Liz Ann Sonders - What is Really Driving Market Returns

Observant1

In this episode of Excess Returns, we welcome back Liz Ann Sonders, Chief Investment Strategist
at Charles Schwab, for an in-depth conversation about what's really driving markets right now.
Drawing on her latest research and commentary, we dig into retail trading dynamics, the implications of rising
tariffs, the debt burden, inflation pressures, market concentration, and why the Fed might be holding the line.
Liz Ann delivers clear, actionable insights—cutting through the noise and helping investors understand
what matters most in today’s unstable environment.

00:00 – Opening clip: debt, growth, inflation & the Fed
01:00 – Welcome and introduction
02:00 – Retail trader impact on market rally since April
05:25 – Sentiment washout and pain trade dynamics
08:00 – Policy instability and tariff complacency
12:00 – What investors can do in the face of uncertainty
14:50 – Budget deficits, debt burden, and growth implications
18:00 – Inflationary risks embedded in the new spending bill
20:30 – Dissecting inflation: tariffs, goods vs. services, and inequality
23:45 – Inflation vs. margins: where the impact shows first
26:00 – Instability vs. uncertainty: the new investor reality
30:30 – Labor market risks and misleading employment metrics
35:00 – Immigration's hidden macroeconomic effects
38:00 – Fed independence, Powell’s job security, and mispriced rate expectations
42:00 – Why the Fed may not cut—and why that’s bullish
44:20 – Mag 7 myth: contribution vs. true performance
48:00 – Broadening the rally: high-quality vs. low-quality stocks
50:30 – AI's second-order effects and sector-level surprises
55:00 – Liz Ann’s contrarian take: why year-end targets are pointless

https://www.youtube.com/watch?v=Lcq0Mux3oC8

Sven

Thank you, @Observant1. It was an excellent interview, and LizAnn answered many questions with much details.

Here is 2025 best performing stocks in S&P 500, and they are not the Magnificat 7.
https://slickcharts.com/sp500/performance

Edits:. She stated that the tariff will either be absorbed by the import companies or the consumers. Companies will NOT lower their own earnings for this administration and will pass on this added cost to the consumers as history has shown over and over. Question is when it will show up this year?

WABAC

Sven said:

Here is 2025 best performing stocks in S&P 500, and they are not the Magnificat 7.
https://slickcharts.com/sp500/performance

I'm guessing Seagate hasn't been that high on a list like that since the 1980's. Have hard disk drives become a meme stock?

Observant1

@Sven,
Thanks for the list of highest-returning stocks YTD.
I wasn't paying close attention to stocks with the highest 2025 returns—the results surprised me.
The two Mag 7 stocks with the highest returns/rankings are:
Nvidia (29.20% - 48th)
Microsoft (21.88% - 86th)

@WABAC,
I haven't done a deep dive on Seagate Technology.
But a quick search indicated there was robust growth for storage in data centers running AI workloads.
Seagate's rival, Western Digital, ranked 13th on the list with a 52.69% return YTD.

WABAC

@Observant1, no doubt. Of the building of AI data centers there is, apparently, no end.

Forbes reports that industry shipments were still down 9.5 for the 1st quarter of 2025.

Sven

Data centers require lots of water for cooling purposes in addition to electricity. The western states are having another dry years. Are there more sustaining ways to operate these data centers ?

Anna

My local energy company has a competition between neighbors to cut their energy usage. They send customers their personal result as compared with their neighborhood. Why are we asking grandmas to cut heating their homes while building data centers to which we transfer the energy usage just to AI my google search and the like?

FD1000

Because this is where the money is.

DrVenture

Anna said:

My local energy company has a competition between neighbors to cut their energy usage. They send customers their personal result as compared with their neighborhood. Why are we asking grandmas to cut heating their homes while building data centers to which we transfer the energy usage just to AI my google search and the like?

I get those too. I find them useful to assess my personal usage. It is a bit of a "competition", I suppose. Odd anecdote that I have on that subject. A co-worker who was a bit odd (bi-polar, in fact), would rant that they were insulting him because his house was old and not very efficient. His wife would call ComEd and insist that they not send these reviews to them any more.

