How Individual Investors Flipped the Script on Wall Street

Individual investors are no longer the "dumb money" of market lore; armed with resilience, a newfound risk appetite, and increasingly sophisticated tools, they're navigating volatile markets and capitalizing on major themes like AI and private market access, often with more agility than traditional institutions. This shift, fueled by a generation undeterred by past scars and empowered by an explosion of information and low-cost options, suggests a secular change in market dynamics where the retail cohort is a formidable, and often prescient, force.

Key Insights

1. The Unshakeable Retail Investor: A Secular Shift Towards Risk and Resilience

Ben Carlson and Josh Brown highlighted a profound change in individual investor behavior, suggesting a potential secular shift rather than a cyclical blip. Despite significant market drawdowns, such as the sharp, albeit brief, bear market described in their hypothetical "June 2025" scenario, younger investors have demonstrated remarkable resilience and a continued appetite for risk.

Ben Carlson: "What if the pandemic flipped a switch... But what if this embracing of risk is secular? ...what if we have a whole generation of people who are just, they have that switch now that says, no, I'm okay with risk. What does that mean?"

This new generation, as Ben Carlson noted, hasn't been scarred by prolonged secular bear markets like previous cohorts. Their experience, as Josh Brown pointed out, has largely been that selling leads to regret, reinforcing a "buy the dip" and "double down" mentality. Michael Batnick added that even after significant losses in popular stocks in 2022 (e.g., Nvidia, Netflix), platforms like Robinhood saw continued user and deposit growth. This contrasts sharply with the risk aversion seen after the Great Depression or even the Great Financial Crisis, which Callie Cox noted made Millennial investors initially more cautious and cash-heavy.

The implication is that this sustained engagement from individual investors, particularly younger demographics (Gen Z and increasingly confident Millennials), could lead to different market dynamics, potentially fueling innovation-driven rallies and providing a more stable demand base for growth assets. For investors, this means recognizing that retail flows are a significant and potentially more persistent market force than previously acknowledged. Understanding this generational shift in risk tolerance is crucial for anticipating market trends and asset class performance.

2. Riding the Wave of Corporate Adaptability: How Individuals Capitalized on Business Ingenuity

Callie Cox emphasized the surprising resilience of businesses, particularly their ability to maintain healthy profit margins through years of operational turmoil, including supply shocks and inflation. This wasn't just a story of Big Tech dominance; even excluding the "Mag 7," larger companies demonstrated significant margin power.

Callie Cox: "The resilience of businesses to keep their profit margins afloat through four or five years of just operational turmoil. It's amazing if you look at S&P 500 margins... margins have been so healthy across."

Josh Brown connected this to an often-overlooked form of progress: companies are simply getting better at navigating challenges. They learn from past mistakes and leverage technology and experience to operate more efficiently. Ben Carlson pointed to the rapid, successful shift to remote work as an example of corporate adaptability. This underlying corporate strength has supported earnings, hiring, and consequently, consumer spending, creating a favorable backdrop for investors who stayed the course.

For individual investors, this corporate resilience has translated into robust market performance, rewarding those who maintained exposure to quality companies. The takeaway is that focusing on well-managed, adaptable businesses can be a winning strategy, as these companies are better equipped to handle economic shocks and capitalize on emerging opportunities. This adaptability, in turn, supports the "buy and hold" approach often favored by successful individual investors.

3. The AI Juggernaut: An Unwavering Theme Fueling Markets and Investor Conviction

Josh Brown identified the unwavering strength of the Artificial Intelligence (AI) theme as a major surprise and a critical driver of the market's rebound. He argued that even a 20% S&P haircut couldn't derail corporate America's commitment to AI, with companies doubling and tripling down on AI spending during earnings calls. This, he posited, likely "saved the stock market" in April of their hypothetical 2025.

Josh Brown: "Mine is that there was not even a hiccup in the AI theme... I'm pretty sure it's not going to be inflation... it's going to be AI. Like that's going to be the decade defining investment theme."

