We Have a K-Shaped Economy: Despirito

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Watch We Have a K-Shaped Economy: Despirito - Bloomberg on Dailymotion

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00:00Tony, there's been a lot of people looking at this bull market.

00:02I think we've now kind of officially entered the third year of this,

00:04at least if you go off the bear market lows in 2022.

00:07And everyone's kind of trying to figure out, I guess,

00:10A, why we're not seeing more conviction to the upside,

00:13but more importantly, why there doesn't really seem to be anything

00:15that could knock this bull market off of its pivot.

00:18Yeah. So, look, I think we're kind of in a K-shaped economy

00:22and a K-shaped market.

00:24You know, AI on the upside.

00:26You know, the economy is definitely soft,

00:28particularly at the low end for, like, the low-end consumer.

00:31And so you're seeing softness there.

00:32Like, even toothpaste sales are a little weak, right?

00:35People are squeezing more out of the tube.

00:36And so we really see that divergence.

00:38And I think that really explains what we're seeing.

00:41This gets an idea, too.

00:42I mean, we were just speaking with Stephen Parker

00:45over at J.P. Morgan Private Bank about their latest outlook.

00:47And they talked a lot about sort of the gaps

00:49between what we're seeing in the economy

00:52and what we're seeing in the markets.

00:53And we've heard this from a lot of folks here

00:54that that gap is widened.

00:56I mean, there's always been a gap, but it's widened.

00:58And I'm curious if that worries you at all

01:00from the perspective of being able to divine

01:03what sort of moves the market in either direction.

01:06Well, I mean, as you point out,

01:08it's pretty typical, actually,

01:09that the economy and the market don't move together, right?

01:12And so with a softer economy,

01:15and it's not weak, but softer economy,

01:17we're seeing lower rates, right?

01:18The 10-year Treasury,

01:20the yield has fallen from about 4.6%

01:22at the beginning of the year to about 4% now.

01:24Well, that's positive, right?

01:26That gives a boost to valuations.

01:29So I think we're seeing that.

01:31We're also seeing really strong earnings.

01:33You know, if you look at earnings estimates last quarter,

01:36earnings were up 11% year over year.

01:38That's nothing to sneeze at, right?

01:40That should be driving the market stronger.

01:42Of course, expectations for third quarter

01:44aren't that bullish,

01:45but I think the bar is pretty low.

01:47I think we're going to beat earnings pretty nicely,

01:49and we'll probably end up with 10%,

01:5011% earnings growth once again.

01:53So I think those are the things

01:54that are really driving the market.

01:56And I guess when it comes to earnings,

01:58as you said,

01:58the expectations look pretty good right now.

02:00Things have been pretty solid,

02:01but how broad-based are we talking about?

02:05Because, I mean,

02:06it feels like you dissect anything,

02:07peel back enough layers,

02:08and it just looks like tech is driving everything.

02:11And is that expected to be the case

02:13in this coming earnings cycle as well?

02:16So, obviously, tech is a big opportunity.

02:18AI is a big deal.

02:20There's big change there.

02:21That's a big wave,

02:22and it's driving the mega-cap end of the market.

02:24But that doesn't mean

02:25there aren't opportunities beyond that.

02:27I see opportunities in healthcare.

02:29I see opportunities in financials.

02:31I see opportunities in the housing market.

02:35So I'm seeing a really broad base

02:38of opportunities beyond, you know, the MAG-7.

02:41I do want to talk about tech a little bit more,

02:43even though there are all those opportunities,

02:45because the conversation we've been having

02:47over the past week, two weeks,

02:49is how you're starting to see the relationship

02:51between some of these big tech companies

02:53and how they treat the debt market change.

02:55You take a look at the investment-grade debt market.

02:57There's more debt tied to AI

02:59than there is to financials,

03:01which is pretty stunning

03:03and certainly a sign of the times.

03:04And I wonder,

03:05as we see ambitions expand

03:07at some of these tech companies

03:08and we start to see them tap the debt markets

03:11to fund that, does that change the nature

03:14of investing in some of these tech names?

03:17Well, I'm a big fan

03:18in playing it reasonably safe, I'll call it.

03:21And one of the things that I think really,

03:23there are a lot of things

03:23that distinguish what's going on now

03:25versus the tech bubble that we had in 2000, right?

03:29First of all, remember the tech bubble in 2000,

03:32the NASDAQ was up 90% plus two years in a row.

03:35Wow.

03:36The valuations were off the charts.

03:37I can tell you a whole list of companies

03:39that we're trading at over 100 times earnings,

03:41whether it's Cisco, Qualcomm, Nortel, EMC, Sun,

03:45et cetera, et cetera, right?

03:46That's not what we have today,

03:47particularly with the mega cap AI companies.

03:50They're trading at 25, you know, 20, 25,

03:5330 times next 12 months earnings.

03:56That's very modest compared to what we saw

03:58at the tech bubble.

03:59Plus at the tech bubble,

04:00at the end of it, you had the Fed tightening.

04:02Now we have the Fed loosening.

04:03So I think we're in a very different place,

04:05but I much prefer,

04:06and one of the things I like

04:07about the situation right now

04:09is the companies have free cashflow, right?

04:11The big spenders for the most part

04:13are spending out of free cashflow.

04:14They're not borrowing money.

04:16And so I think it's prudent to stick

04:17with the companies that are funding

04:19their AI investments through cashflow

04:21as opposed to having big borrowing commitments.

04:23Because in that, I see risk.

04:25There's plenty of upside through AI.

04:26Play it the safe way.

04:27Any worry though about some of that investment

04:30and the lack of return on it?

04:32Yeah, it's certainly an issue.

04:35It's certainly something we have to watch.

04:37But increasingly, we're hearing companies

04:39starting to go from R&D stage with AI to implementation.

04:44I think we had Jamie Dimon last week

04:47speaking about how the cost savings

04:49roughly equal the investment that he's making in AI.

04:52That's a powerful statement.

04:53A one-year return, one-year payback,

04:56that's tremendous, right?

04:57And so I think we're going to increasingly see

04:59that kind of rhetoric coming out of companies.

05:02And so I think the returns are coming.

05:04But it's something we have to watch.

05:05I agree.

05:06I'm just curious real quick.

05:06We only have about a minute left.

05:08But I'm curious just about the IPO pipeline

05:10and just the opening of public markets

05:11to this horde of private companies

05:13with large valuations and in some cases

05:16relatively good fundamentals.

05:17Do you think we are going to see a real march

05:20in the public markets from some of these private companies?

05:23Oh, I think the capital markets are going to be...

05:26We saw from reported earnings, they're quite strong.

05:28We knew that.

05:29I think that will continue to be strong.

05:31There are a lot of companies waiting

05:33to tap the public markets.

05:35You know, some of them will be very attractive,

05:36some not so attractive, right?

05:37And that's the job of us as investors

05:39is to sort through that.

05:40But without a doubt,

05:41a lot of companies are going to be coming public.

05:43All right.

05:44All right.

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