00:00Max Kettner of HSBC writing, strong economic growth will likely keep the current hawkish front end pricing well anchored,
00:06supporting the continued outperformance of tech over small caps.
00:09Max joins us now for more. Max, welcome, buddy.
00:12Let's talk about the rate story and how it relates to the equity market.
00:15Yields are higher, rates are higher, and this equity market has stood up to it really, really well.
00:21Do you think this stock market has already discounted the prospect of higher interest rates from here?
00:26Yes, 100 percent. Absolutely. I think those people who say, well, we still need to see eventually higher interest rates
00:33and higher yields feeding through into equities, I think that is wrong.
00:37If you look at within the S&P 500, we had as of Wednesday evening, we actually had almost 50
00:44percent of the S&P members
00:46with a multiple contraction of more than five P.E. points.
00:50So more than 250 names with multiples contracting than more than five points.
00:56So you have seen the impact from that. Look at the last two months.
01:00About two months ago, the 12-month forward P.E. of the S&P 500 was at roughly 21.
01:07Now we're at 19. So we're give or take with 10 percent down.
01:11Now imagine if earnings expectations, earnings, 12-month forward earnings in the last two months
01:16hadn't been upgraded so much, then if they had just been flat, we would be 10 percent down in the
01:21S&P 500, right?
01:2310 percent down correction territory on moves and yields both on the front end and the long end.
01:30You know, that I would say is pretty fair.
01:33The reality is that earnings are just keep being so, so strong.
01:37And this is not just a tech picture. It's outside of tech. It's in tech. It's in the U.S.
01:43It's in Europe. It's in the U.K. It's in Japan. It's in emerging markets.
01:46It's really a global picture. We've seen that in the Q2 earnings season once again.
01:51We've seen the third earnings season where earnings beat rates globally have just been inflicting higher.
01:56So, yes, we've seen the impact from higher yields. We've seen it on multiples.
02:00But as long as the earnings keep going as much as they are, and let's see what happens in the
02:05Q3 reporting season
02:07in about a month's time, but as long as they keep going as much as they are,
02:11I think we're set up with a sort of choppy environment where, however, if you're short, you're really running the
02:16risk.
02:17You just need one of those potential negative catalysts from geopolitics, higher rates, private credit, and so on.
02:24One of those catalysts not to go away, just to be slightly less negative.
02:29And you really risk that you're being caught out in a squeeze higher.
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