00:00Jonathan Golub joins us here in Studio 2, Managing Director and Chief Equity Strategist at Seaport Research Partners, kicking us
00:06off to the close.
00:07Calling back a good chunk of the losses from Friday, a sell-off that you kind of characterize as out
00:12of sync with, I guess, what we're seeing in terms of corporate and macro fundamentals.
00:16Sure. I mean, the earnings, and I think Katie caught it in the chart before, the earnings are absolutely on
00:23fire and they keep getting ratcheted higher and higher.
00:25The earnings for the semiconductor group are up more than 50% since January 1st.
00:31I mean, I've never seen anything like that in my career, and you're seeing that pretty much throughout all of
00:36tech and the broad market as well.
00:39And valuations are lower almost everywhere.
00:42Well, let's talk about valuations. I understand the argument about this phenomenal earnings growth we've seen, but we've also seen
00:47phenomenal price growth in the stocks as well.
00:49I mean, we're talking about several of these names have doubled, tripled, even more than that over the span of
00:54just a few months.
00:55So why isn't that run-up in share prices pushing, in your view, that multiple to a level that maybe
01:03isn't in sync with those fundamentals?
01:06Well, I mean, Romain, it's really simple. There's a P and there's a PE.
01:10If the earnings are going up faster than the price, the stock is getting cheaper.
01:17And if you look at some of these AI semi-names like Avago and NVIDIA, they're trading at multiples that
01:26are in the bottom half of the tech universe.
01:29And their earnings are expected to grow 50%, 60% or more over the next 12 months.
01:35Also, I appreciate you using Avago instead of Broadcom. Remember those old commercials when they were trying to get everybody
01:40to pronounce Avago right?
01:42I can't say I do.
01:44I still say Google, though. I can't get to alphabet, so I hear you.
01:48What about Facebook versus Meta? There's a whole host of examples we could use there.
01:52There was one Brady on those commercials, by the way.
01:54Oh, that's good to know.
01:55Sure. I'll YouTube it later.
01:57Let's talk about psychology, though, near-term psychology in the stock market, because I hear what you're saying when it
02:03comes to the fundamental backdrop, the earnings backdrop, et cetera.
02:06But there was a really interesting note from Bank of America, dated June 5th, basically saying to take profits, short
02:12-term profits here, because there's too many red flags right now.
02:16And I wonder, you know, you think about how far we've come, especially from the depths of March.
02:21How great do you think that temptation, that urge is for investors right now to maybe lock in some gains?
02:27If investors are locking in gains where the fundamentals don't justify it, you have to buy it.
02:34And, I mean, if you take a look, and there were two things that spooked the market last week.
02:39The one was maybe there was, you know, a blip in demand on the AI side.
02:44And this is on the back of a Vago or Broadcom delivering earnings growth of more than 50 percent year
02:51over year.
02:52And they beat by one and a half or two percent of the number.
02:55And people thought that wasn't enough.
02:57But if you also look at on the economic side, I mean, I'm looking at, you know, on the Bloomberg
03:02Terminal, the economic surprise.
03:04Companies have been beating economic estimates by, you know, by really since, I guess, September.
03:11I mean, you're talking about nine months where the data is coming in better.
03:14The jobs data was strong.
03:17We're seeing the ISM is strong.
03:20So, basically, you know, future demand is there.
03:22So, it's really a healthy backdrop.
03:25And so, I just don't see any fundamental argument to, you know, in general.
03:30Are there niches that look like they're, you know, do I think the hyperscalers look like there's a cash flow
03:36problem?
03:38Yeah, I think so.
03:39But we're not talking about the broad market.
03:41We're talking about small groups.
03:42Well, I want to talk a little bit about what you were saying about, you know, the economy right now.
03:46Because you point out measures such as the city economic surprise index.
03:49It's been in positive territory all year.
03:53That jobs report that we got on Friday wasn't just strong.
03:55It was really a blowout print.
03:57So, again, you take stock of this market.
04:00Do you think that this is an equity market that can withstand the potential of a couple of rate hikes
04:05or at least one?
04:06Yeah, and that was part of the story was that the market is now – let's think about the narrative
04:11and then let's look at the data.
04:12The narrative is, well, there's no way that the Fed is going to cut interest rates now.
04:16Well, first, why does the Fed cut rates is because the economy is not strong enough on its own.
04:21It needs to help.
04:22The economy is saying is we don't need the support.
04:24So, that's one thing.
04:25The other is when you actually, again, looking on the Bloomberg terminal, what is the amount of – what's the
04:31change in late last week on how much people expect the Fed to do?
04:35A half a cut.
04:37A half a cut and the market sells off like it did on Friday.
04:40That's rounding.
04:41It's just not enough.
04:42But was the issue, though, also so much just about what the Fed is going to do with regards to
04:47the short end of the curve?
04:47It seemed that there was a little bit more consternation about that potential increase that we're seeing on the longer
04:53end of the curve, which seems to be a little bit divorced from where people think monetary policy might actually
04:57go.
04:58Sure.
04:58But what was the move on the 10-year on Friday?
05:01Six basis points?
05:02Yeah.
05:03And I'm not saying that it's nothing.
05:05What was more important to me as an equity strategist, the high yield spreads widened out, which is bond investors
05:14getting a little bit concerned.
05:16Yeah.
05:16The VIX blew out.
05:19And if you look at what's happened today, the VIX has come back in.
05:22Yeah.
05:23That blew out.
05:24It went above 20, which is like, remember the old days when it blew out on the VIX was like
05:28when it would get up into the 40s, 50s, and 60s?
05:30Oh, yeah.
05:31This is not like, you know, one of my favorite stats is what's the probability of a recession?
05:39Because really that's what equity investors are concerned about because that's when earnings fall apart and multiples take a hit.
05:45The probability of a recession right now since the beginning of the year is down from 30% to 25%,
05:51and the data is saying that that's probably well overstated.
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