00:00Adam, I mean, what a day. And I think if there's any day that underscores that not just tech, but
00:05the AI trade itself is not a monolith, is a day like today where you have Micron, SanDisk, all those
00:10memory chip stock exposed type companies taking off and the rest of tech, Mag7, even some of the other semis
00:18taking a hit.
00:20How do you navigate this landscape when you have this company that's printing 86 percent profit margins and then other
00:29companies have to pay it up?
00:31You navigate this landscape by recognizing, one, it is certainly a concentrated market and a historically concentrated market.
00:38But luckily, too, it's driving earnings and the profit cycle is paramount at this stage of the cycle.
00:44And what you're seeing here is the profit cycle continues to deliver. And also, gratefully, it's not just in those
00:49narrow markets.
00:50The markets have been broadening year to date and over the last year.
00:53And profits are delivering really across the board, not just in these concentrated sectors.
00:57Why do we see, Adam, such low P.E. ratios for like Micron is 8, SanDisk is 12, Samsung is
01:097.
01:09I mean, if this market is so concentrated and these stocks have run up considerably, shouldn't those numbers be much
01:17higher?
01:19I think there's two stories in multiples. So in these narrower parts, in these more cyclical areas, the markets, which
01:24semis are, when you're seeing earnings growth skyrocket the way that it has,
01:29that's what's doing to the denominator of the P.E. It's really lowering and cratering that multiple.
01:33So that's actually a caution in a very cyclical market when you start seeing P.E.s almost trough in
01:38this way.
01:38On the other side of the market, you're seeing the S&P around 20 times forward earnings.
01:43That's actually derated a little bit since the start of the year.
01:46And actually, the broader market, thinking globally, is derated on net since the start of the year.
01:50And that's a really good thing because what you're actually seeing driving market returns this year, which have been great
01:55on the whole, is earnings delivery.
01:57And that gets back to the profit cycle and earnings have been resilient.
02:01So you can look past some of the multiple noise and really focus on earnings this part of the cycle.
02:05Can earnings continue to be resilient if you have inflation that hasn't, that it doesn't just come from oil prices?
02:12Those have started to subside.
02:14But there is this fear in the P.E. data this morning that it was somewhat narrow, that you had
02:18services inflation.
02:19And now we have to worry about A.I.-led inflation if companies like Apple have to hike prices.
02:24Adam, can the earnings cycle continue as it is if we really get some more diversity of inflation pressures?
02:32The earnings cycle can continue with sticky inflation, but it does depend what type of inflation we're talking about.
02:39So supply-driven inflation, which could be oil from the U.S.-Iran conflict, and maybe now memory, kind of A
02:44.I.-semi-driven supply-side issues on inflation, that's an issue.
02:48But if we can fade some of the supply-driven shocks, which we are seeing in terms of oil prices
02:52and where they've plummeted since we've started seeing some resolution,
02:55and really focus on the demand side, you've got a healthy consumer, you've got a healthy economy that's either between
03:01good or great at times.
03:02And if it's more demand-driven inflation and that's what keeps services and overall inflation sticky, then I think we
03:08can live with that and earnings can continue to deliver and broaden.
03:11But we don't have a very healthy consumer.
03:14I mean, yes, 20% of consumers are healthy, but the bottom 50% are terribly unhealthy.
03:18While this is a supply-driven shock, certainly the memory issue, if not the oil issue, do you have a
03:29task force for that?
03:31Like, how do you work that out?
03:33Well, I'll eagerly await the results from the bigger task force, and you're right, Matt, that there is a K
03:39-shape to the story for the consumer, as it's been for some time.
03:42But on net, in aggregate, you're seeing phenomenal jobs numbers for the most part.
03:47You've seen some net slowing in jobs, but it's still healthy.
03:50You saw some of the numbers this morning, more reassurance that consumers are confident and they're still spending.
03:55And you're seeing GDP somewhere between 2% and 3%, whether you're looking at last quarter's numbers or at estimates
04:01for this quarter.
04:02So overall, you're seeing a consumer that can weather some of this volatility in terms of some sticky inflation.
04:08When it comes to this market and specifically capital markets, Adam, they've been incredibly healthy.
04:14Every day there's some new megatech company that goes to the bond market that taps it, even though it's flush
04:18with cash.
04:19SpaceX, the most recent one, Ludovic Shebron was talking, the Allianz CIO was talking to the FT, and said that
04:27for him it's a sign of a bubble,
04:29that you have this company that just did this massive blockbuster equity issuance.
04:33And then it decides to go into the market and tap bond markets, that it's moved from a healthy boom,
04:37from a stretch boom, into bubble territory.
04:40For you, is that a red flag to have all this, not just equity, but bond market issuance from these
04:45big tech players?
04:46There's no doubt a ton of enthusiasm out there, and one of the places that we're very focused is the
04:52enthusiasm's not just in one place.
04:54So broadening portfolios into U.S. mid-cap, into U.S. small-cap, into international developed and emerging,
05:00those have all been rallying as well and keeping up, if not better, than the broader S&P index.
05:04So we like that broadening trade, and I think that's a good sign that it's not a red flag overall,
05:10even if in certain pockets of the markets things are getting historically expensive,
05:13and some of the earnings estimates are at historically optimistic levels.
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