My own usage was actually quite good, despite having desktop computers, big TVs and surround sound systems on very frequently. I assume it was because our HVAC and appliances and windows are all pretty efficient. Still, it always surprised me.

Crash

Hawaiian Electric is still in the public relations toilet after the Maui fires, but only lately there was a news story about bills coming down because they got a better deal from a materials provider in order to make and distribute electricity to customers. We have A/C but don't use it much. Latest bill was $78 vs. $88 the previous month. Nice surprise for a change.

Sonders is STILL smart and gorgeous. I listened.

DrVenture

My takeaways on the linked video are that once you eliminate partisan beliefs, there is almost nothing in the recent government actions that would ever be considered positive economic news. From tariffs above Smoot-Hawley levels to the Big Deficit Bill to outsized debt servicing levels to rising price pressure on goods to overall instability, these are all things that weigh on long term economic growth. A well-explained narrative that describes why so many economists have forecast a GDP drop. And since these factors have no quick solution, it suggests a long term situation.

Meanwhile the EU tariff announcement is met with no enthusiasm. And the Japan deal was simply an ordinary up day on the market. Canada is not kowtowing, nor is Mexico and I expect the China results to be met with little enthusiasm.

Any FOMO that I may have felt in the last month, or so, is diminishing quickly.

JD_co

Seagate? I'm having flashbacks to my Iomega Corp. and Ascend Communications trading days. Ah, the 90's.

So when FOMO fizzles out, what next for these markets? What is driving this bull?

Old_Joe

"What is driving this bull?"

Maybe DJT Bull ?

JD_co

Old_Joe said:

"What is driving this bull?"

Maybe DJT Bull ?

Big globs of fertilizer can makes things grow, I suppose.

This bull market has overcome a lot thus far in 2025. Retail investors have been contributing greatly to the slow march northward, if I can believe what I read online. FOMO has been key. Now valuations are stretched, complacency abounds and the bears have been beaten down.

If there is a cliff out there, we can't see it in all this fog (and manure?).

Mark

Did you mean to say and manure or of manure?

DrVenture

https://fortune.com/2025/07/29/markets-europe-pulled-wool-over-trump-eyes/

"Analysts are hinting this morning that E.U. officials appear to have pulled the wool over Trump’s eyes in the negotiations. The deal includes $750 billion in “strategic purchases,” $600 billion of private investment, and “vast quantities” of military equipment purchases. But there is near unanimity on Wall Street that the private investment was going to happen anyway in the normal course of business.

“The $600bn represents existing investment plans, not new investment,” Mark Wall and his team at Deutsche Bank wrote this morning."

And the deals may well be deemed invalid. I wonder if the government will be required to pay back any tariffs collected?

"The high court is packed with Trump’s own picks, of course, so he can expect a sympathetic hearing. It would nonetheless be a huge leap for the justices to agree that routine trade deficits constitute a national emergency."

Anna

Rebranding is not an unusual political stragegy in today's world. Political because it rarely has economic benefits and often doesn't even have economic deficits. You making a new movie? Let's negotiate. I'll give you a few other-people's dollars and, in return, leave you alone to make your movie. You add my name to the credits as a co-producer with a small hidden stipend. No profits need appear for me until after I leave my position as my other-people's-money CEO. Yea, look I produced a movie and that makes me a movie expert. The point being that the rebranding disappears and the credits remain (in theory). So the $600bn, despite it's origins, is now a Trump $600bn since it is embedded in the rest of the tariff stuff.

Everyone has seen this rebranding in their own life. For example, an employee keeps asking his boss to consider a new idea he had. The boss ignores him but, six months later, jumps in with the same idea at a manager's meeting. The employee gets the work; the manager gets the credit. etc.

Nothing else matters past the best talking point and the timing of the formulation of the memory.

Charles

"Nothing else matters past the best talking point and the timing of the formulation of the memory."

That's good! Now more than ever, seems like.