00:00And so you were writing last week around this idea of the earnings and where we stand in the deceleration.
00:05Because I think a lot of people looked at this past earnings season, see 30% growth and say,
00:10OK, this is going to be impossible to repeat. This is a bubble and it's going to pop just in
00:13earnings.
00:14How do you see the pace of earnings moving forward from here?
00:17You're right, Danae. I hear that question in my conversations, that anxiety constantly talking with investors.
00:22To some extent, defining a bubble is a semantic game.
00:24But I think there are two key reasons why investors shouldn't be so anxious.
00:27First is, a bubble implies that we're going to see earnings pop.
00:30We just updated our forecast last week. I think you should expect double-digit earnings growth again next week.
00:36And then the second issue, of course, is that these fears are pretty well socialized.
00:39Investors are anxious about them, and you can see it reflected in positioning data.
00:43Our positioning indicator now is at the lowest level it's been since March,
00:46which I think reflects these anxieties I'm hearing every day.
00:50Towards the position, I think that's right.
00:52I think there's a little bit of a pain trade where everyone was a little reluctant into the midterm elections,
00:56into sort of the supply shock sort of story just maintaining,
01:00and often pressuring margins and keeping kind of management on their toes.
01:03All that now is sort of becoming more accepted.
01:05Now, the positioning, to your point, is it really just even?
01:09Is it retail is heavier, and then maybe we have some more sort of institutional guys that need to catch
01:12up?
01:13Because that's kind of what it smells like.
01:14It seems pretty diversified.
01:16We've seen cash balances rise among mutual funds.
01:18We've seen net leverage decline for hedge funds.
01:20I wouldn't say retail positioning is depressed,
01:22but we haven't seen the magnitude of inflows over the last several weeks that we saw earlier this year.
01:26So you have earnings to back these things up, Ben,
01:29but I just wonder about some of these narratives that the market are grabbing onto.
01:32Just to use Meta and Muse as an example,
01:35yesterday there was no announcement from Meta saying,
01:37okay, we're going to do all these new deals because of our AI assistant
01:40and, like, buy all this compute and do all these things,
01:42yet the market ran away from it, and AMD is now a $1 trillion company.
01:46I wonder what you make about the market's willingness to run with narratives
01:50but also back off of them extremely quickly.
01:53It's very hard to know day-to-day how the narrative will evolve.
01:57Markets are always narrative-driven,
01:58especially because we've never seen an AI boom before.
02:01Narratives can be particularly powerful in this environment.
02:03So as an investor, I find it helpful to just take a step back
02:05and ask where we can be confident.
02:07And where I think we can be confident is that token consumption
02:10will be higher in 2027 than it's been in 2026,
02:13that demand for compute is still rising,
02:15and that suggests all of these earnings tailwinds
02:17we've been discussing remain intact.
02:19Yes, over the summer, when we had these wobbles sort of in that AI outlook,
02:23whether it was the CapEx, the model disruptions,
02:25all the different micro-stories,
02:27you kind of saw this rotation save the overall index,
02:29like cyclicals, health care, some of these stories,
02:32the benefactors of AI would take over for a short period,
02:35and then maybe you'd see a rotation back out.
02:37I mean, this seems like we're going to get something similar again
02:39because, again, there's macro shocks,
02:41but correlation is still low and dispersion is somewhat still high.
02:44Correlation is extremely low.
02:45If we look back decades, we've rarely seen correlation across the market this low.
02:49Now, on the one hand, that tells me the market is not really worried about some of the macro risks,
02:53and so investors who are concerned about interest rates or oil
02:55can take that opportunity through index options.
02:58But more broadly, I think your point is right.
03:00There will be times where the market will focus on the AI story.
03:03There will be times where the market will focus on other parts of the market,
03:05like health care or like the consumer.
03:07But generally speaking, as we look across the spectrum,
03:10that earnings tailwind, I know I keep stressing this,
03:12but that earnings tailwind really looks like it's what's driving stocks higher.
03:15Well, to your point, Mike, since the summer, the sectors that have been higher are energy,
03:20which makes sense considering the price of oil.
03:23Financials makes sense considering what rates have done.
03:25And health care.
03:25And I wonder what you make of this idea of health care sort of as a hedge to AI.
03:30In a portfolio, if you're very overweight AI, should you have health care on the other side of it?
03:33You have your finger on the pulse.
03:34I hear this from investors also all the time.
03:36And if you look before the AI trade for years and years,
03:39health care and tech were positively correlated.
03:41They were both secular growth sectors, not that sensitive to the macro economy.
03:46Since 2023, we've seen tech and health care become inversely correlated.
03:50And that is reflected in what we see in the positioning data.
03:52Investors want to own AI.
03:53They agree with the bullish thesis we were discussing earlier.
03:56But they also want some protection in case we go through another month like July,
03:59where the AI trade unwinds.
04:00Can I just ask quickly, though, is there a risk that AI, excuse the pun,
04:05but, like, infects the health care trade?
04:07Because these health care companies have been using AI for some time.
