00:00How jittery is this market, really?
00:03You know, it is pretty jittery in the short term.
00:07But I will say, going back to the quote, I mean, I still think we have to give this bull
00:11market the benefit of the doubt.
00:12It's earned it through kind of these carousel of concerns that we've seen not only this year, but through the
00:17last several years.
00:18And we're coming off a historic earnings season, so we've had this earnings boom.
00:22You know, that said, you know, as we kind of move deeper into August, into September, I do think that
00:28it is going to be a bit bumpier here because, you know, one of the main things that has overwhelmed
00:33these kind of outside forces is this earnings boom.
00:37And now we're going to move past that earnings boom where there's going to be much more focus on inflation,
00:42interest rates, Jackson Hole, upcoming inflation reports, the, you know, next employment report.
00:47So it's going to turn much more macro where I think you'll see more mixed trends as opposed to the
00:52earnings season, which has been really almost one-sided to the upside.
00:55Yeah, we were so spoiled this earnings season, Keith.
00:59What if we don't get that again?
01:00I mean, was this a one and done?
01:02And next time we'll get nice surprises potentially, but you couldn't possibly have that kind of an earnings season again,
01:07could you?
01:10I think it will be tough to top this earnings season.
01:13But on the same token, I still think the path forward is of higher earnings.
01:18And, you know, if we think about the earnings for this year, the upward revisions relative to past years is
01:25one of the strongest we've seen in history.
01:27Typically, we don't see this type of strength unless we've come out of like a recession or a downturn.
01:31What's notable in our work is now we're starting to see estimates come through for next year.
01:36And so far, the trend we're seeing for 2027, our estimates are moving also higher at a more rapid clip
01:42than normal.
01:43So, listen, I think the earnings story is still positive.
01:47Have we hit as good as it gets?
01:49Maybe.
01:49But I think in the same token, this year, if we look at the S&P as an example, the
01:54valuations have reset.
01:56And, you know, the year-to-date gains for the S&P are all earnings-driven.
02:01The P.E. has contracted by about 9% or 10%.
02:03So, I think the good news is I don't know the market's anticipation that we're going to be able to
02:07duplicate this.
02:07But it does expect earnings to continue to move upward and to the right over time.
02:13You're still finding tech very attractive.
02:16Industrials as well, but it's based on the AI narrative, right?
02:20How resilient is that AI narrative?
02:25So, we've long kept during this bull market an overweight to tech.
02:30And as you mentioned, the adjacent play is industrials.
02:33You know, we wrote a note a few weeks ago talking about the kind of the love-hate relationship with
02:37tech.
02:39Every bull market has a dominant theme.
02:41We still think AI and tech is a dominant theme.
02:43We're still showing the strongest earning trends within tech.
02:47But we also have to realize coming off of the March lows until June, you know, tech was up almost
02:5350% and semiconductors were up almost 90%.
02:55So, I think some of the volatility that we're seeing here more recently is that you just went a long
02:59way in a short period of time and you reset expectations higher.
03:02At least the good news over the last month or so is that you reset those expectations lower.
03:08Valuations for the tech sector is at the lowest premium or one of the lowest premiums we've seen over the
03:13last decade.
03:13So, I still think that trend is intact.
03:15But I would also say, Bonnie, you know, look at yesterday.
03:17We have energy, which will overweight, making new highs.
03:19You have healthcare making new highs.
03:20So, I would say it's not just a tech story.
03:23It's tech and others.
03:24Again, healthcare, financials, alongside that tech and industrials and energy are current overweights.
03:31Yeah, financials, healthcare, as you say, energy, and then also small caps is your preferred rotation hedge.
03:37What are your clients saying to you about fixed income right now?
03:39Because if you have yields this high and such risk in the equity market, even if it all looks, you
03:47know, pleasant at the moment, right?
03:49But there's going to be a lot of volatility, as you say, a lot of choppiness.
03:52Because would your clients rather take, you know, a fixed 5% or 6% yield?
03:59Yeah, well, you know, it's somewhat mixed out there.
04:02On some side, we're seeing people see this as a, you know, a great opportunity.
04:07On the other side, if you're a borrower, you're seeing, you know, a different perspective.
04:10But from our view, we do think yields are somewhat attractive up here.
04:13Around 470, we kind of stress test this and said, let's just say yields even move, you know, another 50
04:18basis points higher.
04:20On a one-year forward basis, you would still have a positive total return because that carrier, that coupon, you
04:27know, is at one of the highest levels we've seen over the recent decades.
04:30So from our perspective, we're saying for our clients that, you know, if you're in fixed income and even if
04:36yields move a bit higher, we're getting rewarded for where yields are relative to, you know, some of the risks
04:41that are out there today.
04:42So there's going to be a 20-year treasury auction a little later today.
04:46It looks like the government is going to have to pay 5.29%, roughly.
04:49Alphabet had to pay Australians and whoever else bought the Aussie bonds 6.98%.
04:55Do those AI-related yields go even higher, Keith?
04:59And at that point, would they become quite attractive or, you know, would they start to look a little riskier?
05:07Yeah, so we're actually, it's funny you mentioned that, we're monitoring the credit spreads from the AI side.
05:12It's one of the key risks to our positive view.
05:14And we're looking at that more of kind of what it sounds for the equity market because, you know, in
05:18totality, we're actually seeing pretty broad moves upward in credit spreads.
05:22But this is from, you know, balance sheets, excluding a couple of companies that are somewhat under leveraged, obviously a
05:28lot of focus on cash flow.
05:30So, listen, as far as if they're attractive, I think most of these big cap companies still have really strong
05:36balance sheets.
05:37And I think the investment grade is somewhat attractive at those levels.
05:41But, again, from the equity market, I'd rather see those credit spreads stabilized as opposed to moving up because that's
05:46shown you that kind of tension between this great opportunity,
05:50but also some of the concerns that are in markets with those credit spreads moving higher.
05:54So, Keith, we're coming into, you know, the second half of the year we're in it.
05:58And August is effectively over at this point.
06:00Is there anything that we should be aware of between now and the end of the year that perhaps we
06:05can avoid?
06:06Any pitfalls that typically happen that maybe we should just try to avoid this year?
06:12Yeah, you know, the one thing I try to do is, what our team tries to do, is just kind
06:16of zoom out and focus on what's the main drivers,
06:18what regime are we in, and, you know, continue to look at earnings as our North Star.
06:23But, you know, we are in this midterm election year.
06:26You know, August is bucking some of the, you know, historic weakness.
06:29I mean, we're up over 2.5 percent this month.
06:31But, you know, it's very normal in September and October before the election to see a little bit of a
06:36pullback.
06:36I would focus less on that and what the primary trend is, which is, in our view, still higher, and
06:41use pullbacks as opportunities.
06:43But, I mean, as I mentioned, we have all these macro uncertainties out there.
06:47Jackson Hole's, you know, a big deal.
06:49But ultimately, I think it will come back to corporate profits.
06:52And lastly, Vani, it's always the things that we're not talking about, which is the biggest risk.
06:56As an example, I don't think many people had on their bingo card, you know, the Iran, U.S., tensions
07:01heating up like this year.
07:02So I think it's something that's going to come from left field, a curveball that we'll have to adjust to.
07:06But, again, at this point, going where we started, we still think this bull market has earned the benefit of
07:11the doubt.
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