return. And whether it's in healthcare, whether it's an industry, whether it's in finance, whether it's in insurance, whether it's in entertainment through generative AI with images, the use cases are so significant.

And there is so much investment going on, both with the very largest companies, which is what I invest in, but across the economy, that it was a really very positive outcome, I thought, from these couple of days in L.A. So tell me about some of the big bets you've made in A.I.,

Well, we look at it really as something that is going to affect almost all companies in our portfolio. We look for companies that have global leaders, that have quality, and that we can buy at prices where we can generate long-term returns. And so it starts with companies like NVIDIA and ASML, which are really the infrastructure providers. NVIDIA has an unrivaled position. Jensen Huang was talking about how it's not just chips. He was sort of

He was sort of saying it almost ironically. It's the units that they produce that weigh 1.3 tons that produce and enable the compute that is fueling all of this capacity and innovation. So it's ASML, which is going to help to produce the fabs that will continue to provide the chips on the new generation of capacity. So that's from the infrastructure perspective. It's the cloud computing companies

that are investing and that are going to be generating a lot of revenues from that investing. And then it's the digital platforms. It's Alphabet and Google in particular through search and obviously through the cloud, but also Meta, which again had exceptionally strong numbers and we think is one of the main beneficiaries and main monetizers. Because if you look at the results that they've just reported, then if you look at the increase, the 20% increase,

in revenues that they've been able to achieve. That's about $8 billion. You multiply that by four, that's $32 billion. Last year, they invested between $35 billion and $45 billion. This year, they've said it's going to be $65 billion and $75 billion. But that's almost dollar for dollar a cash return on the investment that has enabled them to have better ads, better engagement.

and higher revenues that incrementally flow through at 80% plus. So we think there's massive cash and cash returns. And this narrative that there's an increase in capital intensity in these digital platforms, and that's going to lower returns and values, we think is plain wrong.

All right. And that's a definitive look at things. Thank you. So let us leave the future and come back to the present, namely companies reporting earnings this week. So I'm going to turn to Ben and ask you about Cisco systems. The company reports on Wednesday. What should investors know heading into the earnings report? Well,

Well, Cisco, I always find so interesting because this was the darling of the dot-com boom. I mean, it was kind of the NVIDIA of it. And since the dot-com bust, it's never gotten back to that all-time high. It hasn't broken out again. It's still working its way there. But the stock has been doing pretty well. It was down 1.9%.

heading into today. It's up 2.4% today on the China news. So it's probably flattish of the last three months. It's gained 27% over the last year though. And you're seeing that they're both increasing earnings are expected to increase earnings and sales. Earnings per share is supposed to come in at 79 cents. That's up from 6%.

On sales of $14 billion, that'd be up from $12.7 billion. Evercore ISI is feeling pretty bullish on the company. They think that it's actually going to beat expectations for the quarter. And they think that it's actually going to have stronger EBIT margins in the guidance. And that should help put the stock up as well. The one thing I look at when I see the stock right now,

um you know i worry a little bit that it's come into a kind of resistance level there it's had a nice run um given uh everything that's happened both with tech earnings that seemed to suggest things weren't as bad as people thought and now with the uh china us uh trade um i know if we want to call it a deal but whatever this thing is that they came up with um and so it's it's already rallied quite a bit and so there could be some disappointment if um if it doesn't do those it doesn't beat and whatnot um but the stock is looking pretty interesting here

All right. That is good news for Cisco. Speaking of China, let's talk about Alibaba next. The company reports on Thursday that Chinese digital giant is having a very good year. The stock is up 20%. So what lies ahead for Alibaba? Well, this was a baron's pick last year, and it's done pretty well for us. The stock has been fantastic. It's up to 20% in the last three months, up 58% in the last 12. It is extremely volatile, though.

I think we've been in the money now, the money on it numerous times since the pick, but we are at really the highest level in quite a while here with this jump today. The stock was up 6% to 132. A lot's happening there. I mean, if you think about what's been happening with big tech here in the United States, Alibaba is going through the same kind of thing. It's spending a lot on AI, it's trying to enhance its businesses with AI.

And they just had an event called Alley Day over the weekend where they were talking about these things that basically AI is going to drive everything for the company. And they're hoping that it's going to allow different ways for them to use their different platforms to build their business. They have lots of businesses. I can't even try to pronounce all the names, but they have things like used goods. They have a basically a Google Maps equivalent enterprise software. They have a B2B marketplace.

