00:00The fundamental story I think is well understood at this point. The earnings have been super, super powerful.
00:04Where is the more speculative story emerging for you? Oh, well, we've seen an incredible rally in the most speculative
00:10portions of the market.
00:11Look at the Goldman Sachs Unprofitable Tech Index, up 15 percent in last week alone. It's up 65 percent since
00:19the March lows.
00:20You look at the cohort of space names. Most of them are unprofitable. They're up 100 percent year to date.
00:25If you look at the Russell 2500, the leaders in that index are all coming from very unprofitable names.
00:32If you take out or if you look at the names that are actually generating profit and up and trading
00:37at a discount, they're only up about 8 percent.
00:40So if you're a high quality name, you've been sitting out on that. You've been sitting out on this rally.
00:45So the question is, how much can this speculative portion of markets continue?
00:49So we've got some froth. You've identified it. Technicals are stretched.
00:51People have talked about that endlessly over the last two months or so. Is that enough reason to sit this
00:56out?
00:57No, it's not because the earnings picture is so very strong.
01:00But I think what we have to appreciate with the earnings story is two really big things.
01:04The first one is the upside in the hyperscaler capex.
01:07This time last year, we were expecting hyperscaler capex to be up 10 percent.
01:11That number today is 80 percent.
01:14So you remember that one man's capex is another man's profit.
01:17And that brings you to the other really important point about this earnings story, which is that we are in
01:22an operating leverage boom driven by the semiconductors.
01:26These are typically high operating leverage businesses, which just means that a little bit of sales growth generates a lot
01:32of earnings growth.
01:33And you've seen that because margins for semiconductors have expanded from 30 percent just nine months ago to 45 percent
01:40today.
01:40So because we're seeing this increase in sales, it's causing a huge boom in profits.
01:45But what we have to watch is that if sales slow down a little bit, what you could see is
01:50this deleveraging of operating profits that could cause earnings growth to not be as robust as we look into 2027.
01:57So we'll see you next time.
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