Citi's Kaiser Says Recession Possible, Likes Small Caps

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00:00So we heard from Stephen Cohen. We also heard from Jamie Dimon just in the past hour saying

00:05that he's not taking a recession off the table. I want to hear the Stuart Kaiser view of where

00:10we stand. Look, honestly, I think I think clients are in the same camp. I think we've sort of broken

00:13into two pieces. There's a group of clients that say you're pulling back on fiscal. You've added

00:18a major uncertainty shock and you've just increased global transaction costs. And that's the recipe

00:22for a recession. And I think some people are positioned for that. I agree. It's kind of a

00:26coin flip. I think before last weekend, if I had to choose, I would have said recession

00:29more likely after this weekend. I think what you're hoping you're going to see is that soft

00:33economic data and the survey data improve and hopefully kind of reduce those recession

00:37risks. But I agree. It's definitely not off the table, even if it's not the most likely

00:41outcome right now. What about earnings? You know, we had gone from an expectation of 14 percent

00:47earnings growth this year, you know, after Trump's right after Trump's election to now

00:51eight percent earnings growth this year. How much does that bounce back up now that it looks like

00:57we're going to be getting a lot more deals? Yeah, I think it probably bounces back a little

01:01bit, Matt. I think next quarter is going to be incredibly interesting because this quarter,

01:04two thirds of S&P companies did not update guidance. They basically took a wait and see

01:08approach and punted on it. I don't think investors are going to be tolerant of that in 2Q.

01:12I think a lot of these companies are going to really need to kind of sharpen up what their view

01:16on the tariff impact on their on their earnings is going to be. So you may see a little bit of an

01:20improvement off of what was kind of a worst case outlook going into 1Q, but I wouldn't expect this

01:25to get back to 14 percent, for instance. So you're somewhere kind of in the lower end of that range.

01:29Why do you like small caps right now? I mean, we like small caps very, very tactically. I mean,

01:33the fact is you've had this huge rally that was so narrow and gappy that a lot of investors weren't

01:39able to participate in it. So what they're looking for is if I get this sort of next leg of the rally,

01:43what's lagged and what might catch up and smaller cap, lower quality, kind of weaker credit risk

01:48type of equities and companies, we think do have that potential. But again, that's a very

01:52tactical trade. It'd be very hard to recommend people get into, you know, IWM or small cap over

01:56the medium term, given the latent recession risks that are out there. But that is the way you like

02:00to trade it. I mean, Katie's ears just perked up. What's the ETF? IWM? IWM, yeah. Yeah, that tracks the

02:06Russell 2000, which people like to tell us is a junkier sort of index. We were having a great conversation

02:11with Ron Temple actually the other day of Lazard, who was saying basically what you're saying,

02:15that you have to be very, very active. There's a lot of security selection that goes on. You like

02:20to trade it tactically, but I have to ask, is the juice worth the squeeze? Because it sounds like a

02:25lot of work. Yeah, I think that's an open question, I would say. I mean, if you can look within the

02:29Russell 2000, there's probably 700 of those 2000 stocks that make money. So you do have the upper

02:34part of IWM is pretty high quality, and we do see some people doing stock picking in there.

02:39For a macro investor, you're just buying the whole index, and you're really hoping for either

02:43improving growth, lower rates, or just kind of a risk on positioning squeeze. And I think right

02:48now it's much more on the positioning side that people are willing to engage in small cap. I think

02:53the difference now versus, let's say, December of 23 or last July is you had such a short base

02:59in small cap that you had a lot of squeeze risk to the upside. I'm not sure that that positioning

03:03dynamic is in there. So to your point, risk reward is kind of a little questionable, and I think

03:07that's why it's had a little bit of trouble getting his footing.

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