Speaker 1: Hello, and welcome to What Goes Up, a weekly markets podcast.
Speaker 1: My name is Mike Reagan. I'm a senior editor at
Speaker 1: Bloomberg and I'm hold on a higher across acid reporter
Speaker 1: at Bloomberg. And this week on the show, well, everyone
Speaker 1: has been talking about how higher interest rates are causing
Speaker 1: the sell off in technology stocks, but is that the
Speaker 1: entire story? We'll talk with a veteran equity market strategist
Speaker 1: who thinks there's more to it than just that, and
Speaker 1: will also pick her brain about the upcoming earning season.
Speaker 1: But first they'll thought, I've got a pop quiz for you.
Speaker 1: Are you ready? Probably not, but okay, I know I
Speaker 1: wonder you there would be a pop quiz and you
Speaker 1: got very nervous. Did I've been nervous for the past
Speaker 1: hour for I've been nervous for like the past thirty years,
Speaker 1: but but especially nervous with pop quiz filed outa As
Speaker 1: you know, to make a name for yourself in the
Speaker 1: stock market, you really need to create an acronym of
Speaker 1: your own. So I've got it. There's a new acronym
Speaker 1: that I'm a big fan of. I'm gonna tell you
Speaker 1: what it is, and you tell me what it stands for.
Speaker 1: It's magma m A g m A. Okay, it's meta Amazon, Google, Microsoft,
Speaker 1: Apple in some order and in in one of those orders,
Speaker 1: it's pretty good. I'm not sure if you got them
Speaker 1: all in the right order. Um, we'll find out. I
Speaker 1: also I kind of feel bad for Alphabet. You know,
Speaker 1: they're like, look, guys, we changed our name in alphabet
Speaker 1: and everyone's like, no, you're still Google. Sorry. That consonant
Speaker 1: in in our made it made its way into the acronym.
Speaker 1: So I guess the lesson is, if you're going to
Speaker 1: change your name, there's enough ase you need a you
Speaker 1: need a constant. But luckily for us, that acronym acronym
Speaker 1: is courtesy of this week's Yes, I think she created it.
Speaker 1: Maybe maybe she can shed some light on that for us.
Speaker 1: But well, obviously we'd like to have strategists on the
Speaker 1: show a lot, and we're lucky enough to have one
Speaker 1: of the best in the biz working for us right
Speaker 1: here in house at Bloomberg and very excited ever on
Speaker 1: the show. We really are. And I have noticed that
Speaker 1: acronym in in her recent notes. So I want to
Speaker 1: welcome back Gina Martin Adams. She's the chief equity strategist
Speaker 1: at Bloomberg Intelligence. Thank you for joining us. Thank you.
Speaker 1: And I have to say, if I have Deliver or
Speaker 1: Die by Magma, I might be in trouble. Hopefully I
Speaker 1: can make my name in some other way shape or
Speaker 1: we did come up with Magma. And I'll tell you
Speaker 1: why the G is still there because Google's ticker, Alphabet's
Speaker 1: ticker is still G O O g L, so it's
Speaker 1: based on the ticker. That's why we could still still
Speaker 1: have the G in there. And yeah, our team came
Speaker 1: up with Magma. I can't say it's catching fire, forgive
Speaker 1: the pun, but we're trying to wait until the podcast
Speaker 1: comes out. Yeah, you know, hopefully hopefully we can get magnetistic.
Speaker 1: It's a good one. I've seen a lot of attempts
Speaker 1: to recreate the acronym. You know. Another good one is
Speaker 1: um ed Yar. Denny has a Magnificent seven he's been
Speaker 1: out there with because it's really the top seven stocks
Speaker 1: that everyone talks about instead of the top five anymore.
Speaker 1: So I'll credit him with that one. We're all struggling
Speaker 1: with how to describe this giant group of megacaps that
Speaker 1: really dominates everything in the SNPI. Yeah for sure, and
Speaker 1: we do want to talk to you about that because
Speaker 1: you have been writing a lot of research reports about
Speaker 1: the big tech companies. But I want to start with
Speaker 1: just something that's happened this week, which is we heard
Speaker 1: from Powell this week, and I wanted to ask you
Speaker 1: if you feel like he actually ended up saying anything
Speaker 1: new and why he's hearing in front of Congress sort
Speaker 1: of helped stocks form a bottom from the recent sell
Speaker 1: off that we've been seeing at least four for a
Speaker 1: day or two. Yeah, Well, I think, um, you know,
Speaker 1: did he really say anything new? I don't think so.
Speaker 1: I think that the market is incredibly sensitive to anything
Speaker 1: that happens with the FED. When they hear from the Fed,
Speaker 1: they seem to feel better, right, Really, when the market
Speaker 1: is freaking out is when everyone speculates about what does
Speaker 1: the minutes mean? What did we read here? Uh? Forecaster
Speaker 1: comes out and says we're gonna get six sites instead
Speaker 1: of three, and that creates a lot of panics. So
Speaker 1: I think that just hearing his voice and hearing him
Speaker 1: restate that the FED is still going to be somewhat
Speaker 1: measured in their approach. Um is still going to remain
Speaker 1: vigilant and consider both sides of their mandate. Probably was
Speaker 1: the trigger, but it did he really say anything new,
Speaker 1: in my opinion, not necessarily. I think that they're pretty
Speaker 1: consistent in their messaging. But in the days leading up
Speaker 1: to his speech, the market had gone through a process
Speaker 1: of perhaps getting a little bit too irrational with respect
Speaker 1: to FED expectations. You know, we were pulling forward every
Speaker 1: possible interest rate forecast, talking about fifty basis point moves
Speaker 1: instead of twenty five basis point moves, and starting to
Speaker 1: talk about QT and what that might mean, all in
Speaker 1: the span of a very short time period. So I think,
Speaker 1: if anything, it's sort of squelched a little bit of
Speaker 1: the speculation and allowed the market a minute of a
Speaker 1: minute to just start to breathe again. I'm glad you
Speaker 1: brought that up too. You know, I've had that same thought.
