A Substack "Water Cooler" Chat: The Magnificent 7 in 2025
We talk tech, the economy and top stock picks with Value Degen ...
Let me start with an admission: I’ve been out in the American work force long enough to remember the proverbial “Office Water Cooler” — the workplace version of the colonial town square … and the place you’d go on your break to meet up with your co-workers … catch up on families … exchange gossip … and (because I usually worked in financial publishing) even trade stock tips.
As the years marched on (and technology advanced) that “water cooler” gave way to the coffee machine … and the microwave …
And finally — just before the COVID-19 Pandemic sent us home — the Keurig.
These days, water-cooler gossip takes place “virtually” … via Slack … or Microsoft Teams.
But with the innovations we’re seeing here, I’d argue that Substack is becoming that new “Office Water Cooler.” You’ve got a self-contained platform of like-minded writers. And Substack tools like Notes, direct messaging and easy commenting are a lot like the proverbial Office Water Cooler … making it easy to make friends and find collaboration partners to trade ideas with — as I saw yet again just last week.
I posted a Note about the final installment of the Stock Picker’s Corner (SPC) “Forecast 2025” investing series — where we shared the New Year investing outlooks of the Substackers who’ve emerged as our top collaborators.
One of those collaborators — Unemployed Value Degen — followed up with this comment:
“My base prediction is 2025 the Mag Seven melt up even higher, but 2026 is the year that they get cut in half. I could be wrong, nobody knows nothing.”
I didn’t miss the clever wit that’s part of my Substack neighbor’s conversational allure. (After all, Value Degen’s descriptor — “writing about small cap value stocks until I find a job or this Substack pays the bills” — grabbed my attention even before our introduction.)
And I was intrigued … intrigued enough to follow up.
Here’s an edited transcript of our talk.
WPIII: Let me start by saying — for our audience here — how glad I was to have you join my “Platinum Rolodex” this year … and how much I enjoyed your contributions to our “Forecast 2025” investing series. Closing out our first year here on Substack, I can tell you that it was a big hit with our subscribers, our new readers and folks intrigued enough to pay us a visit (and a bunch of ‘em stayed).
Part of that excitement was due to your contribution … you brought us Finance of America Cos. Inc. (FOA), the leader in reverse-mortgage retirement financing.
And we had a nice lineup of other stock picks, analyses of 2024 and outlooks for what will come.
That’s when it got intriguing …
Value D: I liked that that series, too, Bill. The fact was that 2024 was an interesting year — on a lot of levels. This year (2025) will be even more interesting. And here’s why. My base prediction for 2025 is that the Mag Seven melt up even higher.
WPIII: Let’s back up a second. You triggered my interest by talking about the Mag 7. Let me do a bit of table-setting here: For folks who don’t know, that group is the successor to the FANG group, anointed by CNBC’s Jim Cramer back in 2013; it was expanded to FAANG in 2017.
In 2023, Bank of America Corp. (BAC) analyst Michael Hartnett began using the term “Magnificent Seven” to describe the FAANG’s successors … grabbing the title of a hit 1960s Western as their sobriquet.
The group consists of Microsoft Corp. (MSFT), Amazon.com Inc. (AMZN), Alphabet Inc. (GOOGL), Nvidia Corp. (NVDA), Meta Platforms Inc. (META), Tesla Inc. (TSLA) and Apple Inc. (AAPL).
The Mag Seven zoomed 75.71% in 2023 (vs 24.33% for the S&P 500). The group gained 63% last year (23% for the S&P 500).
And it’s grown to be a larger piece of the S&P 500 — so its influence has grown.
With that preamble out of the way, let’s turn to your comment … which triggered this chat.
You said the Mag Seven will “melt up even higher.”
Give us your take on that surge … that growing influence … and what it’s meant. You described it as a “melt up.” Give us some context … the drivers (catalysts) … what it means to the market … and perhaps to the economy.
Value D (A): I might be a value investor with a hearty enthusiasm for commodities, but — like you, Bill — I [can see] an industrial revolution that will change the world. I would invest more in Artificial Intelligence if I could get my circle of competence around it.
