Josh Schafer, an investment writer at Barron's and the author of the Searching for Signals newsletter, says the stock market is on thinner ice because only a few large-cap stocks are holding up the index.
He still thinks the next major move is higher because the AI buildout keeps expanding.
I sat down with Schafer on Full Signal with Phil Rosen to talk about weak market breadth, Meta's Muse launch and the stocks his team is watching. Here are the key takeaways.
Why market breadth is so weak
The S&P 500 sits near record highs, yet I noted that the median S&P 500 stock trades 16% below its 52-week high.
Schafer said that means only a handful of large-cap stocks are carrying the index.
He blames higher rates. Schafer said the 10-year Treasury yield started its "hockey stick" move in early August, and many stocks stopped climbing and moved sideways. "You need the bond market sell-off to end," he said, before broader participation can come back.
He is not sure a top in yields is in yet, with oil, inflation data and an uneven jobs report all clouding the picture. Schafer said that "when you have a narrow market, the market is on thinner ice." That could mean a sharp rip higher if breadth returns or a drawdown if the AI trade hits a speed bump.
Why stocks are holding up despite surging bond yields
Schafer gave two reasons. The first is growth, with consensus now projecting about 3% GDP growth for the third quarter, up from 1.9% at the end of June, according to Schafer. I covered the same disconnect in Why stocks are ignoring bond yields surging to 19-year highs.
The second is AI. Schafer said every macro risk now raises one question, which is whether it stops the AI buildout, and investors are betting that higher borrowing costs do not.
How Meta's Muse changed the AI trade
Schafer credited Meta's Muse with the latest leg of the AI rally. He said Muse brings consumer AI that can handle tasks like booking a flight or a doctor's appointment, and he noted Meta's stock rose 30% in September.
Muse is free for now, and Schafer expects Meta to eventually charge for heavier usage, leaning on its more than 3.5 billion daily active users. "I think the next major move is probably higher," he said, because the AI buildout keeps expanding. I also discussed Muse with Jess Inskip on Full Signal.
Schafer also flagged falling AI token prices at OpenAI and Anthropic, which he reads as a sign of growing competition. Using a hypothetical $2 trillion Anthropic valuation, he said public investors would need the company to be a leader to justify the price.
The stocks Schafer's team likes right now
Intel is up 197% this year, and Schafer said earnings estimates keep rising, with 2026 at about $1.50 a share and a little above $2 in 2027. He said expectations are not crazy high and that Intel is strong in inference chips, which an AI agent like Muse would require. He added that he does not know whether Intel chips are used in Muse.
He also pointed to cybersecurity. "AI agents need cybersecurity too," Schafer said, and I noted Okta is up 158% this year and Palo Alto Networks is up 125%. He called them long-term AI buildout plays rather than a six-month call and suggested investors who want broader exposure could look at the ETF CIBR.
Walmart is down 7% this year after falling 9% on its last earnings report. Schafer said it posted its worst same-store sales in about six years and trades below its five-year average 12-month forward price-to-earnings ratio. He called it a "best in breed way to play the consumer."
The last pick is Atlanta Braves Holdings (BATRK), up 30% this year. Schafer said "the valuations of sports franchises just keep going up every single year," and the Braves also own a real estate operation outside their stadium.
He cited a market cap of about $3.7 billion against the Angels' recent $4 billion sale.
Tune in to the full conversation with Josh Schafer on YouTube, Spotify and Apple Podcasts.
For more on narrow market breadth, read Narrow market breadth doesn't mean a bear market is coming, 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 Josh Schafer and his team, and market figures are as stated by the guest at the time of recording.