00:00Are we in the midst of a new bull market and earnings cycle, especially for many of the lagging areas
00:05of the index?
00:06That was your call in mid-November. Is that a call you still stick to?
00:11Yeah. Well, good afternoon. First of all, I would say yes.
00:14I mean, you know, the story we actually started writing about in May of last year, which is a mid
00:18-year update, was exactly that.
00:20I think I think our view still remains out of consensus around this idea that Liberation Day marked the end
00:28of what we call a rolling recession.
00:31So we're actually not only in a new earnings cycle, we're in a new economic cycle.
00:35And that's why we're seeing the broadening out now, because there have been many parts of the economy that have
00:41been sort of mired in a recession for the last three years or so.
00:44And they're just now starting to emerge. Areas like consumer goods, some of the financial sector, industrials, obviously, which is
00:52getting a boost from AI CapEx,
00:54but also getting a boost from, you know, basically underspending for the last several years.
00:58Parts of technology are still doing quite well. And so that broadening out is that is the real story.
01:03And we doubled down on that in November because the evidence was coming through.
01:08And, you know, in May, we didn't know. But now we know.
01:10I mean, the earnings growth for the median stock in the Russell 3000 is now running double digit growth year
01:16over year.
01:16That's the first time we've seen that in four years. So so it's happening.
01:19The question, you know, the question now is how long can it last?
01:23You know, what could derail that? And, you know, what do you pay for?
01:26I mean, those are always the questions. But but the but the first part of your question is a resounding
01:31yes.
01:31We are in a new earnings and economic cycle and the market has figured it out.
01:36Hey, Mike, it's been pretty remarkable to see that we've gotten this tremendous
01:40stock volatility at the single stock level, also at the sector level.
01:44But when you look at the S&P 500, it actually hasn't really done much this year.
01:48What is it going to take to break us out of this range?
01:51And what could be the catalyst to get us past that elusive 7000 level that everyone's waiting for?
01:57Yeah, that seems to be the question. I mean, obviously, stock investors don't mean if you can make money in
02:01other areas, that's fine.
02:02I think that's the real main message is that the market is not going anywhere at the S&P level.
02:07But there are many sectors that are doing well, and that's the name of the game.
02:10Now, to your question, I think what's going to break us out ultimately are two things.
02:15Number one, there is some uncertainty around the AI CapEx cycle and the disruption that perhaps it could cause in
02:23the labor market and other areas.
02:25So I think we're in one of those testing periods now.
02:27We heard about that this week.
02:28We think that ultimately it's a little bit premature to kind of throw a cold blanket on the AI cycle.
02:34It's just getting going, you know, from our standpoint.
02:37And then secondarily, I think that we have a new Fed chair nominee with Kevin Warsh.
02:42And and the market always tests the new Fed chair, whoever it is, when they come into into power or
02:49office.
02:50And so first, we have to go through the, you know, the nominee, the confirmation hearings.
02:54And then we got to learn a little bit more about what he really intends to do.
02:57So that, you know, that could lead to this, you know, the market kind of struggling for another month or
03:02two.
03:03And then ultimately, we think once he takes office, we think that'll that'll be another catalyst for why the market
03:08can have a really good second half.
03:10And we stand by our $7,800 price target for the S&P by the end of this year.
03:14OK, so those are all the reasons and more that you think we could see a 16 percent increase in
03:19the S&P 500 this year.
03:21What changes your mind, Mike?
03:23What could happen between now and the end of the year that could cause you to go back and sharpen
03:28the pencils, break out the Excel and say, wait a second, we've got to recalculate this.
03:33Yeah, well, we do that every week anyways, and we have to.
03:37But but I would say, you know, what would change our view is probably the things that are going right
03:41now.
03:42So, for example, if we would see that earnings cycle start to deteriorate and that could happen.
03:47And it's not our it's not our forecast, but if the earnings revisions were to start to narrow again or
03:52start to really break down, that would be clearly something that would change our view.
03:56The second would be that, you know, the the fear around Kevin Worsh being kind of a balance sheet hawk
04:03where, you know, he's going to maybe shrink the balance sheet and we're going to have a little bit of
04:08a liquidity problem potentially that would cause multiples to come down.
04:12We don't think that's going to be the case this year.
04:14That might be a story for 2027. We'll think about it then.
04:17But but maybe we're wrong on that.
04:19The other one, of course, is yet another exogenous shock of some kind.
04:22And I think, you know, the one I mentioned earlier is starting to weigh on stocks here in the short
04:27term, which is this concern that, you know, AI is happening so fast.
