00:00It's really interesting because for a very long time we were zeroed in on capital expenditures
00:04and that was the be-all and the end-all. There are stories on the Bloomberg Terminal today
00:08about the credit profile and CDS, for example, on Oracle. Are investors starting to look deeper
00:15and at different data sets to assess the health of what's going on?
00:19Yeah, absolutely. We look, though, at the structure of the national economy and we look
00:25at CapEx as a share of GDP, what's interesting to note is that capital formation as a share
00:31of GDP is the same level as a percent as it was in 2018. So while we've seen a tremendous
00:36amount of investment, especially in the tech and AI space, from a national standpoint,
00:41it doesn't feel imbalanced. Now, rightly, investors are starting to wonder what is the return going
00:46to be on all of the investment going into AI? We think that there has been a lot of excitement,
00:51perhaps over exuberance in places. But clearly, as you mentioned, Ed, that there is a lot of demand
00:57still. And that's something that we think can continue to go. You have a very clear line,
01:01which is the primary determinant in equity markets and equity prices is earnings.
01:07100 percent. Absolutely. We just had an astonishingly detailed earnings print from Oracle.
01:10Yes. What did you learn about the world from it?
01:13Yeah. Well, I think going back to what you just said, that demand for AI CapEx is still very,
01:17very high. When we think about what determines equity returns, whether you're looking at
01:22history since World War II or even the last year for the S&P 500, 80 to 90 percent of
01:27the return
01:28comes from earnings. And so the outlook for prices is really predicated on do you expect earnings to
01:34grow? And we do think so. We think earnings growth for the S&P 500 will be about 10 percent
01:38this year.
01:40That is largely predicated on an economy that we think will be growing above trend. We're expecting
01:452.4 percent real GDP growth versus trend growth for the U.S. of about 2 percent that we think
01:50will generate that 10 percent earnings growth. We think, though, in our base case that the total
01:55return, though, for S&P 500 will be about 7 percent, which means not all of that earnings growth makes
02:01its way into the total return, primarily because we think multiples will come down a little bit from
02:06their currently elevated levels. Interesting because you've sort of been talking about the tech sector
02:10not being in a bubble, Matthew, talking about how valuations are relatively reasonable. And certainly
02:15Oracle's come down some in terms of its own P.E. ratios. But talk to us a little bit about
02:20the
02:20anxiety in the software part of the business. And Oracle spoke and pushed back against that.
02:25Have you pushed back against that more broadly? Yeah, we do think that there should be some concern
02:30about the software sector. This, though, is reminding us of a few episodes historically, whether it was the
02:35global financial crisis and there were concerns about the U.S. financial sector and existential
02:40concerns. If we go back to COVID, there are concerns about the office real estate sector and whether it
02:45was dead. We don't think this time is different. Investors, unfortunately, tend to move in mass,
02:50especially when pessimism takes over. We think this time is no different. Reality is probably somewhere
02:56in between what we've seen in terms of the status quo and the existential concerns that investors have.
03:02We think of this more as an evolution of the sector. There's certainly a competitive risk,
03:07but we certainly don't think that this is an existential one where there's so much focus
03:12on the terminal value. We think these are absolutely very competitive companies that will continue
03:18to evolve over time. There was a lot of anxiety in the market initially about software. And then,
03:23look, there was the geopolitical risk that we're now combating day in, day out for a 12-state
03:27straight day over with the Middle East and conflict with Iran. Matthew, does that change in any way,
03:34your perspective on investing into this moment in where you are in the market?
03:39Yeah, we're very focused on Iran. It's terrible from a humanity standpoint. I think, though, we would
03:45focus, though, on from an investment standpoint that this resembles what typically happens when there's a
03:51geopolitical shock. Over the near term, there is a reaction by financial markets. What we've seen
03:57historically and specifically, we've looked at the last 40 years, there are 21 airstrikes in terms of
04:03the U.S. in the Middle East. And we do see some patterns emerge. The first is that the initial
04:08reaction
04:09in markets is that risky assets like equities initially sell off. But then we see the dollar
04:14appreciate. We see oil rise. We see bond prices rise. But after about eight weeks, fundamentals,
04:22whether economic or corporate fundamentals, reassert themselves. And the prior trend in
04:27financial markets resumes such that after eight weeks, 95 percent of the time, U.S. equities are
04:33actually above their pre-strike levels by an average of about four percent. So as a consequence,
04:40we haven't changed our views. We have a key investment tenant at Goldman Sachs that history
04:46is a useful guide. The words this time is different we think are very dangerous. We think that history
04:53will repeat itself here and eventually markets will resume their core trend. We're every day trying
04:58to understand the long-term impact of AI on inflation and labor markets. And I know the Goldman
05:04House call is that AI may displace a million jobs a year. Correct. But there is also job creation.
05:09Absolutely. You know, happening in parallel. Just what you said about, you know, how one might
05:13approach that as an investor. From your desk and your perspective, what happens in the short,
05:19medium and long term? So we think technological innovation is a feature and not a bug of the U.S.
05:24equity market and the U.S. economy. The U.S. economy is by far the most innovative globally. It's a
05:28key
05:28reason that we recommend our clients be strategically overweight U.S. assets. Now, certainly AI is going to
05:35boost productivity. And unfortunately, it is going to displace workers. But as you mentioned, Ed,
05:41there's a tremendous amount of new job creation each year. Bear with me some numbers here. Sure.
05:46There are 170 million jobs in the U.S. Each year, there are about 25 to 30 million jobs either
05:52lost
05:52or destroyed. But on the other side of that, and this is creative destruction, new jobs are created and
05:58there are more new jobs created than jobs destroyed. So as we put that 1 million number
06:02into context, we think that a lot, if not all of those jobs lost to AI, will be replaced by
06:10new jobs.
06:11Think about the investment we've seen so far, whether it's the construction of data centers. Think about
06:16rising financial market prices. That's increased net worth. And it's increased consumer consumption.
06:22And so as we think about the net impact longer term, we're bullish. And we think that this is
06:27something that will be additive, even though over the short term, there will be some tough adjustments.
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