And all those are going to, they think, will benefit from AI. And so the company is supposed to report a profit of $1.73. That'd be up from $1.40 on sales of $33.1 billion. And, you know, again, the thing I think we have to fear the most with Alibaba is just how volatile it is. But I think given where, how the US AI companies or the US tech companies have done, the potential is there for Alibaba to do something similar.

Christopher, are you investing in any of the Chinese AI companies? No, we don't invest. We look at them very closely. The Chinese digital economy is obviously enormous and there's a tremendous amount of innovation. But as we look at global companies, we have a framework where we're looking not just at what the underlying businesses are doing, but in terms of the quality, but we're also looking at things globally.

like the overall market environment, like the corporate governance and other types of issues. And so we think that Chinese companies have issues in that regard. So we look at the global opportunity set, but we prefer the companies that we have and those for the most part are the American ones. It's not taking anything away from a company like Alibaba, which is a tremendous franchise with a lot of innovation.

But we think that for the mandate that we have of looking for quality stocks that can compound the other issues outweigh the opportunity that we see. Of course, you have to be aware of what's happening technologically with the Chinese companies as you are.

So let's talk about agriculture for a moment, Ben. Deere is also reporting on Thursday. Will Deere find itself in the eye of the tariff storm, or do you think it's going to manage to avoid the worst? Well, what's interesting to me is that Deere has a lot of bad news priced into its stock right now. Its earnings are supposed to drop this year to $5.56 from $8.53. Sales are supposed to come in at $11 billion, which would be down from $13.6 billion.

There has been a lot of tariff uncertainty, a lot of macro uncertainty. The ag cycle has not been working in its favor. But then you look at the stock. It's actually up 7.9% over the past three months, and it's up 24% over the last 12.

And it also had been trading in a really tight range for a number, for about two years at this point, heading into 2025. And now we see the stock slowly breaking out of the range. I think this is kind of the market looking ahead to what could be coming for the company. Because things have been tough, the next 18 months, or the next report should have easy comparisons.

Deere has also done a lot of work to get its costs under control so its margins should be improving as business picks up. And so there are, you know, this is a possible that if we're at trough earnings here that the stock could keep going higher. I love seeing a big breakout like this after two years of doing nothing. So I think that's a pretty exciting thing to watch.

Interesting. All right. Let's conclude our look at earnings with a look at Walmart. It was a market darling last year. This year, the company has investors somewhat disappointed. Stock is down about six and a half percent. What's at stake when Walmart reports on Thursday? Well, I think the big fear with Walmart is that it's just too darn expensive. The stock is trading at 33 times.

It's basically as high as it ever gets. But the business is doing well. I mean, it is taking market share and it's becoming more profitable. Part of that is due to it's actually getting higher income consumers to shop there, which never really happened before. The digital business is going great. They're actually doing well with digital advertising as well, which is bringing in new sources of income.

And so the stock is really doing well. I mean, I think one of the things I find interesting is just the response of shares today where the whole market's going kind of crazy to the upside and Walmart is down 0.9%. I think part of that is that in the face of everything that was going on with tariffs and a possible recession, it was seen as a safe play.

And so maybe people are looking to other retailers that are getting some huge moves today. It's pretty amazing to look at some things which, you know, are like Target is up 3.9% today.

Others were up even more. Things like Williams-Sonoma is up 8.6%. And so you're seeing, I think, a bit of a shift where people are like, "Oh, I can only be in stocks like Walmart," or I can be in, I think, Costco would be another. Costco is also down just a touch.

and nothing else. And now they're going back into those things. So I have to see how that plays out with earnings as well. But I don't think the narrative really has changed here. It's just this is a good, strong business. They're taking market share. And so now we just got to get through this period of what's going on with tariffs and see if the valuation really does stays an issue for it.

It's funny to think of Walmart and Costco, such amazing companies, as risk-off plays. Yeah, it's what they've been. I mean, they're just bigger, they're more defensive, especially even though they are obviously hurt by tariffs, but they can withstand it a lot better than some of these other companies. My favorite is today, as you look at, you want to know who people were really worried about, as you look at Five Below, F-I-V-E, the ticker, and that's a stock that's up 18% today.

- Do they get all their merchandise from China? - I assume they must do with a move like that. - That's amazing.

