Bullish But Brittle: Crossmark's Caution on the Rally

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00:00When we look at these numbers that are coming out and the CapEx that they're spending, yes,

00:04there's this positive component to CapEx going forward and the multiplier that it has on the

00:08economy and jobs. But we're also seeing free cash flow come down pretty significantly for

00:13these companies. And that's one of the reasons they've always had this nice high multiple placed

00:19on them is because of the strength of those balance sheets. So it is affecting that. We're

00:23seeing more debt. Obviously, Alphabet came and announced their new deal that they're doing their

00:27debt deals. So we'll see debt ratios start to come down a little bit. And so I think there's a reason

00:33that people are concerned around valuations and they want to see the monetization from this.

00:38And as was mentioned by your guest, I think that when you look at AI, it's not just these

00:44hyperscalers. How are we going to see AI come to fruition in the users? And that's where the key

00:50component is. And she's right. We don't have the answer to that yet, but that will be key in regards

00:56to valuations going forward. But they are a little high right now. Luckily, they have earnings to

01:01support them. So I think the problem is the CapEx commitments, maybe not what we're seeing

01:08committed now by the big mega cap tech companies, right? Google, Microsoft, Amazon, they all have the

01:16money and we know it. But it was laid pretty bare when Brad Gerstner asked Sam Altman how OpenAI is

01:24going to invest one and a half trillion dollars when it only has 13 billion of revenue. And Altman

01:29snapped at him and said, I'll just sell your shares if you don't want to be part of this. Right.

01:32How will they come up with that kind of money? I think that's the million dollar question is how are

01:39they going to make these commitments come to fruition? And you've seen this circular component

01:45start to build, right? A chip company is going to put money into someone else and they're going to use

01:51that money to buy the chips. And there's this circular component that has to give you a little

01:55bit of concern as to if one of those links in that chain breaks down, what happens to all of it? And so

02:02I do think there is some concern there. We have to wait and see, are they going to come to the market

02:07with debt? How are they going to get that cash? What does that free cash flow expectation look like?

02:12They are concerns that you have to look at when you're valuing these companies. It's why you're

02:17probably safer going with some of the big hyperscale or some of those Mag 7 names that we

02:22know have the solid balance sheets to back that up, at least for now. What do you buy right now?

02:27I mean, if you're confident of earnings, Victoria, and you think, you know, this economy is

02:32a good support to a continued climb in the stock market, if you have fresh money to put to use,

02:40because you already own, I'm guessing, the Mag 7, what do you buy?

02:43Yeah, I do think you have to be careful when you look at this, Matt, and it's what we've been

02:48talking to our clients about. Yes, there's these tailwinds to the market, the anticipation that the

02:52Fed is going to ease, the earnings component, the seasonality, stimulus coming from the one big

02:58beautiful bill next year, right, the capex. So you have these tailwinds, and you want to be invested

03:02in this market, and you can add to some of those positions on pullbacks in the market. But we also want

03:08to have a little bit of a defensive position. So you look at some of these sectors where they're

03:13starting to turn, they're starting to move into an uptrend, look at healthcare, that's just now

03:18starting, and it's doing pretty well. Watch energy, it's not there yet, but it's getting there. I would

03:23add a little bit to utilities as well. And we like financials, we know when you look at financials as a

03:29whole, private capital and regional banks have had some concerns along with insurance, but those major

03:35banks, they continue to do well, and they're responding to their trend lines. So those are places we think

03:42you can look to put money to work that gives you a little bit of a defensive posture, knowing that there's

03:47some yellow flags in this market ahead, and it can help buffer your portfolio. By the way, you have been

03:52cautious about the Fed giving us another cut in December. And, you know, we've had speaker after speaker over

03:59the last couple of days, sounding a cautious tone on that. Is it going to be a real

04:04disappointment to this market if we don't get it?

04:07I think the market needs to kind of temper their expectations for that December. I think that's what Powell was

04:15trying to do in the last meeting, he was trying to set the stage for the fact that maybe that won't happen. And we saw

04:20some repricing in the Treasury market. Yes, fiscal policy, inflation, that's pushing term premiums higher. But we did

04:26see a little bit of repricing due to the change in expectations there. And I think that's what the market should be

04:32looking at. You really don't need at this point in time, probably another cut, especially if we don't get the

04:39government open and get all of that back data that we're looking for. Hopefully we do. But again, there's concerns around

04:45what those inflation numbers are going to be. And I think if the labor market just continues along the path that it's on right

04:53now, where it's not just falling off of the cliff, but it is slowly weakening, I think the Fed may wait until

04:592026 to do that extra cut.

05:01By the way, I have a trader writing in, Victoria, asking if you like the base metal miners like copper or, you know,

05:09Freeport-McMoran, for example. And I think it's a great question because if you have a weaker labor market, you're going to

05:16have Fed support here that could lead to more inflation. And these are the things that we need for the AI build out,

05:21right? Like you can't put up a data center without a ton of copper.

05:24That's right. And you've seen these names start to do better and better. And look, the Bloomberg Commodity Index

05:30just broke out as well. I mean, I think it's at a two-year high. So there's some opportunity there as well.

05:36Obviously, when you look at some of the fine metals, the gold and the silver, those have pulled back a little

05:41bit, kind of reached those tops and pulled back. But I think you do have opportunity in some of those other mining

05:46in the materials sector as well.

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