00:00More importantly, a look ahead into 2026 with Matt Kettner over at HSBC writing the big concern
00:05with regards to that big AI trade is when CapEx starts to drop. Worries about higher tech debt,
00:11outlook for productivity gains or monetization potential, just too long term to matter for
00:17the near term. Max joins us right now to talk a little bit more about that. And Max, we talk
00:21about investor sentiment. Investor sentiment had gotten a big boost over the past few months
00:25because of the sustainability of that AI trade. We saw a bit of a rethink, though, of that over the
00:30last four weeks. Is that a rethink or the end of it? No, I don't think it's the end of it at all.
00:36Actually, when we look at the last couple of weeks, the biggest shift I think that we've seen and the
00:41biggest change was really an investor sentiment. Whereas I would say August, September and in large
00:48parts of October as well, in lots of our client conversations, at least lots of clients were
00:52saying, look, we're waiting for the dip. We're ready to buy the dip. That's completely changed in the last four
00:57and a half weeks over November. But really, most investors have been saying, no, this might actually be
01:02the end of it. This is threatening the overall open AI universe. It might only really benefit Google.
01:08So is that the end of the entire Nvidia trade, the entire hyperscaler trade? And the biggest shift really was in the last four
01:16and a half weeks on in terms of our positioning indicators. When we look at that, even systematic positioning, so the likes of CTAs,
01:23but particularly risk parity and volatility target strategies, momentum signals that were flashing some sort of warning signal in August
01:31and September on our measures that was above the 95th percentile. Even that has come off to the 50th percentile. So even within already
01:38light positioning, the one warning sign we had, that has all but disappeared in November.
01:43And so the catalyst to really recover, Max, is that the December Fed decision?
01:49I don't think so. I don't think it's just the December Fed decision because, let's be honest, for risk acids overall, I don't think it matters
01:58greatly if the Fed says in December, look, we're not going to cut, but we are wary of what was in the beige book this week.
02:05We are wary that labor market conditions are tightening. So if they then say there may be near term cuts, i.e.
02:11a January cut, I don't think, you know, equities, credit spreads, the dollar, EM assets, I don't think they will greatly care
02:19whether a rate cut comes in December or January. Likewise, if it happens then in December and they say, well, but don't confuse that
02:27for an overall rate cut cycle all the way down below neutral, like the front end is pricing right now. Again, you know, if they say that in
02:35December instead of January, that's not going to move the needle an awful lot. I think what matters much, much more in terms of
02:40the catalyst for not only the next month, but really the next two, three months is once again earnings. When we look at the
02:46earnings expectations for the fourth quarter.
02:47We've only just had them. I mean, we've only maxed. We've only just had NVIDIA earnings and that gave us no resiliency, even though they
02:54beat and they guided to the better expectations of the entire market.
02:58Yeah, Carolyn, I mean, we could argue that, but we could also argue that's been basically been or what's been over
03:05overshadowing the earnings from NVIDIA was the concerns around open AI. And we can also say that when we look at investor
03:11positioning, if you've got the mix of once again more subdued investor positioning, but on the other hand, overall an earnings
03:18season that has once again been much, much stronger. Let's let's remember that the earning speed rate in the for the third quarter has once again been the
03:26best one since COVID since 2021. And now we're facing a setup for the fourth quarter earning season starting in January, where once again,
03:36consensus is actually in the last couple of weeks been downgrading expectations. Bear in mind, consensus now says quarter over quarter
03:42sequential earnings growth for the S&P from the fourth to the third quarter is down a percent. If you exclude tech, we're talking about net income
03:50expectations, bottom up expectations for the S&P of minus eight percent, minus eight percent. Eight of the 11 sectors are expected to
03:59report a sequential decline in earnings. That is such an uber, uber bearish setup that I do fear that once again, people have been cutting
04:08perhaps or taking up hedges in November too much. And they're not going long risk enough in, you know, what I think could be a proper
04:15melt up in the next two, three months earnings driven once again. Well, with regards to that earnings driven, though, Max, I mean,
04:20strip out some of the tech stuff and all that big cap stuff. I mean, we actually saw a relatively strong earnings season for a lot of
04:27the small and mid caps, at least here in the United States. And there has been some optimism that if we do see those names have some
04:34sustainability in some of those earnings reports for the fourth quarter and beyond, that that actually might be a much, much, I guess,
04:42stronger bit of fuel for this market than just the big cap tech stocks. Yeah, I do think that is true. And in fact, when we look at even the
04:50year-to-date performance, I keep getting asked, look, when is the broadening finally happening? And I do think sometimes people define
04:56broadening a little bit wrong. In my mind, it's a bit like, well, do I buy tech or do I buy the other stuff? And for me, broadening is, well, I'm still
05:04buying tech, because I do think the CapEx incentives in the big, beautiful bill are really positive for AI CapEx, but I'm also
05:12buying some of the other stuff. And that has happened, really, year-to-date as well. Look at industrials, look at
05:17health care, look at financials, even energy, despite the lower oil prices. All of those are up, sort of 6% to 14% year-to-date.
05:25So the broadening really has been happening, not only in earnings, but already also in performance.
05:30Max, always great to catch up with you. Max Kettner over at HSBC.
Be the first to comment