Why 2026 Is A "Prove It" Year for Many AI Stocks
Recorded at the Exchange ETF Conference in Las Vegas, host Ryan Nauman welcomes Sal Esposito, Head of ETFs at Zacks Investment Management, to discuss why market leadership driven by mega-cap tech and AI is shifting back toward fundamentals. Esposito explains Zacks’ disciplined process focused on earnings, analyst estimate revisions, and balance sheets, calling 2026 a “prove it” year for AI as investors look under the hood for real results. They cover how Zacks applies its Zacks Indicator model across products, why active management can add value in small/mid caps and international equities, and how geopolitical uncertainty and interest-rate expectations can affect market breadth and international performance. Esposito also shares updates on Zacks’ growing ETF lineup, including international exposure.
Zephyr can help financial advisors locate the best ETF strategies for their clients. Learn more here.
Learn more about Zacks Investment Management here.
00:00 Welcome and Disclosures
00:38 Live From ETF Conference
01:37 Meet Sal Esposito
02:04 Zacks ETF Growth Story
03:05 AI Hype vs Fundamentals
04:30 Prove It Year for AI
08:05 Earnings Driven Process
10:42 International ETF Expansion
12:21 Small Mid Cap Active Edge
16:08 International Outlook 2026
19:37 Active Defense in Downturns
20:30 Where to Learn More
20:46 Closing and Subscribe
Connect with Ryan Nauman:
Transcript
Welcome to the Adjusted for Risk podcast.
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:Join myself, Brian Namath, as I talk
markets, investments, economics- Let's
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:get started ... and life as I help prepare
you for the upcoming week in markets.
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:I work for Zephyr, and all opinions
expressed by myself and my podcast
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:guests are solely of their own opinions
and do not reflect the opinion of
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:Zephyr or Informa, its parent company.
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:This podcast is for informational
purposes only and should not be
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:relied on for investment decisions.
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:Welcome everyone to Zephyr's
Adjust for Risk podcast.
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:We are recording on location at the
Exchange ETF Conference in Las Vegas.
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:It's been a fantastic conference so far.
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:A lot of great conversations,
and the next one is gonna be
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:another great conversation.
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:You know, equities have had a
great three-year run during the
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:past, you know, three years.
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:And during solid runs like this,
it can be easy to forget about
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:fundamentals, especially when there
are investment themes like, like AI.
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:Well, I have on the perfect guest on
to discuss why fundamentals will, uh,
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:be back in the forefront for investing.
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:But first, this episode is sponsored
by the award-winning Zephyr, which
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:helps investment professionals
make more informed investment
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:decisions on behalf of their clients.
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:All right, enough from me.
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:I've already talked enough.
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:Let's, uh, bring on the star of the show.
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:I'd like to give a warm
welcome to Sal Esposito.
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:Sal is the head of ETFs at
Zacks Investment Management.
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:Sal, thank you so much for coming on.
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:I believe, Sal, this might
be your third time on.
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:I think so, yeah.
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:Thanks for having me on again.
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:I, I, uh- I guess you like me.
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:Yeah.
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:Well, I, I'm m- usually more
worried about my guests liking
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:me and wanting to come back on.
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:So, uh, thank you.
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:It's an honor to have you back on.
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:Always love these conversations.
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:Can you tell us a little bit more about
yourself and Zacks Investment Management?
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:Yeah.
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:Yeah, so I've been at Zacks
for a little more than four
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:years now, which has flown by.
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:I, my prior roles were at UBS,
so big firm to small firm.
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:Uh, I've worked on building out our
ETF business since I've gotten here.
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:You know, we started with one fund.
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:We have four now.
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:Uh, it's been a whirlwind.
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:We have model products, model
portfolios, things that didn't
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:exist before, they do now at Zacks.
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:Uh, and we are committed
to growing this space.
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:We will be launching two more ETFs in May.
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:Fun.
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:And then, uh, we, we certainly have some
more, uh, on the horizon for the year.
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:So It's been a long road, but it's been
very, very, uh, rewarding, I think.
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:And, and, and we're just kinda coming
into our own here in the ETF space.
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:I love it.
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:So maybe we'll have to get you
on later this year to talk about
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:some of these new, uh, ETFs you're
about to launch and- Yeah, no
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:talk about them.
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:That'd be fun.
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:That would be, that would be great.
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:For sure.
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:So, over the years, um, you know, or
recent years I should say, mega tech,
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:AI-linked companies- Mm-hmm ... uh,
those stocks have driven markets.