04:31And and it's, you know, it's migrating now into the corporate world that we're going to see a big labor
04:36cycle.
04:36That's not our view, but it could happen.
04:39And so there are those would be the top three, I would say, that could derail our positive view for
04:44this year.
04:45We've heard time and time again that big tech's profits are going to slow, that it's time to rotate.
04:50And anyone who said that for the last few years has been wrong on that.
04:54Do you think that this year is different?
04:55And when you think about the end of 2026, when we close out, who are going to be the new
05:00winners?
05:00And I love that you went there because, Mike, it feels like the last three years people have said, get
05:05away from big tech, diversify.
05:07And yet that's where we've seen so much of the gains.
05:09It's a great it's a great.
05:11Yeah. I mean, I think a lot of people also made the other side of the call, which is to
05:14kind of upgrade small caps or the equal weighted S&P.
05:16We didn't do that.
05:18You know, we don't get everything right.
05:19But we waited until November to make that call because our our view is not that tech earnings are going
05:25to collapse.
05:26It's that the rest of the market's earnings are going to improve.
05:29And that's what usually drives relative performance.
05:32So it's it's really the spread between sort of the mag seven or large cap growth stock earnings growth and
05:39the other 493 stocks or the other equal weighted index, whatever you want to call it.
05:44And that spread is narrowing.
05:46And so the areas that we have been recommending is based on where that earnings growth is accelerating the most.
05:52That would be things like consumer goods or financials, some of the industrial segments, some of the small mid cap
05:58areas.
05:59And we stand by that.
06:00That's what we're seeing.
06:01And that's what we think is going to continue for the rest of this year.
06:05And and that's really the story.
06:06It's not a it's not an anti tech or anti large cap growth call.
06:10It's more of a just a bullish call on all these parts of the economy in the market that have
06:15been under earning because of this rolling recession.
06:18So is it fair, Mike, to say that you like the equal weighted version of the S&P 500 more
06:23than the main index?
06:25Absolutely.
06:25That that was our one of our lead calls in the November outlook.
06:29And that has worked so far.
06:31So knock on wood, hopefully that continues.
06:32And based on what we've seen so far this year in the earnings and what we see kind of in
06:37this, you know, that the economy itself, which which I think, quite frankly, is booming at the moment because you
06:41have capital spending increasing and consumer spending holding up.
06:45That's that's a much better environment for the average company.
06:49Hey, Mike, two things I just real quickly I'm curious about.
06:52Do you think the White House is still a risk to financial markets or with midterms looming?
06:57Do you think that the president and his team are going to be very careful about unsettling things in the
07:04financial markets?
07:05Many have said he certainly keeps an eye on it.
07:07Maybe that's the checks and balances on the White House.
07:10And secondly, Kevin Warsh, if indeed he does become Fed chair, will he be an independent Fed?
07:17Yeah, no, I think I mean, look, I think that this administration and the president, you know, specifically has shown
07:24that, you know, they're going to he's going to kind of operate in his speed.
07:27And so I don't anticipate that we're going to see, for example, you know, this administration trying to lose momentum
07:34in what they're trying to achieve, which which means more of the same.
07:37Quite frankly, it's going to be, you know, it's going to be active and that creates, you know, periods of
07:42volatility, uncertainty, whatever you want to call it.
07:44But I mean, I think the mission and what they're trying to accomplish is now crystal clear.
07:48They're trying to rebalance the economy on three different planes at the same time.
07:52And I think they're having some success with that.
07:53That's why we're seeing productivity increase already.
07:55We're seeing GDP increase.
07:57We're seeing earnings broaden out.
08:00And so as long as they're seeing results like that, I think they're going to stay the course.
08:03With respect to the Fed independence, I mean, I have probably had a bit different view here.
08:08I mean, as far as I can tell, I mean, the Fed independence has been sort of fading for the
08:14better part of 20 years, really, since the financial crisis.
08:17And when I say independent, I don't mean they're under the thumb of the White House.
08:20What I mean is that they have to play ball in terms of their role to help the government fund
08:27itself.
08:28OK, and we saw that after the financial crisis.
08:30We saw that in 2012.
08:31We saw that, you know, when we had a regional banking stress in 2023.
08:37So the Fed is obligated to, you know, help financial markets operate.
08:43I mean, it's their third mandate.
08:46They even call it that.
08:47So that to me is where the Fed independence has been challenged for the better part of two decades.
08:53And I think that's going to continue.
08:55I think the Fed and Treasury are going to work closer together.
08:57OK, similar to the, you know, 2000 World War Two period.
09:00And that's a good thing, because that means they're going to figure it out.
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