So let's talk about the economy for a moment. We're going to get two inflation reports this week, the consumer price index and the producer price index. Inflation, as we know, has not yet fallen to the Fed's 2% annual target. But any let up in trade, excuse me, any let up in trade tensions is likely to be good news on the inflation front. Ben, tell us what economists are expecting from CPI and PPI and what

what a more benign price growth environment would mean for the Fed. Well, I mean, the report should be fairly benign. We're not expecting much change so that the CPI is supposed to come in up 2.4%. That would actually be unchanged from the previous month. And Cora is supposed to come in at 2.8%, also unchanged. And then you look at the PPI, and then that's supposed to come in at 2.4%, which would be down from 2.7%.

And then core PPI is supposed to come in at 3%. That'd be down from 3.3. So there's either no upward pressure or actually a little bit downward pressure on it. As you said, it's up above the Fed's target, even though the Fed's using PCE, but, you know,

Inflation is still not where the Fed would like it to be. And we're still caught in this balance of like, is growth going to be weak? Is inflation going to be hot? And right now we're seeing, you know, the Fed has said that it's not in a position to do anything. That's probably the best thing to best place to be. And we're seeing the economic data has held up really well so far, despite all the surveys looking pretty terrible.

And if that continues and you have an economy that is just continuing to grow, and if you have inflation that is relatively stable, then that's good, too. And the Fed could just wait to see what it needs to do. And so for right now, it doesn't look like these are going to, you know, if we get a surprise one way or the other, there could be, you know, the market will respond. But at least as the numbers are looking right now, there's nothing for the Fed to do. And so the, you know, we're looking at the Fed

how many cuts are expected this year. It used to be that before this deal with China, they're expecting the first cut to be in June. Now it's September. And there may be one cut this year priced into the market at this point, maybe two when we had three priced before. So this is really just the Fed can just let things play out kind of market. And that's probably a good thing where the Fed isn't the story. Right. Don't wreck a good thing.

So, Chris, does Ben's view of the Fed or his analysis of the Fed align with your opinion? What do you see ahead? I think it's all about the fundamentals. And I think one of the things that's been so striking is how strong they've been. I think we started the year with a very positive outlook.

with an economy in the U.S. that was strong, with consumer spending that was robust, with real incomes that were rising, employment that was positive, and inflation that was coming down. So really setting ourselves up for a good year economically. And of course, the question being after such strong stock market years, valuations were somewhat higher, but we certainly see and saw lots of opportunities. Now, with this disruption from the tariffs,

If it turns out that the negotiations with China also lead to effectively a 10% plus reciprocal tariff regime, then that's what we're going to end up having. And so that will be then Trump having –

effectively realized his ambition to have tariffs to start to see some of the benefits, but I think it will take away a lot of the clouds that we've had. And so if we can be in an environment where consumers can continue to have confidence and spend so that some of these early indications that we had about consumer confidence, about the savings rate going up were really just reactions

to the headlines that have led to what now may be a more sensible outcome, then I think that that's much more positive. And likewise, if inflation doesn't pick up significantly and most of the tariffs have been announced, they haven't actually been implemented, then I think that really is back to a kind of Goldilocks scenario. That's what we've been looking at. That's language from the 2000s. I haven't heard that language in a while.

Well, we've been at it for a while, Lauren, I think. But that's the I'm speaking for myself, of course. But that's, I think, the scenario we're in. And so that, I think, will be very positive, because if we have a decent growth, if we have moderate inflation, then the Fed can, in fact, step back. But it means that on the one hand, we have a president and an administration that is going to be pragmatic.

And on the other hand, we have a Fed that has a lot of tools at its disposal if something does go wrong and there's an overreaction. So I think that basically sets us back to where we were at the beginning of this year, which is a pretty positive scenario.

It's a lot of turmoil in the first quarter to wind up where we were. So pretty, pretty interesting. Let's talk about two consumer stocks that I know you own. And one is L'Oreal. The other is Nestle. Give us your view on both of those and then we'll go into some listener questions.

Yes, gladly and clearly being based in London, we have a strong perspective on these globally leading companies. L'Oreal to start with is the global leader in cosmetics and in hair color. These are huge and important categories that are resilient because if you think of it, whether it's your skin cream or if you're coloring your hair and you're doing it yourself or in a salon, these are things that are very important to you and they're among the very last of the discretionary

purchases that you're going to be giving up. L'Oreal, like other consumer products companies, has been going through a really tough time. It really is through the pandemic, which was very positive, but then difficult comparisons, issues with stock, the inflation and the interest rate rises squeezing consumers. These have all not been good. It's also been combined with the ongoing slump in China, which is also looking like it's starting to moderate and going to come through. So they've had a lot of headwinds.