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:And I'm gonna age myself here, so,
you know, when I was starting in
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:the industry, it was the dot com.
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:And maybe I have PTSD or something, but
thinking back to the dot com era is like,
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:everything with dot com went to the moon.
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:Right.
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:And now I kinda feel like, did
that just happen too with AI?
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:Anything linked to AI, didn't care
about fundamentals, whether making
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:money, there were earnings, any
revenue, it just went to the moon.
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:And that can happen during
exuberance, times of exuberance.
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:Do you think we're getting back to where
stock selection shouldn't just be about
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:whether it's linked to AI, but more
about fundamentals and really focusing
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:on, uh, the fundamentals of a company?
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:Yeah, I mean, that's, that's
really part, one of our core
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:principles at Zacks, right?
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:We're looking at earnings, we're looking
at earnings estimate revisions by the
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:analysts covering these companies, uh, and
we're looking at balance sheets, right?
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:I- We, we can make the argument
all day long for that being
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:a really important piece of
choosing any stock in a portfolio.
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:So, you know, coming up here and
talking about AI, right, obviously
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:there's a lot of, uh, dreams and
wishes, uh, that have kinda been
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:promised over the last couple of years.
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:I think this is kind of the year
where- We're at an inflection point.
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:Uh, AI was once just became, uh, the
buzzword for any kind of earnings call.
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:Uh, if you wanted to see your earnings
kinda, uh, and your, you know, your stock
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:pop a little bit, you'd bring up AI in
your earnings call, and now I think,
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:you know, it's like a prove it year.
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:So we're in a year now where it's like,
okay, let's, let's look under the hood
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:and see what actually is coming of this
AI investment in all these companies.
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:I love that you- That's a great
way of putting it, a prove it year.
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:All right, it's time to prove it.
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:What, you know, prove
that you have earnings.
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:And do you think a lot of that is
just because of the uncertainty
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:in market now- markets now?
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:Like, we've got the war, macro
uncertainty, a new Fed chairman.
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:Uh, just all this stuff going.
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:Do you think now, with uncertainty,
we gotta get back to fundamentals,
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:and you gotta prove it now, you know?
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:We're...
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:A lot of uncertainty is out there.
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:There's, there's certainly, uh, a
number of things, uh, right now that's
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:affecting the short-term market, right?
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:Iran being, the Iran
conflict being one of them.
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:Uh, but the reality of the fact is,
is that, you know, if you stick to a
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:specific, you know, investment process
like we do, when we're looking at
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:these companies, and we're, we're,
we're targeting companies that we
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:know are gonna be successful in the
long term, some of the short-term
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:noise kinda gets moved out, right?
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:Uh, AI, you know, from an AI perspective,
right, we, we definitely monitor
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:companies, especially in our, uh,
large cap growth, uh, ETF growth, GROZ.
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:You know, we do have
an, uh, an AI kind of...
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:It's there's not a fa- like, an a-
factor in it, but we are looking at
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:companies that, that are being affected
by AI or are using AI to kinda grow
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:their, their, their balance sheets.
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:So, um, it's, it's not quite, I would
say, like, part of the actual process,
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:'cause it isn't, but it's really more
about understanding what's going on and
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:that, you know, f- if our team needs to
make a qualitative decision, uh, in the
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:short term to, you know, effectively,
you know, produce a better portfolio in
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:the long term, they, they'll look at it.
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:Sal, that's interest- So maybe not
companies that are specific, they're
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:have a AI technology or AI product, but
just firms that are leveraging AI to be
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:maybe more efficient in their processes.
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:So those are attractive then.
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:Yeah.
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:Yeah.
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:I mean, I think- You know, I'm sure
just like, just like myself, you've been
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:playing around with a lot of these LLMs.
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:Um, I certainly don't wanna be behind the
eight ball on, uh, on, on what's happening
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:because things are moving so quickly.
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:Uh, we're just trying to stay ahead
of, uh, in our processes, we're just
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:trying to stay ahead of, you know,
what can be coming down the pipeline.
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:Um, and just looking at the companies,
uh, s- from the AI view, like how
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:is it affecting their business?
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:Is it helping them?
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:Is it hurting them?
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:The- these things are, are good
to know and like can help us make
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:better investment decisions in
the long run for, for that, for
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:that specific portfolio, right?
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:Yeah.
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:But, you know, we're constantly
monitoring what's going on.
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:But the reality is, is that we have
a specific process that we stick to
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:in all of our strategies, and it's
based off of earnings and, and, you
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:know, the, the Zacks Indicator model,
which looks at all the different,
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:um, earnings estimate revisions.