04:09Is there not some degree in which the benefits of the technology also benefit the sector
04:14and they become correlated once again?
04:16If you took a survey of investors and you asked them,
04:18where will AI be most decretive in the next several years as adoption increases?
04:23The two answers I hear constantly are financials and health care.
04:27Now, that said, I don't really think the market is paying for that optimism.
04:31I think the market is focusing on earnings where it sees it today.
04:33And that's part of the reason why the AI infrastructure stocks have performed so well
04:37rather than companies that investors think will be long-term productivity winners.
04:40But that is, that's a potential argument going forward.
04:44I think all things now are tech, which has been a big macro trade.
04:47But it's not an easy trade.
04:48It's not necessarily something.
04:49We just know that all these companies have to adopt and they have to do it responsibly.
04:53Sort of Q2 got a big boost from the fiscal support.
04:57You know, the one big, beautiful bill.
04:58That kind of helped the breadth of the earnings grow past this AI CapEx,
05:01which was obviously the bulk of it.
05:03Looking forward, I guess, you know, we're worrying about headwinds and all this for the consumer.
05:06Like, where are you thinking about sort of the breadth of earning guidance improving?
05:10Is it going to be more concentrated in sectors?
05:11Because Q2 seemed a little bit of an aberration in that sense.
05:14You're right.
05:15If you look at the S&P 500, earnings growth was north of 30%.
05:18The median stock grew earnings by 14%.
05:20So even pulling out that AI impulse, it was pretty strong.
05:23I think as you look over the next few quarters, we'll see a bit of deceleration.
05:26As you noted, we're losing some tailwinds from fiscal policy.
05:29Higher energy prices are also going to be a little bit of a weight.
05:32That said, look at the GDP tracking.
05:34We're still running at north of 3% real for the third quarter.
05:37I still think earnings will be pretty solid over the next couple quarters.
05:40Is anything this week UN-related, be it various negotiations between countries,
05:45be it Trump's speech, be it anything that happens with Iran,
05:48does anything hit the threshold of market moving for this equity market,
05:52or is this just a politics story that will not impact fundamentals?
05:55Well, if you didn't have the view coming into this year,
05:57this year should have been a key lesson that forecasting geopolitics is very difficult.
06:00But what I will say is, to the discussion of positioning earlier,
06:04investors are very cognizant of how higher interest rates
06:07and higher energy prices can threaten the market.
06:09But we should remember, there are two sides to that distribution.
06:11And we've been reminded of this a little bit in the last couple days.
06:14It's very possible we see a positive catalyst that helps bring down oil, bring down rates.
06:19And that would be obviously positive for the market,
06:21but also a broadening dynamic, to your point earlier.
06:23So one of the bigger themes I'm personally on right now
06:26is sort of diverge between what we're seeing on the screens of the oil
06:28and what we're seeing sort of on the ground with diesel and product.
06:31And I guess when we're going to go into earnings season,
06:33and we're starting to see it in the PMIs already,
06:35how management's sort of, you know, passing that through.
06:37What are your thoughts there?
06:38We obviously go kind of back to the consumer here,
06:40but then, you know, there's business-to-business kind of aspects to this.
06:42I mean, so far it doesn't smell like there's any sort of crunch on margins.
06:46When you guys are doing your modeling now,
06:47and diesel's back at 650, not back, at 650 for the first time.
06:51I mean, this is kind of new uncharted territory for forecasting in a lot of ways.
06:55We are seeing some concerning signals, and we highlighted this last quarter.
06:59If you look at what companies are saying,
07:00they are talking about input cost pressures.
07:03And then the key question is, do those pressures remain elevated?
07:06And what do companies do on the pricing side?
07:08The good news is, if you look across the market,
07:10we've not really seen margins contract yet,
07:12but we have not seen much expansion either over the last couple quarters,
07:15and so we'll be keeping a close eye this quarter, too.
07:18I think that's what everyone's watching for,
07:19because, again, supply shock is now turning into a longer, stronger pulse,
07:24and we're also getting some demand pull of, obviously, AI CapEx.
07:27But as you said, consumer actually helped the breadth of Q2,
07:30and I was really surprised by that,
07:32and that helped the revisions of GDP higher and higher.
07:34And, you know, as we know, this also seems to be occurring again in Q3.
07:37That's right. We saw very strong retail sales again.
07:39And our expectation is we will see this eventually affect spending,
07:42higher energy prices, low savings rates,
07:44should lead to a little bit of deceleration.
07:46And you've seen some of that, though, like Walmart earnings.
07:48I know you can't talk to specific companies,
07:49but there were individual instances, Walmart, P&G,
07:52where the consumer was pressed and could say,
07:54okay, it's the continued K-shape.
07:55But Walmart had been doing well even despite that.
07:58And the best indicator, I think, is stock prices.
08:00I mean, if you look at consumer stocks over the last few weeks,
08:02they are telling you very clearly,
08:03whatever the resilience we've seen over the last few months,
08:06we should expect a little bit of deceleration,
08:08and that's very much in line with our forecast.
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