But underlying, it's an incredibly successful company that is just getting stronger in this kind of environment. And so we think that it is very well positioned and the most recent results that it had have been, I think, in line with that. So we think it's very well positioned. And if you look at the tariff impact, for example, with L'Oreal, then

About a quarter of their sales are in the US. 50% of those are made here. Another 20% are made in Canada and Mexico. So it's 30% that gets imported from Europe, a lot less than you might think.

And if you then think that there's a 10% tariff on that, you get to an overall impact on their sales that's less than 1%. So it's just an example of a company that we think is now attractively valued for a premium asset that is also well positioned to handle these tariffs because for them, that can be offset by price increases. So we think it's a real opportunity now to buy the stock.

Alright, Nestlé is more of a turnaround situation. Tell us what's going on there. Nestlé is the world's leading food company. We look at stocks globally so we compare it to other companies in Europe, in the US and in other places and we think it has an unrivaled position.

It has strong verticals in pet food, in the water business that it has, in coffee, where it's the global leader. And it's building a business in nutrition, which is similar to the business that Abbott has, which is another great American company that has

that kind of exposure. It also has been going through a difficult time in part like other consumer products companies for the reasons I said, all of the issues that have been happening since the pandemic. But in particular with Nestle, it's been really squeezed by the cost inflation. One of the things that they've said is that the inflation that they saw post pandemic is second only to the inflation that they saw after the oil shock in 1973, 74.

So there were billions of Swiss francs in their case missing, and they had to cut A&P. There were less consumers to sell to. They had to cut some of the innovation and some of the investment. And so one of the reasons I think why for Nestle and for other consumer products companies, the product range seems a little stale is because they haven't invested as much because of these issues. They're now coming back.

Nestle has a new CEO who is more of an insider. The previous CEO, Mark Schneider, was more of a strategist, an efficiency type of manager. The new one is more of a product manager who's getting the brands going again. So you're starting to see a turnaround in that business. We think it's exceptionally attractively valued. It has a dividend yield of

more than 3%. It's also up 20% in first-rank terms, so even more in dollars this year. So we're starting to see a turnaround, and we think that Nestlé is just getting started. It's an exciting situation.

For sure. So let's go to some questions. We had a question from Matt, and this is for you, Chris. You mentioned that you take long-term positions, and he wants to know how you define long-term, especially given trigger-happy investors in today's markets.

We really, when we say long-term, we really mean long-term. So we buy stocks with a perspective of holding them for five to 10 years or longer. And we want to own stocks for 25 years or more. I've been invested in Nestle in one form or another for my entire investment career that goes back to the 2000s, which is Lauren, why I remember Goldilocks because that's when I was an analyst and then a portfolio manager.

here in London. So that's what we're looking for. And we think that with our mandate, having that time is one of the main competitive advantages, because if you set yourself up right, right, if you're an individualist, you set up your portfolio right. If you're an institution or an endowment and you do your asset allocation right, if you are an investor and set up your portfolio right, then you can act. You don't have to react.

And so that to us is really important. And that means that volatility can become an opportunity. This kind of geopolitics and macroeconomics that we have to put up with, like this tariff thing, which looks like it's going to end up with 10% tariffs plus specific tariffs for

certain types of areas that are a particular focus of President Trump's, then all of these things become opportunities. And I think this year has been a great opportunity. You've been able to take that perspective. So that's what we're looking for when we look at these companies. And that's why we're

of course, following the quarterly earnings, but we're always asking what is changing on an underlying basis. Is there something that is affecting our investment thesis? And we don't think so for the companies I've talked about here.