Michael Batnick acknowledged a brief "hiccup" with the DeepMind (likely referring to a similar event, DeepSeek was mentioned) news causing a temporary dip in Nvidia, but overall, the capex spending from giants like Google and Amazon remained relentless. Ben Carlson raised a crucial question: could AI be the deflationary force that helps manage government deficits? Josh Brown concurred, viewing AI as a "mother of all disinflationary bombs" due to its potential to reduce costs across industries.

This persistent, powerful theme has been a significant area where individual investors have actively participated, often identifying and investing in key AI players early on. The actionable insight is that AI is not just a fleeting trend but a foundational technology reshaping the economy. Investors should look beyond immediate hype to understand the long-term implications for productivity, cost structures, and new market creation, recognizing AI's potential disinflationary impact.

4. Beyond Borders and Bitcoin: Retail's Expanding Horizons and Shifting Sentiments

The panel highlighted surprising strength in areas often overlooked or approached with skepticism by traditional investors: international stocks and Bitcoin. Michael Batnick pointed out that international stocks were having their "best quarter relative to just to start a year in 25 years," a stark turnaround from the bleak sentiment at the beginning of the year. Callie Cox suggested this outperformance could continue, citing factors like a potentially weaker dollar, the tech story in developed markets, and Germany's fiscal pivot.

Michael Batnick: "The fact that international stocks are having their best quarter relative just to start a year in 25 years. Holy shit. Nobody had that on their parlay."

Simultaneously, Bitcoin demonstrated remarkable resilience and an ability to "break the mold," as Josh Brown put it, by outperforming gold and decoupling from its perception as merely a tech proxy. Michael Batnick shared his surprise at Bitcoin's surge to $110,000 (hypothetical 2025 price) after a dip to $74,000. Callie Cox described Bitcoin as a "shape shifter," capable of acting like digital gold or a risk-on Nasdaq-like asset depending on market conditions and narratives. Ben Carlson noted Bitcoin's enduring dominance within the crypto space despite narratives favoring other tokens like Ethereum.

This demonstrates a willingness among many individual investors to look beyond domestic markets and traditional asset classes, embracing global diversification and digital assets. The takeaway for investors is to remain open-minded about asset allocation and to recognize that leadership can shift unexpectedly. The outperformance of international equities and Bitcoin challenges the notion that US tech is the only game in town and underscores the importance of a globally diversified and potentially digitally-inclusive portfolio.

5. The $20 Trillion Cash Enigma & The Debt Dilemma: Decoding Consumer Power and Market Jitters

A fascinating dichotomy emerged: while consumers are spending and markets are rallying, an enormous amount of cash remains on the sidelines, and concerns about US debt are growing. Josh Brown highlighted the "cash obsession," with nearly $7 trillion in money market funds and a staggering $19.44 trillion in total currency and deposits as of May (hypothetical 2025). He argued, "There's too much money to have a recession."

Josh Brown: "We are still feeling the reverberations of $14 trillion worth of COVID era stimulus. It's still sloshing around the economy... people are still holding onto tons of cash, tons of buying power."

However, this financial cushion exists alongside rising anxiety about US fiscal policy. Michael Batnick asserted that for the first time in his memory, "the market is worried about the debt," citing gold's response, rising rates, and a falling dollar as evidence. Callie Cox agreed, noting the 10-year and 30-year Treasury yields were breaking away from economic fundamentals due to deficit concerns. Despite this, Michael Batnick maintained that as long as the labor market remains strong (initial jobless claims low), consumer spending, the "anchor to windward" for the US economy, will persist. Callie Cox expressed caution, watching for weakening in continuing jobless claims.

For investors, this presents a complex picture. The massive cash reserves offer potential fuel for future investment and consumption, acting as a buffer against economic shocks. However, the growing concern over national debt could lead to increased volatility in bond markets and currency fluctuations. This underscores the importance of a balanced approach, considering both the resilience of the US consumer and the potential long-term headwinds from fiscal imbalances.

