00:00Goldman Sachs publishing a hedge fund report, taking a look at equity position to kick off the year, noting increased
00:05ownership in NVIDIA.
00:07The team, including chief U.S. equity strategist Ben Snyder, writing hedge funds rotated from within Infotech, moving to semis
00:15from software ahead of this year's software sell-off.
00:18Ben joins us now. And Ben, maybe more even than where they went to, the thing I find interesting about
00:23this report is just how high the turnover has been, the highest since 2021.
00:29The hedgies at the moment, are they part of the reason this market has been so volatile? And what does
00:34it say about their moves to come?
00:37When we look at the performance of hedge funds and of their portfolios, you see exactly reflective of what is
00:42happening in the broad market.
00:44For example, net exposure, net length for the hedge fund community is pretty close to the five-year average.
00:50But as you mentioned, turnover has increased quite remarkably and gross exposures are close to the highest levels ever.
00:56Same thing when you look at the S&P 500. If you just look at the index, it's been a
01:00pretty boring year so far.
01:01And yet within the market, we've seen very violent rotations across factors, sectors, single stocks.
01:07And so the result is today the gap between volatility for the aggregate S&P 500 and its average stock
01:14is the highest it's been in 25 years since the dot-com boom.
01:18Wow. So there is some movement under the surface. We still don't really see spreads blowing out, though, Ben.
01:25And this is, you know, what concerns me the most because I always think of the bond market as the
01:30smart money.
01:32Why are they still so complacent with all the concerns, with all the uncertainty, which I know we always have.
01:38But as Danny points out, it feels bigger at this moment.
01:43I think there are two issues going on. One is, of course, the equity market is dramatically overweight technology relative
01:49to the rest of the economy.
01:50You know, this is something that's been good for the S&P 500 over the last few years.
01:54But this year, as the market has struggled with disruption risk, it's been a problem for the S&P 500.
01:59The other issue, of course, is that the economic data has been very strong, as have the earnings data.
02:05And so while the market is struggling with narratives, we're seeing companies now reporting earnings growth of 12 percent.
02:10We're seeing improving industrial economic activity data, even improving consumer sentiment data.
02:16And so it's very reasonable to me that the market is still pricing a pretty optimistic economic outlook.
02:21By the way, just straight up want to ask you your take on the AI kind of ghost GDP concern.
02:29I'm sure you read the Citrini research piece. It was kind of freaking the markets out on Monday.
02:34But yesterday, Workday CEO came out and said, hey, OpenAI, Anthropic, Google, they all use our software.
02:41So it's not like at least any time soon people are going to be using AI to stop paying their
02:48SAS bills. Right.
02:49Or how do you see it? This is the key challenge in the market, which is if you look at
02:54actual earnings, take software, for example.
02:56That industry just reported double digit earnings growth.
02:59And not only were backward looking results good, the forward looking implications of those results led analysts to raise their
03:062026 earnings estimates.
03:08Meanwhile, that industry is down 30 percent over the last few months,
03:10because what's happening is investors are pricing a narrative about future disruption and ignoring near-term growth.
03:17The result to me is that it's very hard to disprove that narrative.
03:21And what we've seen in historical disruption episodes is it can take quite a while for realized earnings to prove
03:28the resilience of sectors.
03:29I think that's going to happen this time, too. I think it's going to take a little bit of time.
03:33It sounds like 19 uncertainty to me.
03:36Is it 19?
03:37No, like a night.
03:39Oh, 19.
03:39Yeah, like K.
03:40Got it. OK.
03:41Yeah, Ben, OK, it's horribly nerdy.
03:43And I'm so sorry I'm bringing this up.
03:45But it's this idea of unmeasurable risk, of true uncertainty coined by the economist Frank Knight in 1921,
03:51that when you have these big shocks, it is any outcome feels like it is possible.
03:56And that is exactly what you're talking about.
03:58But when it takes a while to resolve itself, even if you see irrationality in this market,
04:03can you really go in and buy dips?
04:06Because we won't know the future.
04:08We won't know what happens for some time.
04:10So you could continue to get those sell-offs and be punished, even if you think it's overdone.
04:15I agree with you.
04:16And I think for investors here, they're unlikely to re-engage with industries like software, for example, en masse,
04:22without seeing either several quarters of continued earnings resilience or much lower valuation.
04:28Something you have to keep in mind, of course, there are differences within the industry.
04:31But in aggregate, even with that 30% sell-off I mentioned,
04:35multiples are still not much cheaper than the average stock across that industry.
04:39Well, Ben, if I can just jump in, because I think that's a really important point.
04:43If there continues to be pain, let's say, in software in these exposed sectors, isn't that enough in itself?
04:48And it's something Matt has been really great on.
04:50Isn't that enough in itself to really hurt these companies?
04:53The stock sells off, spreads wide, and the cost of capital gets more expensive.
04:58Isn't that enough to seriously damage these companies, even if the threat of AI isn't real?
05:04The earnings have been solid.
05:05We should remember that.
05:06I think this is much more a story of future risk.
05:08Of course, there are going to be examples where those price declines make it harder for those companies to fund
05:14themselves going forward.
05:15But even if you look at the S&P 500, for example, these are very cash flow generative, very healthy
05:20companies,
05:21where really the problem is being priced in terms of terminal value or even a few years down the road.
05:27I'm looking at some of the shared favorites that you highlight in the notes our producers gave us.
05:33I see MasterCard there.
05:35I see Visa there.
05:36And again, these are stocks that were called out in this Trini note for a reason that really resonates with
05:43me.
05:44I've been thinking about the friction problem for many years, right?
05:46Why does it take us so long to wire money around the world?
05:50Why do we pay these card issuers 3% or 4% as vendors?
05:56Why do you like these stocks still?
05:59Well, this is really reflective of what we see in the hedge fund and the mutual fund portfolios.
06:03And I think it speaks back to the dynamic we mentioned earlier, which is because funds have been so optimistic,
06:08these companies,
06:09as this disruption narrative spreads, it's led to very violent rotations in their portfolios.
06:14And we see that result, for example, if you look at parts of the asset-heavy universe.
06:18We flagged in a note yesterday on AI that we have two baskets, asset-heavy stocks and asset-light stocks.
06:24The asset-heavy stocks have outperformed by over 30% in the last several weeks.
06:29And I think that is, again, reflective of investors running away from this narrative risk that is very hard to
06:34disprove at the moment.
06:36So where do you want to hide out?
06:38When everything feels like it's shaking, when everything feels like it's turning,
06:42what are the safe places that you can hold in your portfolio right now and say,
06:45I don't need to worry about a research note coming out and completely destroying the stock or Anthropik putting out
06:50a press release?
06:52To us, the clearest tailwind at the moment is that economic acceleration.
06:56This is something we expected coming into the year.
06:58Happy to say it's playing out with the recent economic data.
07:01And so we've been focused, for example, on the materials sector, on a number of industrials exposed to the industrial
07:06cycle,
07:07and even on middle-income consumer stocks, where we think we're going to see pretty substantial tax refunds get delivered
07:13over the next several weeks.
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