00:00Denise, in your view, is this a turning point? Is this a buying opportunity when it comes to tech?
00:05Yeah, when you look at the data, I mean, there's certainly concerns around the technology sector
00:08since it's been such dominant leadership in the markets. But it's interesting when you look at
00:13the mathematical setup. We saw this very, very briefly in the tariff tantrum last year. But
00:17the sector is now in the bottom third of its cheapest when you look back to the data since
00:23the 60s. And we haven't really been this cheap from a valuation perspective in over 10 years.
00:29And look, I mean, there's always the potential that it could be different this time or there's
00:33a value trap. But there is a very linear relationship between the cheaper this sector has been
00:38historically, the more likely it is to outperform. 70% odds are not 100% odds. But the risk reward
00:44when
00:44you take a one year time horizon, I can't say if the bottom is in right now, but when you
00:48take a
00:49longer term time horizon, it does look more like an opportunity. Now that those 70% odds are actually
00:55sticky, even if things like operating margins decline or earnings revisions come down, which
01:01is kind of a mathematical way to say whatever it is that you're worried about might be partly priced
01:05in at this point. I think what people might be concerned about right now, Denise, is that
01:09this sell-off looks a little bit different if you peel back the layers of, you know, quote unquote
01:14tech, because there's this worry about AI and the idea that AI will lead to the demise of some in
01:21the
01:21software industry, the so-called SaaSpocalypse. Where are you seeing deals? Because just because
01:27we're seeing something is relatively cheap doesn't necessarily mean there's opportunity around the
01:31corner. Right to your point in terms of a value trap. Now, look, I'll let the fundamental analysts
01:36tackle what will happen to software from a long-term perspective. But when I look at the data, you see
01:42something very rare historically. You have an industry that's never been more profitable, pinned to the
01:47100th percentile of their profitability. And yet what we've seen over the last three months only has
01:53been a devaluation such that relative forward PEs are now in the almost the bottom decile. So you have
02:00this massive disconnect between the valuation and the operating profit. That is rare historically. When you
02:05look back in all industries to the 60s, you only see this happen 2% of the time. The instances
02:11that it
02:12happens are things like the financial crisis. So one of the ways that we can sort of tackle this
02:18quantitatively is to say, well, it is different, but we have seen a little bit of this movie before.
02:23In some ways, software is going through its own great financial crisis pricing. Now, how has that
02:30worked historically speaking? Now, N is only 2%. So you can't draw broad conclusions, but we have seen
02:36this historically in technology sectors like communications, you know, com equipment and
02:42hardware, even though we haven't seen it in software. We've also seen it in semiconductors
02:46when you look back historically. And it's, you know, in some ways, the odds from a go forward
02:50perspective, once you're priced like this, what are your odds of outperformance over the course of the
02:55next 12 months? And what's your average outperformance over the next 12 months? Is look, it's only 50 50,
03:00which is hard to say that that's a table pounding buy. It's not. But it is to say that the
03:05average
03:06outperformance of all these sectors is around zero in the sense that they tend to be at the point
03:12where much is priced in and downside might be more or less limited. Denise, I do want to, yeah, go
03:18ahead.
03:19The technology sectors like semiconductors and com equipment have actually had higher odds of
03:25outperformance, which gets to a little bit of what Chair Powell was talking about, which is technology
03:30as a sector has a history of reinventing itself. And yes, there may be, in fact, bankruptcies within
03:37the software industry, but there might be companies that are actually coming in to create new products
03:42as well. I understand the urge to use history as a guide here. But I do wonder for those people
03:48who
03:48are out there who say, wait a second, we are on the verge of a new industrial revolution. We are
03:54seeing
03:54something with AI that we've never seen before in modern investing and in the modern economy.
04:01Do you have to throw the history textbook out the window or the markets history textbook out the
04:06window in an environment like this? Well, I'm always struck by the fact that it is always different
04:11this time, right? COVID was very different. Tariffs were very different. And yet the patterns are very
04:15sticky. I do think that there's always a knee jerk reaction behind, you know, equity markets need to be
04:21reflective of very good times in the economy or no existential risk. But when you study history,
04:27you know, you see over and over again that sometimes the market goes up and climbs the wall
04:31of worry, despite whatever you are worried about ending up coming to fruition. And I do think that
04:37what is the definition of this cycle when I look at the math is that the equity market has remained
04:42much
04:43more fearful on an ongoing basis than we see in most credit markets, which are tend to be the smarter
04:49markets. You know, more you see that fear and that knee jerk reaction, the more likely the market is to
04:54be
04:54higher, not to say over any three month time horizon, but it is to say over any long term time
04:59horizon. So yes,
05:00could it be different this time? But I think history shows you that those differences might end up being tailwinds
05:07that
05:07you don't suspect like productivity, like higher GDP growth, like higher earnings growth, like more profitability in the
05:14overall market as well. I'm taking a look at WTI crude, it's up to $102 a barrel. Brent is at
05:19about $112 a barrel. To what
05:22extent are high energy prices a drag on the tech industry? On the tech industry, you know, in some ways,
05:28you can think of it as a
05:29cyclical industry. So I think that's pro cyclical in the sense that it's tied to the US economy overall. I
05:34mean, energy prices are
05:35interesting in that I understand why the knee jerk reaction is to look at real energy prices over time. And
05:41we've seen them
05:41spike in, you know, obviously 1980. And even the high in 2008 from a real inflation adjusted perspective was nominally
05:47higher, was
05:48actually higher than the peak in 1980. So you draw those peaks and you say that there's real, very strong
05:55correlation to very
05:56uncomfortable economic situations. But it is quite different, right? History can show you what the similarities are and also the
06:03differences, which is to say that oil intensity has actually declined substantially in the overall economy. So that effect on
06:10the
06:10same price might actually have a much less impact than you think on the overall economy. And in some ways
06:17to think about it in very
06:18practical terms, instead of just oil prices, to think about the stress that it could impact on corporate profits, specifically
06:25when
06:25we're talking about equity prices, if you renormalize those oil prices in relation to corporate profits, you'd see that that
06:33spike in 1980 effectively was $1,000 in terms of the price per barrel that it would take to equate
06:41the same stress, which is not to
06:42say that higher energy prices don't take a bite off the U.S. consumer. They do. You see declines in
06:48real income growth and
06:49especially over the short run, demand is relatively inelastic. But what you do see is I think that the comparisons
06:54to the 70s and 80s of
06:56stagflation, this is a very different economy and it might be much more absorbable than you think, which might mean,
07:03back to
07:04technology, that more of that is priced in than you may think.
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