00:00I do want to start off with stocks here and really just where the broad market right now is kind
00:05of feeling things heading into this second half.
00:07Do you remain overweight given the gains, the outsized gains we had in the first?
00:11I do. I, you know, look, I think that the progress in the market has been very, very well underpinned
00:17by good fundamentals.
00:18I mean, we've seen earnings that have come out really strong in the first quarter.
00:22There's an expectation for second quarter earnings to be really good.
00:25The other is that we're not seeing that this gain in equity prices is coming from multiples.
00:30It's coming from the earning side. In fact, multiples have started to contract a little bit.
00:34So in many ways, what people thought were an overvalued market, we saw that earnings actually grew into this.
00:40We're also seeing, as you were pointing out, we're starting to see much more of a cyclical story.
00:44We're starting to see this broadening.
00:45Value has outperformed growth in the first half of the year by about 10 percentage points.
00:50This is not a market that feels frothy and has a narrative of it's just about the MAG-7 and
00:55semis and tech.
00:57In fact, semis and tech have actually had a more difficult time.
01:01I'm glad you brought that up because I was looking at this at the end of the month, the end
01:05of the quarter, I should say.
01:06And even as of today, the S&P Equal Weight Index outperforming SPX for a second straight week.
01:11I was looking at the factors to watch and you make a good point.
01:14I mean, I would think momentum and growth would have been right at the top, but it was value and
01:18dividends and a lot of other things that had outperformed the broader market.
01:21Is the economic backdrop going to be supportive of that going forward?
01:25So I think it will.
01:27I think now that we have some of the headwinds of higher energy prices, hopefully the U.S.-Iran conflict is
01:35on the mend, we're going to have to get more clarity.
01:38One of the things that we're looking at is actually one of the laggards that's out there, which is the
01:42consumer.
01:43Many people have been worried about it because higher energy prices, higher gas prices, where are they going to get
01:47the money to spend?
01:48The consumer has been relatively strong.
01:50But if you look at the valuations in the market, many people are negative on the consumer.
01:54We see this as a second half of the year that's still likely to grow a little above 2%.
02:00Look at the payroll number that came out today.
02:02Wagers are still good.
02:04Unemployment rates relatively low.
02:05We think the consumer is a lot stronger than what many in the markets are giving it credit for.
02:09So I'm going to say, yeah, look, consumption is 70% of GDP.
02:13As long as GDP growth stays reasonably strong, I think the consumer does well, and I think the broader economy
02:18does.
02:19But if the consumers do well, does that represent an opportunity to invest in some of these laggards?
02:23I'm just looking at a market again.
02:25Yes, we are seeing chips kind of through the roof, but we're also seeing anything around industrials that has a
02:30small part to play in the AI thesis booming.
02:34Yeah, so look, I mean, I think the AI trade is going to come in waves, right?
02:39There's going to be volatility around this.
02:41I think the consumer overall is still going to remain relatively healthy.
02:46I just don't think that it's an overvalued sector at this point.
02:49And I think that what we're likely to be surprised with is the retail data, the consumption data that continues
02:56to come through.
02:56I think this broadening is real.
02:59So, yeah, I do think that the AI trade is obviously taking a little bit of a breather right now,
03:05and there's some volatility and bumps.
03:06I get it.
03:08But, you know, but we're on the side that this is still, you know, a very big market-changing event,
03:14economic-changing, secular story.
03:17And, you know, we just have to manage the volatility around it.
03:19You make an interesting point in terms of the secular nature, because it just certainly is top of mind that
03:24when you look at the spending, it's really obviously driven by MAG-7.
03:27But it's CapEx from companies, not necessarily consumers showing up and spending a lot.
03:32Yeah, no, that's a good point, right?
03:33So when we think about the CapEx story, right, so the narrative in the market is that there's a lot
03:38of CapEx.
03:38That's what's driving the markets.
03:39That's what's driving a lot of these, you know, big tech companies and the gains.
03:43But, look, you know, the reality is that right now the way people think about AI is as a cost
03:49-cutting tool, and that's going to add to the bottom line, and that's going to, you know, drive profits and
03:53things like that.
03:54Okay, fine.
03:55In the initial part of the story, that's correct.
03:58Ultimately, what I think happens is that AI works its way into becoming a much more productive efficiency story and
04:04a creative destruction story,
04:06where now companies see it as an enterprise solution where it not just drives profits by cutting costs, but it
04:13drives profits by increased volumes, increased sales, increased production.
04:17And that's where I think you get the second leg up in the AI story and in the technology story
04:24that surrounds it.
04:25So, you know, still very positive, but I'm waiting for that.
04:27Is that kind of maybe what we're seeing kind of play out over the last few weeks in the market
04:31with kind of the sell-off in chip stocks,
04:33or at least a little less enthusiasm for the chip stocks and a rotation in some of these other names
04:39that might actually be the beneficiaries?
04:40Yeah, like so like compute, like the shortages in compute, the shortages in hardware, right?
04:44So we've got the technology story out there, but now we need the machines to do this on.
04:49We need the infrastructure to, you know, to build this around.
04:52So broadly speaking, I, you know, I still think that we are in a secular wave with this story that
04:58we are really just trying to understand right now in the markets.
05:02And like I said, it would be a totally different story remain if if the valuations were sky high and
05:08we're looking at multiples that are really we're not.
05:10We're looking at multiples that have come down actually in the markets, just broadly speaking in the sector.
05:16So I still think it's well valued relative to the earnings that are coming out.
05:20So you're pretty optimistic about the second half of this year for both equities and fixed income alike?
05:24I'd say more for equities than fixed income.
05:27I do think that rates will remain stable.
05:29So I think that you're going to clip your coupon in fixed income.
05:32I don't think you're going to get return from spread compression.
05:35I don't think you're going to get your return from a significant fall in rates.
05:39So whatever your coupon is, I think that's what you get.
05:42I think default risk is going to stay relatively low.
05:44I don't think that the Fed is going to hike interest rates.
05:47So I don't think they're going to ruin the party in the bond market necessarily.
05:51So I'm OK with bonds.
05:53But I think that we are in a nominal growth world.
05:55Nominal growth, first quarter data is 6%, 6.1% nominal growth.
05:59That's driving earnings.
06:00I still think we're in a nominal growth world, which is going to be very supportive of equities going forward.
06:04So more so than bonds.
06:06But you still need bonds to diversify your portfolio.
Comments