6. Morningstar's Mission: Arming Individual Investors for an Evolving Financial World

Kunal Kapoor, CEO of Morningstar, provided insights into how the landscape is changing to better serve and empower individual investors. He affirmed the panel's observation about retail investor strength, stating, "buy and hold is really taken hold," and investors are increasingly using low-cost vehicles. Morningstar itself has evolved from a mutual fund data provider to a multifaceted firm encompassing private market data (PitchBook) and credit ratings, aiming to create a "common language of investing" across public and private assets.

Kunal Kapoor: "Retail investors, particularly in their retirement accounts and longer term investments, tend to stick with things... one thing Morningstar has done over time is at least when it comes to mutual fund investing, stock investing, we've created this common language."

Kunal Kapoor emphasized that as portfolios grow to include private equity and private credit, clear frameworks for understanding liquidity, leverage, and risk are essential. Morningstar is addressing this by developing tools like the Morningstar Medalist rating for semi-liquid funds. He also highlighted the rise of personalization in investing, allowing for portfolios tailored to individual circumstances (e.g., excluding employer stock, tax-loss harvesting), and the impact of AI in making complex data more accessible (e.g., Morningstar's "Mo" AI avatar). He believes AI will automate routine tasks for advisors, allowing them to focus on higher-value client interactions, and foresees an "inevitable killer B2C AI advisor app."

This evolution signifies a democratization of sophisticated investment tools and information. Individual investors now have access to data and analytics previously reserved for institutions, enabling them to make more informed decisions across a wider range of asset classes. The actionable takeaway is to leverage these evolving resources to build more personalized, diversified, and cost-effective portfolios, truly empowering individuals to manage their financial futures.

Insightful Quotes

• Ben Carlson on the potential generational shift in risk perception:

  "What if the pandemic flipped a switch... But what if this embracing of risk is secular? ...what if we have a whole generation of people who are just, they have that switch now that says, no, I'm okay with risk. What does that mean?"

• Josh Brown on the defining investment theme of the decade:

  "I'm pretty sure it's not going to be inflation, it's not going to be tariffs, it's not going to be us versus international or vice versa. It's going to be AI. Like that's going to be the decade defining investment theme."

• Kunal Kapoor on the changing narrative around retail investors and the need for accessible language:

  "People often say retail investors are sort of the dumb money... when we looked at the data... retail investors... tend to stick with things... When we talk about common language, it's just that, right. Like jargon sucks."

Market Implications

The discussion paints a picture of a market where individual investors are a more resilient and influential force than ever before. Their embrace of risk, participation in major themes like AI, and willingness to explore non-traditional assets like Bitcoin and international stocks suggest several implications:

1. Sustained Support for Growth & Innovation: The "buy the dip" mentality and long-term focus of many individual investors, particularly younger ones, could provide more stable support for growth-oriented sectors and innovative companies, potentially dampening volatility in these areas over time.
2. AI as a Deflationary Tailwind: If Josh Brown and Ben Carlson are correct about AI's disinflationary impact, this could eventually alleviate pressures on interest rates and create a more favorable environment for equities, even if government debt remains a concern. Investors might consider companies enabling or benefiting from AI-driven productivity gains.
3. Democratization of Private Markets: As firms like Morningstar work to improve transparency and access, individual investors may increasingly allocate to private credit and equity. This could unlock new return streams but also requires careful due diligence. The rise of interval funds and potentially new ETF structures for private assets will be key to watch.
4. The Enduring Power of Low-Cost Investing: The success of individual investors is intrinsically linked to the availability of low-cost index funds and ETFs. This trend will likely continue, putting further pressure on high-cost active managers who don't deliver commensurate value.
5. Personalization and AI in Advice: The future of investment advice will be increasingly personalized and AI-assisted. Investors should seek out platforms and advisors who leverage these technologies to provide tailored, efficient, and goal-oriented strategies.

Ultimately, the "outsmarting" of the pros by individual investors may lie in their collective ability to adapt, learn, and leverage new tools and information with fewer institutional constraints, allowing them to capitalize on long-term trends and navigate market shifts with surprising acumen.