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:A- and we don't really deviate a ton
from that across all of our product sets.
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:Sal, I- I'm really glad you brought
that up, talking about earnings.
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:I feel as if that's really important, and
sometimes it gets lost when everyone's
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:maybe investing in a hype, AI hype.
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:Mm-hmm.
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:Maybe they forget about
earnings and why important.
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:Do you think earnings now...
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:And also, why at Zacks do you focus
so much on earnings consistency?
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:You just talked about you're
focusing on the long term.
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:What's the importance there,
and why do you guys focus so
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:much on earning consistency?
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:Yeah, I mean, it comes from
our research company, right?
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:We've been a research firm for
the better part of 50 years.
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:Uh, Len Zacks, who started our
research, uh, Zacks Investment Research,
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:coined the term EPS surprise, right?
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:So I mean, it's kinda, it's pretty cool
to kind of be a part of a, a, a comp-
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:a company that's kind of taken a stand
in, in, in this space for so long.
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:And, and really, he created this Zacks
indicator ranking system that looks
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:at these companies and their earnings
estimate revisions, and, and kinda looks
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:at, like, four specific things, right?
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:It's, it's agreement,
agreement of the analysts.
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:It's the magnitude of the earnings,
uh, the earnings movements
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:in their, in their revisions.
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:It's the potential for upside,
and then it's also surprise.
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:So there's four specific things we're
looking at that go into that ranking
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:system, and that ranking is utilized, like
I said, in all of our products, right?
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:We started our investment
management company in:
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:About 26 billion in assets across
SMAs, mutual funds, and you know, as
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:of the last couple of years, ETFs.
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:I love that.
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:E- I often talk when I do a lot
of research, whether it's on SMAs,
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:mutual funds, E- consistency of
philosophy- Mm-hmm ... strategy,
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:and obviously returns.
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:You want consistent returns.
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:But how important that is.
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:If you're gonna invest in a manager,
you wanna know Wha-- You know, that
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:they are going to be consistent in
their investment- Mm-hmm ... philosophy,
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:their strategy, regardless if
that is in favor or out of favor.
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:Right.
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:Regardless of what market cycle it is.
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:And it just shows that you guys are very
consistent across all your products.
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:Yeah.
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:You know, if you're investing in, whether
it's small cap, mid cap, inter- whatever
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:product it is, you're gonna get that same
methodology- Right ... across the board.
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:Yeah, it's just, it's, it's a very
replicatable process that we, we,
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:you know, we're finding that, um,
you know, obviously it's worked well
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:in the SMA space for quite a while.
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:You know, our ETF business is now growing
pretty- Mm ... pretty rapidly, I think.
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:Um, and we are always looking for
interesting new potential ideas to launch
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:as well, which kind of leads into, right,
obviously our international fund, which
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:is QUIZ, Quiz, which is relatively new.
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:It's about seven, I think eight months.
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:Time- Wow ... is going by so quick.
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:Um, so yeah, I mean, we were like, as
a, as a company, we, we kind of sat down
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:and we were like, "What's the next step?"
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:What's the next step for our firm?
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:And it's like we've never covered
international stocks before.
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:So that's something, you know, we knew
we could be good at because we've been
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:doing it for so long on the domestic side.
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:Yeah.
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:And, and, and since we wanna own
the, the local shares, like you
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:can't do local share SMAs, right?
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:The- you're not gonna be able
to- Yeah ... buy something in
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:Japan, uh, and hold it in an SMA.
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:Yeah.
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:You'd have to buy the ADR.
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:Um, and that's really kinda the active
ETF space has, has given us that
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:opportunity to kind of take that next
step to, to the international market.
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:Yeah.
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:So I'm gonna put a little plug in.
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:You mentioned SMAs.
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:You know, with the PSN, separately
managed account database,
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:Zacks has a lot of great...
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:It's like almost every
quarter I do PSN top guns.
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:Zacks has a top performing SMAs out there
that's always, you know, they're always
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:a top gun 'cause they're doing some
great work there on the SMAs, and then
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:you just bring it forward to the ETFs.
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:Yeah.
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:I mean, obviously there's a little
bit of difference in, in obvious-
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:you know, as you know, with ETFs,
a little bit of a different, uh,
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:trading- Mm-hmm ... trading situation.
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:But yeah, we try to, we try to keep a
consistent, like you said, consistent,
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:uh, process across all of our strategies.
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:I think that's fantastic.