I don't think it's controversial to think that U.S. Big Tech is a growth trap; in 2024, the Mag 7 grew earnings by 30%. And here in 2025, analysts are projecting them to grow earnings by 20%. Slowing earnings growth is enough to get multiple (P/E) compression. And I think that everyone in the market knows that this is coming eventually … but that the question is: When?
We are still below the P/E ratio of the dot-com peak. This means that the S&P 500 could grow faster than their earnings again. The Mag 7 could provide another year of 30%+ returns — off of 20% earnings growth — and expand multiples into the end of 2025. And you have to keep in mind that the Silicon Valley tech crowd is a much-more experienced bunch of investors and corporate executives than they were 25 years ago.
WPIII: Yes, indeedy … I was a reporter working through that … I was two years removed from Prentice Hall publishing my Contrarian Investing book … and I wrote a column for The Baltimore Sun warning of valuations … and a bubble.
Value D: In many cases it's the same people in charge … but they have learned a lot of new tricks since then. So the odds that they can structure their companies to earn a higher multiple than in 2000 is pretty good.
With the enthusiasm surrounding the promised deregulation from the new administration, global central banks entering an interest-rate-cutting cycle, and U.S. households with a pristine (aggregate) balance sheet, I think 2025 could be off to the races. I don't know if 2026 is the year when the party ends, but without some sort of Black Swan coming out of left field, I'm pretty sure that the party keeps going in 2025.
WPIII: Interesting stuff … okay, let’s talk 2025 … you said that the “melt-up” continues … what’s the driver? What does that mean? Give us some context … how confident are you in that prediction? Any “wildcards” to watch for?
How would you play it?
Any interest ripple effects? Ancillary opportunities? Value plays? Mid-cap and small-cap? Anything else?
Value D: As the cliché goes, a bear market is about balance sheets, and a bull market is about narratives. Well the narrative on Artificial Intelligence is still dominant, but now the paradigm has shifted and the tech bros are acknowledging that they need baseload electricity and plenty of it. Utilities were the top performing sector of 2024! The narrative has not yet shifted to the infrastructure or the natural gas that is needed to transmit and generate that baseload power, so there is a decent chance that many more commodities could become AI beneficiaries in 2025.
I had been allocated for a commodity supercycle for the last two years, and painfully so. Fortunately I found other undervalued small caps that were not exposed to commodities over the last two years as well, so it wasn't all pain. But the fundamentals of the commodity supercycle are still intact; we have underinvested in exploration and extraction for a lot of different resources.
But the overall economic activity that comes from an interest rate cutting cycle is likely to permeate throughout the economy, so you don't have to be in just commodities. The U.S. household has over $35 trillion in home equity since housing prices doubled from the COVID money printing, and their mortgages were all fixed at 3.5%. If Trump can get the 10-year Treasury down to 3.5%, and get the mortgage spread down to 2.0% from deregulating some 2008-era banking rules, we could see a 5.5% 30-year mortgage.
And that could cause a frenzy in home-equity loans so that people could buy their jet skis and Winnebagos again.
WPIII:Your “jet-skis-and-Winnebagos” line — and the reference to using houses as ATM machines to finance them — reminds me of 1998, and the Fed rate-campaign reversal. In our area — the Baltimore-Washington Region — housing prices soared after that. I was working as a business reporter then and saw personally how folks were pulling cash from their houses.
Okay … that brings us to 2026? And your expectation that this group gets chopped in half. What’ll be the drivers there? What kicks that off?
What’s the fallout? Market? Economy? U.S. competitiveness?
Anything I’m missing?
Value D: I was joking when I predicted a crash in 2026 — that is too far away to try and guess at. I am much more confident that we won't have the crash in 2025 than I am that we will have a crash in 2026. I really don't have a clue on just how crazy the multiples can go on the S&P 500 as the mix becomes more and more weighted toward growth stocks.
With these large growth companies routinely able to deliver 20%-30% earnings growth rates, very little would surprise me. We could rally until 2027 — with an S&P 500 that delivered 20%+ returns for five years again just like in the 1990s … and end up at a P/E ratio of 28 - 30 before the next market crash.
