00:00Julian Emanuel of Evercore, maintaining a 77.50 S&P year-end price target, writing,
00:05stocks have become more volatile as the wall of worry is large around AI adoption, spend
00:10regulation, profits sustainability and capital raise. Julian joins us now for more. Julian,
00:15good morning. Good morning. We often say on this program you can learn something about the data
00:19and you can learn something from how the market responds to the data. This morning,
00:23numbers from Samsung, fantastic, record quarterly profits, stock gets hammered.
00:28What can you learn from that this morning? So what you can learn is the sentiment around the AI
00:34trade, in our view, is probably as cautious as it was in the first quarter of the year coming into
00:42the reporting season in April that actually caused the market to pivot higher. It really is this,
00:51every one of these aspects has now become a glass half empty type of view. But at the end of
00:57the day,
00:57what we think that this earnings season will show is that, like this report last night,
01:03there is incredible strength. And if positioning gets to one way, it gets taken off. But the longer
01:11term trend, the fact that these stocks and this theme is driving financial markets in the global
01:19economy higher is intact. Julian, in the short to medium term, it does feel like there's been a turn
01:23though. Off the back of the micron numbers, 85% margin, Samsung, record quarterly profits, and yet
01:28the market is punishing some of those stories. And you're starting to see a rotation back to the big
01:33spenders, the hyperscalers. We've heard from multiple people in the last 24 hours, that's the trade they
01:37like now, leading into the so-called lag seven, not the mag seven, the part of the market that has
01:42struggled, meta, Microsoft, and leaning away from some of the chip makers. What do you make of that
01:46call? I'm going to have to use that one. It's not mine. It's not mine for what it's worth. I
01:50kind of
01:50like that. If you look at the last two and a half years, particularly into earnings season,
01:59it's much more about positioning in terms of short-term reactions. And in that respect, look,
02:05we know where all the money and all the profit has been this last two or three months. Look at
02:11some
02:11of these names, how much they've run up, 200, 300% off of the March 30th low. This kind of
02:18digestion
02:19is completely normal. And frankly, we'd argue it's healthy, as is the rotation into some of these
02:26names, which are going to report stellar earnings. And oh, by the way, because they've been punished so
02:31much, are trading at pretty reasonable valuations. On top of that, you have the headwind of higher oil
02:37prices now put to the side, right? Because oil prices have made a round trip back to where they
02:42were before the start of the Iran war. How positive of a talking point is that going to be for
02:46the
02:47companies and sectors outside of tech? I think it's very underappreciated as a profound positive.
02:54We went back and we looked at, you know, we started the war in March by doing this analysis of
03:01when
03:01oil price went above the 24-month moving average by 30 or 40%, that that would be a market disruption
03:10event. The retreat back to $70 and below is almost one of the fastest spike on wines on record. And
03:19it's absolutely unequivocally positive. The market averages 17% gains in the 12 months following that
03:27return to earth of the oil gusher. It's a huge relief for the consumer, especially since we had
03:33seen pressure on the consumer, both high income as well as lower income. I'm curious to get your
03:37take on whether this, the change in oil makes the Fed minutes that we're going to get next tomorrow
03:45almost obsolete because, you know, we're not going to get a whole lot of information in any way from
03:49Kevin Worsh because he's not one to be totally communicative. But does it matter as much what the
03:54Fed says now that oil prices have come down so much? It matters less. But what will be interesting
04:00is how much of a read we get or don't get into that closed-door family fight that Chair Worsh
04:09keeps
04:09talking about. Look, but in our view, we don't think the Fed's going to move this year. And we
04:15don't think that the market... You don't hold. Why?
04:18Two things. Number one, the oil price can have very salutary disinflationary effects
04:24throughout the rest of the economy. Look, we saw the world's largest retailer make that announcement,
04:30whether it was prompted or not prompted. But that did happen. And that is real.
04:36And then the other aspect of it is the AI-driven inflation is something, if you listen to Chair Worsh,
04:43he said, we're going to give it time. We're going to, you know, we don't want to make the mistake
04:50that was made in late 1999 by assessing the technological revolution as a bubble and raising
04:57rates when it wasn't necessary.
04:59This kind of raises a good question, the disconnect. Deutsche Bank's written about it in the last 24
05:02hours. There still is a bit of a disconnect here. We've had a reset in crude prices from triple digits
05:07down to the 60s on WTI, Brent in the low 70s. But we haven't reset the Fed hike debate. In
05:13fact,
05:13this market's still primed for Fed hikes. What's going on there and why?
05:18I think it is this sort of getting used to the discomfort of less transparency, less communication
05:28from the Fed. It's intentional. Do you see reduced communication equaling
05:32increased hawkishness? Is that the right way to look at this? I've heard pushback from some
05:36people to that. In our mind, it isn't. But given the fact that that initial press conference
05:43used, you know, was really a primer on fighting inflation, the concept of price stability being,
05:51you know, number one mandate, it's understandable. But again, in our view, the market's misreading
05:59the intention. And I likened it more to the Greenspan era, which a lot of people talked
06:07about, the concept of jawboning the markets into where you wanted them to go.
06:12Or does the decreased communication lead to increased volatility? The VIX closing below
06:1716 for a second straight day. But we might get more volatility in the rates market, which
06:22will then, of course, trickle into the equity market.
06:24Well, there's a lot of things going on, of course. And I think, again, oil where it is
06:30certainly helps the rest of asset market volatility. It's also the summer where we're digesting,
06:37the market's rotating. And then the other part of this volatility is the fact that even though
06:42you're seeing more volatility in the tech sector, you're seeing less volatility elsewhere. In fact,
06:49you're seeing an entire cohort of stocks on a day-to-day basis move inversely to the S&P 500,
06:56the likes of which we haven't seen in 25 years.
07:00Negative beta stocks. This has been a call for you. Walk us through it.
07:03So basically, what it means is it's a variety of industries. Energy, you can understand intuitively
07:11why it would move inversely to the S&P 500. Utilities, consumer staples, and strangely enough,
07:18insurance stocks. We scratch our heads as to why. But if you look at the last six months,
07:24on a day-in and day-out basis, this group of stocks, a number larger than you've seen in 25
07:31years,
07:32move inversely to the S&P 500. Last Thursday, with Nasdaq selling off, you had all of those sectors
07:39that I mentioned. Insurance stocks were up 3%. Yesterday, the exact opposite happened. But what it
07:46tells you is, A, people are trying to diversify the fact that AI is everywhere now. It's in bonds.
07:56It's in gold. It's in emerging. I mean, is Korea an emerging market anymore? We don't know the answer.
08:01By some measures.
08:02By some measures. But it also tells you that the demand for stocks remains very high.
08:09It feels like one trade in the market right now, which is what you're getting at. And people are
08:12looking for alternatives increasingly as well. Typically, we'd sit on the programmer like this
08:15and we'd say the market is not the economy. The economy is not the market. But the economy
08:19increasingly is firing on one engine, isn't it? Aren't they the same thing at the moment?
08:22And that's the problem for investors, really. And that's why, again, these negative beta stocks are
08:31getting as much attention as they are, because you do want to, you know, portfolio theory tells you
08:37you don't want to put all your eggs in one basket. Nevertheless, the market has gravitated,
08:44as has the economy, to putting most of its eggs in the AI basket. We think there's more room to
08:50run,
08:51to be clear. But again, you know, diversified portfolio is something most investors are hoping to achieve.
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