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:Let's talk about small mid caps.
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:Mm-hmm.
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:You know, we've experienced over the
past, I don't know, few months here,
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:like we've talked a lot about AI
driving markets, but we've experienced
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:now a breadth of leadership.
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:Markets at leadership has expanded some.
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:Mm-hmm.
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:I th- it's good.
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:Uh, helps with the health of the market.
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:Do you think, you know, during this
period of uncertainty though, who
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:knows how long market leadership,
do you think it'll benefit?
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:Yeah, I mean, it's a good question.
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:I think it's a question and, that
we've brought up on, you know,
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:our minds multiple years in a row.
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:We're kinda waiting for
something in the space.
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:Mm-hmm.
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:And I think obviously, um, interest
rates do play a role in that, right?
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:So we don't necessarily know
what we're gonna get in the
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:near term, in the short term.
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:I think we're in the one, one cut
camp here, I think, as you talk to
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:our chief markets sta- uh, strategist.
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:I think right now we're in kinda
the one cut for the rest- Mm-hmm
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:of the year camp.
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:Uh, but that could change, right?
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:With the new, with the new,
uh, Fed chair coming in.
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:Uh, it could change rapidly, uh, depending
on how, you know, persuasive he is with,
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:with the rest of the, uh, committee.
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:Yeah.
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:Um, so it's- And also with,
uh, the White House too.
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:Yeah.
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:Well, yeah, I mean, I'm
certain that's gonna be an, an
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:immediate pressure, step back.
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:The Fed chair is not controlling this.
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:They're just the mouthpiece-
Yeah ... for the committee.
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:So, you know, as much as you can
put who you want in there, it's
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:certainly, you know, it's still
a group, group decision overall.
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:So we don't necessarily know,
uh, how that's gonna play out.
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:But then, you know, when you're
taking a look at small and mid
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:caps, you still wanna be...
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:And, and I'm gonna, you know, pound
the table on the earnings and kind of
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:where, where, where we are, you still
wanna be invested in companies that
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:actually perform on their balance sheets.
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:Mm-hmm.
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:Not the kind of shoot for the...
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:Well, at least what we do, right?
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:We're not investing in the shoot for
the moon unprofitable small caps- Mm-hmm
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:out there, right?
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:That's one of our main kind of arguments
against owning a benchmark versus owning
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:our small and mid cap funds, SMIZ.
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:It's more about understanding
what you're owning.
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:And, and if you own the entire
benchmark, you have no control over
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:what you're invested in- Mm ... aside
from what you're getting in a benchmark.
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:We own about 8% of the Russell 2500.
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:Right.
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:Right?
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:So think about 200 stocks versus
2,500 stocks, where we have a process
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:that we know has, has a decent, um, a
decent track record of, of, of history.
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:Yeah.
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:And, and, and the process has been run
for, you know, 15 years, uh, behind
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:the scenes before we launched the fund.
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:Um, so it's something where we're
looking at companies that, that
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:actually have tangible balance
sheet- and assets and balance sheets.
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:Yeah.
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:That's fantastic, Sal.
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:And I...
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:There is maybe some asset classes you
can get away with just doing a passive,
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:passive approach, like maybe large blend.
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:Yeah.
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:Large.
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:But- Yeah, I mean-
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:small cap's one where you're
better off active, right?
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:Be a little bit more selective.
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:I like to make that argument.
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:Um, I believe, and, and, and this is by
no means talking, you know, down on our
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:GROZ and ZECP, which is our large core.
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:Um, small and mid cap, international, and
then we don't cover it, but fixed income.
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:I think three places where you can
actually have an active manager can really
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:make some tangible strides in a portfolio.
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:I...
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:Sal, we agree on a lot of things,
but that one I really agree with you.
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:Those, especially, like, fixed income.
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:I just, that market, uh,
too much going on there.
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:Let, you know, let
active management- Mm-hmm
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:take its role.
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:So you brought up international.
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:Let's touch on it real quickly.
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:International, especially
emerging markets, had a great run-
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:Mm-hmm ... 2025 into this year.
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:Outperformed.
321
:Finally, diversification now matters.
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:Thanks to international.
323
:Do you think international maybe,
you know, again, uncertainty
324
:out there, has some more room to
perform heading, you know, in:
325
:Do you think we're gonna see
some more outperformance there?
326
:Or do you think that maybe
run is over with a little bit?
327
:Yeah, I mean- I think that the--
what's going on in, in the Middle
328
:East mu- is affecting it, right?
