Tech Stocks Rally Ahead of Big Earnings Week

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00:00What we love about you is you bring the historical context, the research, the data,

00:03and push us forward. Are there any alarm bells ringing as we go into this important week?

00:08Yeah, it's interesting. When you look at the data, I mean, everybody highlighted the fact

00:11that numbers have been coming up into this earnings season. And interestingly enough,

00:14technology has now re-accelerated from a sector perspective back into the top quartile of its

00:19history. And as much as we want to be skeptical and say, well, doesn't that usually mean that

00:24we have to mean revert? That earnings growth typically does prove durable when you study

00:29history. The more interesting data comes with the fact that they've actually become more expensive,

00:34obviously, from that almost discount that we saw during the tariff tantrum. They're also back in

00:39the top quartile of their valuation range as well. So meaning that you have a matched perspective of

00:44expensive valuations and really high earnings growth. The interesting part is for the last 20

00:49years, if you had to decide between an environment of expensive valuations but high growth or lower

00:55growth but lower valuations, that would actually be, it would be a better situation to be in the high

01:01growth, high valuation, which has been much more predictive historically.

01:07Denise, over the weekend, I did a lot of reading and, you know, the headline bubble comes up everywhere

01:13across the newspapers. But there are some interesting kind of points of distinction between a stock bubble

01:19and a sector bubble. So in a stock bubble, the argument is, well, you know, prices and valuations

01:24are being driven up without the fundamentals to support them. But that is different where you

01:29have an entire industry saying, we're going to keep investing in this technology, right? And in the

01:34future, we see a return on that investment. Which side of the bubble debate do you sit on? The stock or

01:41the story?

01:43Well, it's interesting. When you look at it compared to what we went through in the tech rack, I mean,

01:47when you look at high growth and high valuations, you say, well, that was exactly what we saw in the

01:51prior bubble. So isn't this the first early stages of that? Well, relative valuations were actually

01:5770 percent higher in 2000. And you ended up with almost negative operating margins. Not only are we

02:04not negative in terms of operating margins for technology as a sector, but they're actually

02:09increasing overall, which is to say that sometimes things are expensive for a reason. And when you look

02:15at bubble indicators like CapEx, if you add up all the CapEx in the technology sector and you divide

02:20it by the sales basis or even free cash flow, you'll see that there's really nothing anomalous,

02:26meaning that as much as some of the nominal numbers are eye popping, some of the free cash flow is also

02:32eye popping, as is the sales. So again, it's back to that high growth is matched with high valuations.

02:37A lot of the time, what you almost see is high valuations are being positive predictors

02:43of future growth, which is usually more durable than I think investors expect.

02:49Denise, for you right now, which primary or secondary data sets are you watching most closely

02:54for the tech sector? So for the tech sector, I do think overall this shift between either

03:00economically sensitive sectors like technology, communication services, consumer discretionary,

03:04and the defensive sectors like consumer staples, healthcare utilities. The fact that median earnings

03:10is finally starting to recover for the first time in the better part of three years is actually the

03:16best setup for those economically sensitive sectors like technology, even despite the fact that

03:21technology has already worked. It usually continues to work as the durability of the earning story

03:28actually broadens out. On top of that broadening out story, you might say, well, are there any tailwinds

03:33that actually are positively predictive? You know, even besides the Fed cuts that we're seeing and

03:39about to still see and the tax cuts that we are still seeing or that have seen and will bear fruit

03:44into 2026, remember of all the sectors, when you look at lower oil prices, which were kind of a form

03:51of a tax cut, technology is the number one sector that outperforms after that style of a tax cut

03:58as it filters through in terms of cost to margins and potentially lower inflation that increases

04:04multiples. So I think that there are a lot of things that highlight the fact that there are more

04:09tailwinds for overall earnings growth, which is bullish for economically sensitive sectors

04:14like technology. And how global does that data set and do those tailwinds tend to be right now, Denise?

04:22So I would say that from a global perspective, you are certainly seeing earnings growth across the globe,

04:28but right now you are seeing an interesting, what I would say is a change in trend from the last,

04:33let's call it four to six months, where international was accelerating and the U.S.

04:38was decelerating slightly. You are now seeing that shift, meaning that U.S. earnings specifically

04:43led by technology is re-accelerating at the same point where Europe, IFA and emerging markets are

04:49decelerating. That sets up, in my mind, a better risk reward for markets, despite the fact

04:54that U.S. stocks are much more expensive. It's interesting when you look at international versus

05:00the U.S. and you say, well, these stocks have actually outperformed over the last 10 months,

05:05year to date, certainly, and they're still cheap. That seems like a compelling proposition.

05:09But when you look over the last, you know, since 2010, so over the last 15 years, you'll see that

05:14that's led to 0% odds of outperformance for international, which again highlights the fact that,

05:20look, valuation sometimes doesn't say what you think it means. Sometimes stocks are cheap for

05:25a reason, and sometimes stocks are expensive for a reason. And a lot of times, valuation almost

05:30correctly predicts whether or not earnings growth is going to be durable or not. So I do think that

05:36you are seeing the U.S. be leadership from an earnings perspective again. Briefly, in historical

05:42context, have you ever seen such underpinnings of importance from the private market? Because yes,

05:48we worry about bubbles in the public markets, but a lot of them all go back to a few players in the

05:53private market like OpenAI. Yeah, so I think that the places to look from a data perspective are

05:58always in the public credit markets to see what we are discounting in terms of the private credit

06:04markets. I don't have any specific insight, but when you see more stress being in high yield credit

06:09spreads than there is in the VIX or in equity valuation spreads, that's usually a negative setup.

06:14We're not seeing that so far. Credit spreads are well contained, and there's still more fear in the

06:20equity market. So whenever you see headlines like that, you always have to step back as an investor

06:24and say, this could be a situation where yet again, the market can climb the wall of worry.

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