00:00Margins are soaring and they're soaring because of semiconductor margins and semiconductor margins are soaring not because we're having some
00:08kind of productivity boom, but we're having an operating leverage boom.
00:13And that's a really big difference. So you've seen let's look at EBIT margins for the socks EBIT margins earnings
00:19before income and taxes EBIT margins in 2025 were 16 percent in 2026.
00:25They're expected to be 44 percent. This is absolutely incredible amount of margin expansion because what happens with a high
00:34fixed cost business like semiconductors is that it doesn't take a lot of revenue growth to see it transfer down
00:40into the bottom line.
00:41So you get what the street calls really good incremental margins. The catch with that, though, is that it's not
00:47necessarily sustainable.
00:48If you see revenue growth start to slow, that incremental margin turns into what's called a decremental margin and you
00:55see profits drop a lot more than you see revenues drop.
00:58That's operating margin underlined. So does that mean we had very, very strong first quarter earnings?
01:06The bar is pretty high for the second quarter. Can the S&P 500 meet that bar, do you think?
01:11Yeah, the bar is at 23 percent earnings growth for the second quarter. And what's unique about this quarter is
01:18usually through the quarter, analysts are cutting their forecasts.
01:22So they cut their forecasts and people jump over the lower bar and everybody high fives themselves and say, great
01:28quarter, guys.
01:29But the reality is that this quarter you're seeing earnings estimates having gone up from 18 percent to start the
01:35quarter to 23 percent.
01:37And so as we think about the normal cadence of earnings beats, which usually you have 80 to 85 percent
01:43of names beat in the in each and every quarter.
01:46I think the big question is, will you see that same kind of earnings beat rate because you've raised the
01:51bar so much over the course of the last few months?
01:54Yeah, absolutely. So what are we doing here with the A.I. trade?
01:58I feel like the market really has been over the last several quarters trying to discern winners and losers.
02:04How do you guys think about it? Yeah, well, we think the whole A.I. trade, whether you're thinking about
02:09those that are spending the money or those that are receiving those CapEx dollars,
02:13all depends on the forecast for CapEx guidance from the hyperscalers.
02:19Morgan Stanley put out a note last week where they said that they expected 2027 CapEx guidance to CapEx to
02:26go up to one point two trillion dollars and then one point four trillion dollars in 28.
02:32The ultimate question is, who pays for that?
02:36Is it rotation when we move from a big move and socks over back over to the Mag 7?
02:42Like right now, there's something going on there. Is that like a legitimate rotation?
02:47Well, I mean, that has been the story over the course of 2026.
02:50You've seen Mag 7 significantly underperform the socks because the market has been saying,
02:55hey, we'd rather pay up for the guys who are receiving the CapEx dollars versus the guys who are spending
03:01the CapEx dollars.
03:03And so the question, the ultimate question in all of this is when will Mag 7, mostly the hyperscalers, start
03:09seeing a return on all of this CapEx spending?
03:12Like when? What's your guess?
03:14Well, I think it very much remains to be seen.
03:16And the one stat that we're looking at the closest is cash flow from operations.
03:21Everybody looks at free cash flow.
03:23That's cash flow from operations minus CapEx.
03:25We know that CapEx is soaring, but if you want to spend more money on CapEx, your operating cash flow
03:31has to go up.
03:32She brings an audience at a CFA Society bar after the speech, after the panels.
03:39She brings the bar to a complete halt between EBIT and CapEx.
03:45Yeah, that's a lot of geek speak there.
03:47Cash flow.
03:48Exactly.
03:49So what's screening well for you these days, whether it's a sector or a factor?
03:55What are you looking at these days?
03:56I mean, I will say the quality factor has been absolutely walloped on a year-to-date basis.
04:02It has significantly lagged in the various ways that you can define quality because all of the strength has been
04:08in high beta momentum as well as unprofitable names.
04:12You look at something like the Goldman Sachs Unprofitable Tech Index, which really led coming out of the April lows.
04:18It was up 50% coming off of the April lows, so significant outperformance.
04:23But you're starting to see those things crack.
04:26Over the last couple of weeks, high beta momentum is down about 20% or 27%, sorry.
04:32The Unprofitable Tech Index is below its 50-day moving average for the first time in a while.
04:37So it feels as if we're starting to see a shift back to more fundamentally driven market versus YOLO, dream
04:44for the future market.
04:45Okay.
04:46I would start while you're here.
04:48Voodoo Bayou, Orlando.
04:51Oh, man.
04:51And if you want to start out like me, you try Shakey's Gator Tail, which is basically Gator Tail with
04:59stuff put on it so you don't taste the Gator Tail.
05:02Voodoo Bayou is on Sand Lake Road, which is Restaurant Row, and so you could do a whole progress through
05:08the world.
05:08It's sort of like Epcot, but just on one street.
05:11It's fantastic.
05:12I mean, it's just, do you do like a Gator Sushi?
05:16No, I think that would be ill-advised.
05:18You'd have to cook it.
05:19It's in the swamp.
05:20You need to cook this.
05:22Yeah.
05:23I'm looking at this Voodoo Bayou.
05:24It looks like it could be our kind of place, Tom.
05:27To a remote from there.
05:28Yeah.
05:28I think I'm looking at the bar.
05:29Road trip.
05:30Set up for us.
05:30Do you do the strip mall in Orlando Walk of Gator Tail?
05:35Do you do that in a Cutlass Supreme, or do you do that in an old 68 Mustangs?
05:41Look, if you want to do a Gator Crawl, where we just find all the fried gator in all of
05:48Orlando, I'm right there with you.
05:50We can go for an airboat ride and everything.
05:52Yeah.
05:53That's very cool, actually.
05:55We could do that.
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