Drew Pettit, chief investment strategist at Roundhill Investments, told Phil Rosen on Full Signal that today's market is late cycle, even as he stays constructive on the AI buildout.
Pettit argued growth expectations remain near 10-year highs, favored photonics on AI pullbacks, and said investors should pair Microsoft with a hyperscaler inside the Mag 7.
Why Pettit calls this a late-cycle bull market
"OK, late cycle," Pettit said when Rosen asked where markets stand. "Nothing is easy, and nothing's cheap."
"I don't think it's late cycle for where fundamentals are, but markets don't work backwards," he said, arguing investors are already comfortable with 2027 numbers and looking beyond.
Rosen noted PEs have compressed this year even as prices rose. Pettit agreed earnings outpaced price, but said higher rates mean growth has to deliver more.
From a DCF lens, growth expectations are still near 10-year highs, so the market "feels more like it's trading at 24 times earnings."
Asked about a bubble in expectations, he pushed back, "Not bubble, they're high." "They might be at 10-year highs, they're not at all-time highs." He put today's growth expectation around "5 or 6%."
Feel versus real, and a market of stocks
Rosen pointed to a bearish AAII survey alongside stock allocations near all-time highs. Pettit said surveys capture feel, not behavior. "The real is investors are still bullish," he said.
At Roundhill, the team reads sentiment from options prices, VIX term structure and skew.
On S&P 500 pair-wise correlation near five-year lows, he returned to a mentor's line, "It's not a stock market. It's a market of stocks."
Low correlation can leave the VIX low while single stocks swing hard. He called that "micro efficient."
Mag 7 pairing and photonics on pullbacks
Rosen noted the Mag 7 were up only about 6% year to date and lagging the S&P 500. Pettit still sees the group as central via capex and financing. Forced to choose, he favored Microsoft after weak sentiment, paired with Meta, Amazon or Google for differentiation.
In Roundhill's Focus 5, photonics was the favorite "AI on pullbacks" trade—pricing power, multi-year visibility and lower debt risk, yet sold with neo-cloud names.
He called Coherent (COHR) "the baby that's getting thrown out with the bathwater," and Lumentum (LITE) a longer-term bottleneck, though its pending all-stock acquisition by Marvell complicates the near-term trade.
Halo stocks as a different kind of risk
Pettit also liked Josh Brown's Halo idea—heavy assets, low obsolescence—via Roundhill's LOHA ETF as a Mag 7 diversifier. He still liked Canadian Natural Resources (CNQ) for refining and petrochemical exposure, and Kirby (KEX), a U.S. barge operator moving oil and refined products.
Those names and AI leaders share rising Wall Street revisions, he said. In a late-stage bull market where "nothing is cheap," that pattern is why he stays willing to own risk.
For another AI-cycle take, see Strategist Adam Parker on the AI spending cycle.
Tune in to the full conversation with Drew Pettit on YouTube, Spotify and Apple Podcasts.
For more on the AI cycle, read J.P. Morgan's Stephanie Aliaga on Why the AI Cycle Is Still Early and the Sectors She Likes, and subscribe to the free Opening Bell Daily newsletter for a daily briefing on stocks, macro and Wall Street.
This article is for informational purposes only and is not investment advice. Views and stock opinions are those of Drew Pettit and market figures are as stated by the guest at the time of recording.