25 years. That's impressive. So we had a couple of questions about the European defense sector. Keith asks, will European governments spend more on defense and infrastructure? And Edward asks, whom do you view as the most important companies in Europe's rearmament? I wonder if you could talk for a minute about that. Yeah, that's a really important issue. And that was one of the things from the Milken conference. And I also was just at another conference here.

where we heard from some NATO commanders and some US counterparts about these issues. I think one of the major accomplishments that President Trump can look at in this term is really an almost Nixon and China moment, where he has finally succeeded in Europe to get Europe to pull itself together

to invest more, to get Germany to get rid of the constitutional debt limit that they had, which will allow them to invest more in the overall economy, which is going to be good for Europe, good for consumers, good for corporates, and to step up on the defense spending. We've had 100 billion euros that have been allocated

allocated by Germany alone from February 2022 with the Russian invasion of Ukraine. But we've now had a commitment to further increase the spending. And I think that is something that the U.S. has been working on under various administrations for really the last two decades. And it's now that this is happening. So I think that is a very important moment that is going to be important geopolitically and will mean that there's going to be the largest

consumer economy in the world, which is Europe, that is going to be able to pull more of its weight. So I think that is real, it's happening, and it is in part a real achievement of the current administration.

If you look at the companies that are going to benefit, a lot of that spending is going to go to European companies, but it can't all go. The US and companies like RTX, like some of the other large defense companies, have strong businesses in some of the most important areas, in particular in missile defense, in avionics.

with the incipient technology that you need to fight drones, which is the main insight from the Russia-Ukraine war, how important that is. So it's going to have to be spent across the board. And I think part of what is going to happen in this next phase, we've had the tariff confrontation. We seem to have lost Christopher. Oh, there you are. I'm still here? Sorry. You

Yes, so with the tariff confrontation, I think we're now going to have a more constructive perspective. But so I think there's going to be engagement across the Atlantic on that spending. In Europe, you do have great companies. You have companies like BA Systems in the UK. You have Thales. You have Safran. You have Leonardo. You have Rheinmetall in Germany, which has done very well, but it's much more around more hardcore equipment.

So you have companies there, but in many cases they are struggling with legacy businesses. And we can't forget, as we look at some of these expectations, that these are government procurement businesses. So they're cost plus. And I think as you look at some of the performances of the European companies,

They are actually anticipating a lot more than I think is going to be realized. And so I would look at the overall space very positively, but I would be very cautious about concluding that there are European companies that are going to be the main beneficiaries and that these European companies are still trading in valuations that mean that investors can make money from buying them.

I just want to make a public service announcement. We had a wonderful cover story this weekend by Al Root on defense stocks. So I encourage people to take a look at that. You know, we had a question from Stephanie that relates to what you're talking about, Chris. She says European stocks are at 52 week highs already after approximately a decade of underperformance. Is there more room to run? And it sounds like you think there may be some, but not an infinite amount. It's, it's, it's,

It's a question that has to be looked at in great detail because there's one thing is to look at the European indices and to look at the average valuation of those indices compared to the US, but it's another to look at what the companies are that make up these indices. So if you look at it on a one-for-one basis,

For example, if you compare the Eurostox 50 or the Eurostox 600, which are the two big indices in Europe, to the S&P 500, which is probably the best direct comparison, then there's no real valuation discount for companies of similar quality. So Nestle is not trading more cheaply than an American company. L'Oreal isn't.

It really is across the board. LVMH and luxury, which we own, is not. So I think there's no evidence that on a like-for-like business for quality, for growth, for scale, that there's a valuation discount. Where there's a valuation discount, but it's in part because in Europe, we don't have the large technology companies. There's very few. SAP, which is a leading company, is trading at the same type of multiple as a U.S. company would.

So the composition of the index is very different. It's skewed towards banks, it's skewed towards capital intensive businesses, and to a lesser extent, it's skewed towards healthcare and consumer companies. But those trade at very different valuations, so that explains a big part of the discount. I think if you're looking at Europe and you're looking for opportunities, you have to look below that, really at the small and mid caps.

It's a different part of the market. It's companies that have much greater exposure to Europe. You're going to be investing much more, again, in financial companies, industrial companies, healthcare and consumer companies than in tech companies. But there, I think there are opportunities and you can still find them. But the overall...

Indices, I think, have made a large run, like in the US, where I think banks have had a great run but are now really quite fully priced. I think the same can be said, for example, for banks which make up the biggest part of the European index and which, on the whole, are much lower quality than the US banks. That's a good distinction between the index and what's beneath them.

And with that, we need to wrap up the call. We've hit time. Chris, I want to thank you so much for joining us today. It was really fascinating. And Ben, thank you, as always, for your great commentary. Thanks, Gwen.

So I apologize that we didn't get to everybody's questions. We had some terrific ones today, but I think we covered a lot of ground. Next week, Ben and I will be back speaking with you about markets, and we may have an outside guest watch the registration page for more information. Thanks, everyone, for tuning in today. Stay well and have a good week.