00:00We should play spin the wheel and figure out which topic we can start with in our conversation today.
00:05Given we just heard from Jerome Powell yesterday and markets are reacting to it this morning.
00:09Let's start there. I mean, it's interesting that he's sort of sticking to the line that they are going to go ahead with these rate cuts for the remainder of this year.
00:16I mean, he's hinting at that, despite the fact that the U.S. is still in a shutdown and we're not really getting that government data.
00:22Good morning, Jomana. I think that it's a given that we are going to get two more cuts, 25 basis points each.
00:28And we heard Chair Powell speak of financial stability being very important for the Fed and he's looking at the labor market.
00:36He is worried. So that is superseding any inflation concerns that he might have regarding the tariffs that are being implemented.
00:44So we are looking at rate cuts. That's positive for markets.
00:47So despite the geopolitical tension that we are seeing, you know, in terms of what's happening between China and the U.S.,
00:53we are seeing this yo-yo in U.S. markets one day up and one day down.
00:56Yeah, but mostly up, though. I mean, mostly the U.S. markets keep trending up and up and up.
01:01Yes. Why do you think investors are reacting?
01:05I mean, Friday was a special case, right? But in general, what you've seen is sort of complacency around tariff discussions, tariff talk,
01:13the ongoing never-ending trade deal discussions also with various blocks around the world.
01:18Is it because investors sort of have fatigue, tariff fatigue, or because they've come to the conclusion that it is not as relevant for the direction of stock markets?
01:27At the moment, what investors are paying attention to is earnings growth.
01:31They are putting earnings growth above anything else, and that's been a norm in markets for decades.
01:36Yeah. So you did have a Liberation Day sell-off, which was very severe.
01:40After that, kind of the facts came through in terms of, of course, what the big tech, what the Magnificent Seven are doing in terms of adding to earnings and growth.
01:49And it is still an AI story. So there's, of course, the concentration risk.
01:53But markets today are very much being driven by the AI stocks, of course.
01:58And I'll be, do not forget the fact that you've got in this month in October a bit of a shift towards health care and consumer staples such as Walmart.
02:07We are seeing stock prices rise both for the more defensive sectors.
02:13So Bank of America conducted a global fund survey.
02:17Fifty-four percent of participants in October indicate tech stocks are looking too expensive.
02:22So that is a big jump from the prior month when nearly half had dismissed those concerns.
02:29What do you think, how do you think this is going to be reflected in price action in the coming months,
02:35given that a good portion of fund managers are now getting a bit hesitant or cautious about the outlook for AI?
02:40I don't think there's anything new about the fact that people have seen tech as overvalued.
02:45They've seen a kind of a bubble. They've seen that the rally has overstressed itself.
02:49This has been the talk for the last few years. Again, everything depends on the earnings when you've got technology growing at a higher earnings growth rate than the rest of the market.
02:59When you're seeing that revenue is again very strong, whether it's cloud computing, large language models, whether it's consumer mapping that's coming through.
03:07It's, you know, it's still a story of, yes, concentration risk, 35 percent of the S&P 500 is seven stocks.
03:15But at the same point, you cannot deny the fact that we are getting growth.
03:20We are getting production efficiencies through technology and that is going to continue.
03:26So we're not worried about the tech rally. We don't think that's going to go away.
03:30What we would very closely watch is the guidance and the earnings that and that's not until the end of October.
03:36So we're starting with the banks and big tech only comes in towards the end of October.
03:40Yeah, to your point, to go back to consensus earnings estimates for this quarter.
03:45I saw consensus are expecting tech, i.e. the magnificent seven to drive third quarter growth.
03:49Expectations of 20 percent year in year EPS growth.
03:53So massively surpassing the rest of the index.
03:55Let me do ask you, though, about where AI fits into the China-U.S. geopolitical tensions,
04:02because one thing that has emerged over the last couple of weeks is China's feeling pretty good about its strongholds on rare earths.
04:10And they have looked to apply export controls.
04:13If they wanted to wreak havoc on the AI ecosystem, they could,
04:18because these are essential materials that are used in the fabrication of chips.
04:22Is that somewhat of a risk, you think, that is on investors' minds?
04:26Should they be thinking about it more?
04:28Yes, it's definitely a risk.
04:30But the way that we've seen the rhetoric play out between the U.S. and China,
04:34I think that there will be a resolution over time.
04:38The U.S., of course, has been very proactive in terms of taking stakes in anything they see as, you know,
04:44a rare earth company.
04:45We have seen that recently they've been taking stakes.
04:48They are worried.
04:49So I wouldn't say that they are complacent.
04:51But they would have to look for alternative sources.
04:54At the same time, China does need those high-end chips within its own development of large language models.
05:01So it's a bit of give and take going on here.
05:03And I would, you know, think and hope that there will be a satisfactory resolution.
05:08So yesterday, Paul Tudor-Jones was speaking to our colleagues at Bloomberg,
05:12and he said he's quite nervous about the concentration that exists in the S&P.
05:16And I wonder, though, if given your bullishness, you are worried about a systemic pullback in broader stocks should something happen in the AI space that causes people to rethink.
05:32Paul Tudor-Jones was also very optimistic on the Nasdaq continuing to go up.
05:36So there's a mixed view that he gave, firstly.
05:40Secondly, yes, we see a continued rise in the markets.
05:45But I've always said this, two 5% to 10% pullbacks in a year are normal.
05:50It's very few years that you don't see those pullbacks.
05:53And yet you might see the index end up 18% to 20% up.
05:57So volatility in markets is a given.
05:59Nothing is going to go up in a straight line.
06:01We will get a couple of pullbacks, maybe one more this year, a couple next year.
06:05But again, we will look through.
06:07We will look through to how the economy is growing.
06:09We will look through how the consumer is reacting.
06:11As I said, we're not complacent.
06:12There are worries.
06:13You've got the big automakers in the U.S., the three big ones talking about a $7 billion impact on tariffs.
06:19We've got people worried about the imports of household goods, furniture.
06:23There's a lumber tariff that came in through yesterday.
06:27So you're going to have fewer house purchases.
06:30So we have to watch the economic growth.
06:32And yet we had an upward revision to economic growth yesterday.
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