00:00Yeah, absolutely. I think there's parts of the S&P that look amazing.
00:04Can you readjust the MAG7 now after the Fed meeting yesterday, the hyperscaler debt where you've got Mark Cabana working
00:11for it.
00:11That's a good start.
00:12No, he doesn't work for me. I work for him.
00:14But can you say tech is still a place to be?
00:19Look, I think tech has gotten really interesting and we've seen a massive rotation.
00:24So we have this thesis that, you know, the hyperscalers were going to derate and price in the fact that
00:30they're getting a little bit more levered.
00:32They're getting more capital intensive.
00:35They're less asset light and they spend less on R&D and buybacks and more on physical capbacks, which is
00:41generally a reason to expect multiple compression.
00:45And we got that. We also got a big earnings surprise.
00:49So I think what we've seen this year is sort of what we were expecting, but better returns than what
00:56we were expecting at the beginning of the year.
00:58What I worry about from here, less so maybe for tech, maybe semis, I think they're talking about this is
01:07just margin compression next year.
01:10And what's interesting is, again, when you look at trends in earnings forecasts, we're seeing margin expansion expectations for 2027.
01:21And I've worried about margins before and I've been wrong.
01:24Companies have been able to maintain them.
01:26But I think now what we're in is this environment where you want to build, you want to build and
01:31there's a shortage of products.
01:32There's complicated structures.
01:34You need this whole supply chain.
01:36Things are unavailable.
01:37Some things are getting more expensive.
01:39Like that, to me, is margins.
01:42That's where the risk is.
01:43This market, the performance we've seen this year and maybe for a little bit longer, has been really driven by
01:48incredible earnings growth.
01:50Yes, yes.
01:50I mean, just amazing.
01:52Strong earnings.
01:52So being a former analyst myself, if nothing else, the comps have to be tougher in 2027.
01:57How does the market adjust to that, do you think?
01:59So that's the question.
02:01Is a big earnings slowdown going to drive negative returns or just kind of meh returns?
02:08And our view is, you know, the earnings slowdown itself is almost inevitable.
02:13You can't beat 50% growth or 35 or whatever we're tracking.
02:17But if you think about next year, the slowdown that we're forecasting is from, you know, 30 to 15.
02:25And 15 is still a pretty healthy growth rate.
02:29So I think that's the question is where do you see the biggest slowdown?
02:35I need to interrupt here.
02:36Bank of England, sterling moves finally off of the announcement they will not raise rates.
02:42Yes, we saw a little move in sterling, but now it's more tangible.
02:45I have cable.
02:47This is U.S. and sterling, a weaker now, testing a 133.63.
02:53And Francine taught me how to look at euro sterling, showing euro strength as well.
02:58But we now have, for our European audience, we've now got a little bit of move there.
03:02Paul Svini with Savita Subramanian.
03:05Savita, how do stocks perform?
03:06I guess what a lot of folks are telling us now, you better get used to these higher yields out
03:11there, the 10-year, maybe 5%.
03:13If that's, in fact, the case, how do stocks perform in that kind of environment?
03:18Yeah, I mean, it's interesting.
03:19I think that we've never been not worried about 5% as some kind of red line, even though it
03:25feels like that's the point of pain in the market.
03:30I think what's interesting is that when you look at large companies, you know, even these tech companies that are
03:36levering up have locked in long-dated, generally low fixed-rate debt.
03:43So it's not necessarily anathema.
03:46I mean, you know, back in 2007, I think half of the S&P 500 debt was floating.
03:52Today it's, you know, 80% fixed.
03:54So I think that's the good news.
03:56Small caps might have a harder time.
03:58They've got more refinancing risk in some areas of leverage.
04:03You have to be selective there.
04:04The consumer, I think, you know, what we're seeing now is oil prices elevated and short rates moving higher.
04:12I don't know if that's enough to slow down the consumer because we've had what I think has also been
04:18a surprise this year is that we talked about this at the beginning of the year.
04:22You're seeing a lot of benefits to lower-income consumers kick in, despite the fact that oil prices and gas
04:28prices are so high.
04:30You are more qualified with your call, which is a collared trade, folks, down to 7,400 SPX.
04:35It maybe would go up a little bit, like 7,800.
04:38It's a very tight range.
04:40The drama on Wall Street now, once again, generational, they rebrand it and all that, is call-riding, where I
04:47own a portfolio and I sell calls against it and bring in income to enhance my dividend income.
04:55And if I get a pop, which you're not calling for, the equities can be called away.
05:01But if I have a collared trade, this can be a very successful strategy.
05:05Do you agree that call-riding right now is a premium builder for people?
05:10I mean, you know, I'm not a derivatives expert, but I think that at some level...
05:15Excuse me.
05:16I think it's three degrees in mathematics from Berkeley.
05:20Okay, continue with the charade.
05:21That was for compliance, folks.
05:24But look, I think that, you know, we're...
05:27I don't know if the market remains in a very tight range.
05:30I wouldn't be surprised by big swings up and down.
05:34But I think the run rate for S&P returns from here is lower than what we've enjoyed over the
05:43last 10 years.
05:44Yeah.
05:44So, you know, I think yield is very important.
05:48There's not a lot of dividend yield in the S&P, so you've got to get your yield elsewhere.
05:52One of my favorite areas, and I think where I would be sort of shifting allocations aggressively, and we've liked
05:59this for a few years, is large cap value.
06:02I think that's one area of the market that is under-owned, boring, nobody wants to talk about it.
06:08What's an example of a large cap value stock?
06:09So, it's constantly changing.
06:12So, large value we think of as financials, energy, and those are sectors that I think look pretty good.
06:18Large financials and energy look clean, capital discipline, like kind of the opposite of tech.
06:25They've de-levered rather than levered up.
06:28But you're also getting some of the bombed-out tech companies floating into the value index.
06:35So, I think it's really a good place to hunt for cheap growth and quality.
06:41What is the AI call for you guys these days?
06:44It seems like it changes not on a quarterly or yearly, almost like a weekly basis.
06:50Right now, we've got concerns about from some of these AI leaders themselves talking about the growth.
06:54So, how do you guys think about that broadly defined AI?
06:57I think that it's, I mean, I'm not calling, I'm not an apocalypse doomsayer, but I think that it might
07:06take longer than what everyone's expecting.
07:09And there might be little hiccups along the way.
07:11So, you know, when you think about building physical equipment, like plant and property, you know, renovating your house always
07:20costs more and takes longer than what you think it will.
07:22And I think that's the same thing for this build cycle.
07:25That's a good point.
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