329
:I think we were doing really well
this year on the international
330
:space versus domestic.
331
:And, um, you know, the, the, the
conflict has certainly kinda put
332
:a little bit of a pin in that,
depending on where you're investing.
333
:Mm-hmm.
334
:Uh, obviously, you know, Europe and Japan
probably getting some residual effects.
335
:I mean, everybody's gonna be
affected if, you know, oil prices
336
:continue to climb in the short term.
337
:But the reality is, is that
you don't really kind of...
338
:Like we said, we're, we're investing
for more, more towards the longer term.
339
:I mean, we do in our QUZ fund, we do look
at momentum, so obviously it's playing a
340
:role in kind of what's going on right now.
341
:But we are still kind of overlaying
that four factor model that we use
342
:that looks at quality companies and,
you know, quality, you know, companies
343
:with, with solid balance sheets.
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:Yeah.
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:I mean, I think we've done
decently well so far this year
346
:still versus, like, the S&P.
347
:I think we're up 2%.
348
:I think the S&P is, like, down
2%, so a little bit better, right?
349
:Yep.
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:I mean, so there's, there's obviously
an argument to be made there that
351
:there's still some meat on the bone
on the international spot, uh, space.
352
:Uh, I just don't necessarily know the
sentiment for, you know, from an investor
353
:or an advisor putting portfolios together
where, where that lies, and we like
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:to kind of take a little bit more of
a- More conservative approach to even
355
:though we have international, right?
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:We think we're good at our
p- process is good at it.
357
:We still are very much more, uh,
okay, like there's definitely more
358
:opportunity for growth in the l- like-
Yeah ... the long-term in the U...
359
:In the domestic space.
360
:So.
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:Yeah.
362
:Yeah.
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:And, you know, it, it goes back to,
yes, uh, interna- the US supremacy
364
:ended last year, and that's good for
diversification- Mm ... markets, but US
365
:is still, you know, the primary market,
and the growth there, and, um, I agree.
366
:Yeah.
367
:I agree.
368
:There's just more opportunities there.
369
:Even if valuations are high, uh, you know?
370
:Right.
371
:Cheaper valuations overseas, there's
still stronger potential growth.
372
:Yeah.
373
:I mean, if you look at, and
this is where, you know, we
374
:talked about active management.
375
:I really, you know, our QUIZ fund
l- has about 170 holdings in it
376
:versus obviously the IFA is, is- Yeah
377
:is much, much bigger.
378
:So it's still knowing what you own.
379
:It's the same story as the small, small
caps and the mid cap spaces, right?
380
:Where, where is your money being deployed
in, in these different investments
381
:that you're using for your clients?
382
:If it's a benchmark, then there's
things, there's things in there that
383
:once you kinda get under the hood
might not necessarily be great if
384
:the market, you know, if we see this
volatility like we're seeing right now.
385
:Yeah.
386
:I- it's...
387
:Active management provides a space
for potentially outperforming
388
:more on the downside, right?
389
:Yeah.
390
:That's really the argument I think people
should really kinda think about, right?
391
:It's like everybody look, looks great
when everybody's hitting home runs,
392
:but then, you know, the reality is, is
it's like if, if you're, the market's
393
:crushing it, no one's really upset.
394
:It's when the market goes
down, people start calling,
395
:clients start calling advisors.
396
:They're like, "What's happening here?
397
:Uh, what, what are we invested in?"
398
:And if you're riding the wave
with the b- with the index, you
399
:might not- You can't play defense.
400
:You can't.
401
:Yeah.
402
:Yeah.
403
:As an advisor, you really don't
really have kind of anything in
404
:your tool bag to kinda combat that.
405
:Yeah.
406
:Sal, always great chatting with you.
407
:You always bring such great insight.
408
:Really fun conversation.
409
:I love it.
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:W- it's been an honor.
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:Thank you.
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:Where can our, uh, audience
get more information about
413
:Zach's Investment Management?
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:Yeah.
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:So you can visit our, our,
our website at zachsim.com,
416
:or you can visit zachetsfs.com
417
:to know more about the ETFs.
418
:Love it.
419
:Thank you.
420
:Thank you, Ryan.
421
:Thank you, Sal.
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:Thank you everyone for listening
to this episode of Zephyr's
423
:Adjusted for Risk podcast.
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:You can watch all of our other episodes
on the Zephyr YouTube channel, Spotify.
425
:Please be sure to like, subscribe to those
channels and give us a follow on LinkedIn.
426
:Thank you very much, and have
a great rest of your week.