But even when that crash comes, a tech crash has a different outcome on the economy in general than the 2008 financial crisis … something I’m sure you saw yourself, Bill … given that work as a reporter and financial writer.
WPIII: Indeed … indeed.
Value D: Both in 2000 and in 2021 — when tech crashed — it didn't permeate through the rest of the economy … because tech is almost exclusively funded with equity fundraising, and the debt stays out of the banking system. Without a bunch of bad loans, you don't get the financial crisis and the bank solvency issues. So even when tech eventually deflates, it doesn't mean that anybody on Main Street will feel it.
Well … unless this mania extends to something that is heavily leveraged and collateralized — like an old-school industrial buildout, for example.
And when the tech crash does come, it might not last for years like the dot-com crash did.
Remember that the dot-com crash was extended by the Enron scandal and the World Trade Center bombing in 2001. Both of those events shook confidence in the market generally, and extended the selloff. With such a large percentage of the population who have automatic S&P 500 purchasing plans through their 401(k)s — or through an IRA on their mobile banking app — there is a relentless bid that wasn't there before.
I don't mean to sound like a Pollyanna who is blind to the risks in the market. But if you were to ask me my “base case” — without a Black Swan event, this melt-up could surprise everyone for years.
WPIII: What else are you looking at for this year?
Give us a peek at your “Watch List.”
Value D: My pinned Substack article is a Model Portfolio. I have it at about 45% commodity supercycle / sustained inflation, oil, gold and land. There's another 10% for small-cap tech; if you look at the Cathie Wood-type stocks, a lot have improved earnings (but) stock prices that can't catch a bid.
That can't go on forever.
I put 10% in consumer discretionary for when interest rates fall … but I might be a year early on that one. There's 5% in logistics for the end of the “destocking cycle” … another 5% in industrials with exposure to re-shoring — what you’ve been writing about as “deglobalization.”
Oh, and more than 10% in Finance of America Cos (FOA) — which you kindly mentioned in your 2025 investing series. I think it's a pretty solid little Model Portfolio for the year ahead, but it's behind my $5 Substack paywall.
WPIII: This is good stuff … and it leads me to an obvious “closing” question.
Anything else you want to mention?
Value D: I never mind giving away a few ticker symbols that I'm buying. I believe in free samples — kids of like the bourbon chicken in the food court at the mall — and I believe my bourbon chicken is delicious.
I think Burford Capital LTD (BUR) gets a resolution from Argentina this year and will have a nice rerating.
Newell Brands (NWL) is about five quarters into its turnaround, results have been good and the shares are still cheaper than where the CFO spent $3 million on insider buying.
Douglas Elliman (DOUG) was one of my paywalled stocks … but I already talked about it on enough podcasts, so the secret is out. These next few quarters they should receive the first deferred revenue from their COVID-era focus on selling new-build condos. That should show up as an improvement in many different numbers on the company’s income statement.
WPIII: For folks who might not know the name since it’s UK-based, Burford Capital provides financial services to the legal sector. You know … helping businesses and law firms finance legal cases — especially when those cases are expensive … or take a long time to play out … both of which I saw a lot of during my years as a newspaper reporter and business journalist.
Lots of folks reading this probably know Newell … thanks to products they use at home, work or school … or for camping or outdoor recreation. It markets Mr. Coffee — an earlier version of the Keurig … so pardon me if I’m chuckling, given the “water cooler” intro I used here.
Douglas Elliman helps folks buy, sell and rent homes, with a big focus on the New York Metro region .. and in California, Florida and Texas. in the New York metropolitan area and other key markets like Florida, California, and Texas. It offers service like development marketing, title/escrow services and even property management, if I recall.
VD: That’s correct, Bill. And I’ve got full write-ups — for all of those names — on my Substack.
WPIII: I’d encourage folks to check out your Substack. Thanks for joining us around the “water cooler” yet again.
VD: Absolutely, Bill — let’s talk again.
WPIII: And for all you folks who are members of the SPC Family … see you back here next time;
Thanks for having me as a guest, I don't talk about macro musings often enough. Mostly I just turn over rocks every day.