Speaker 1: I wish someone could almost study that. I don't know
Speaker 1: how you would do it, but it's like, it seems
Speaker 1: like if you were to print out a speech and
Speaker 1: send it out into the market and print form, you'd
Speaker 1: have one reaction. But if you had pal just read
Speaker 1: it in front of the cameras, who would be a
Speaker 1: completely different reaction. There's something about his soothing tone, I think, yeah,
Speaker 1: And I think that already one's really there's there's something
Speaker 1: about the hearing someone say it rather than reading it.
Speaker 1: It comes across more certain. I totally agree. And I
Speaker 1: think it's a legacy aspect too, because if you think
Speaker 1: about how the FED used to operate, you know, you'd
Speaker 1: have teams of people inside banks trying to figure out
Speaker 1: every little language change in a FED statement and what
Speaker 1: that might mean for future interest rate increases and what
Speaker 1: that might mean for future FED policy, and in the
Speaker 1: open era of communication. Really, just the last twenty thirty
Speaker 1: years here, we've become much more accustomed to constant communication,
Speaker 1: and we really crave that constant messaging. And so I
Speaker 1: think there's something to be said for the fact that
Speaker 1: the personal message, we need it, we want it, we
Speaker 1: want to hear it all the time. We've gotten very
Speaker 1: spoiled by it. And when we're there's a vacuum of messaging,
Speaker 1: the market is tendent, has a tendency to revert to
Speaker 1: its worst self and start to extract the late extreme
Speaker 1: potential outcomes. Runs me. In the old days, didn't they
Speaker 1: used to look and try to figure out how heavy
Speaker 1: green spans briefly exactly. But let's let's get into it
Speaker 1: about interest rates in tech and I was noticed that
Speaker 1: in one of your recent notes. I think it's a
Speaker 1: really important topic to kind of dissect a little bit.
Speaker 1: I mean, I think may and maybe it's partly the
Speaker 1: media's fault. We we tend to shorthand this notion of
Speaker 1: rates are up, tech is selling off. You know, it's
Speaker 1: obviously causing effect there, but uh, your work, you you
Speaker 1: seem to think there's more to it. I mean, obviously
Speaker 1: tech long duration stocks are are clearly sensitive interest rates,
Speaker 1: but in your opinion, it's it's and and the work
Speaker 1: you've done, it seems like you think there's a little
Speaker 1: bit more to it, that that's not the whole story.
Speaker 1: Can you can you talk to us a little bit
Speaker 1: about what, um, you know, what is really the story
Speaker 1: with tech and this sort of mini correct Yeah, I
Speaker 1: think it is multifaceted, and I thank you for giving
Speaker 1: me the air time to discuss it because I do.
Speaker 1: I do believe that there is absolutely a tendency, particularly
Speaker 1: in this environment where rates volatility is coming to the forefront,
Speaker 1: where the market is naturally going to trade on duration.
Speaker 1: So your longest duration stocks like the tech and the
Speaker 1: high growth stocks, the stocks with much longer dated cash
Speaker 1: flow growth are likely to perform much worse than the
Speaker 1: lower duration stocks like the financials and the energies of
Speaker 1: the world. That's just a given. That said, when we
Speaker 1: really analyze what's been happening with tech, and specifically what's
Speaker 1: been happening with the Magma, the biggest of the tech stocks,
Speaker 1: we saw this extreme flight into this group throughout twenty
Speaker 1: and much of one, at least the early part of one,
Speaker 1: really in and sort of seeking safety, and that resulted
Speaker 1: in this tremendous valuation premium for this group. Not necessarily
Speaker 1: related to interest rates, right, because for most of one
Speaker 1: long term interest rates have been slowly rising, albeit in
Speaker 1: fits and starts. We're certainly off of our lows. So
Speaker 1: if it were all about duration, why would these stocks
Speaker 1: have been performing so well when interest rates were initially
Speaker 1: rising and now all of a sudden not that's not
Speaker 1: the entire story, right, So we saw this incredible valuation
Speaker 1: sort of premium get built into these stocks when there
Speaker 1: was just an absence of growth, in an absence of
Speaker 1: confidence everywhere else. Really, over the course of the last
Speaker 1: six months or so, we've started to see that valuation
Speaker 1: premium compressed as the market has become a little bit
Speaker 1: more confident in growth prospects for everyone else outside of
Speaker 1: this space, and a little less confident that these providers
Speaker 1: are going to be the dominant providers in the marketplace.
Speaker 1: As you've had new entrance to the market, you've had
Speaker 1: a lot more competitive you know, the competitive environment has
Speaker 1: changed so dramatically and the like. On top of that,
Speaker 1: we did see a pretty consequential technical indicator developed in
Speaker 1: November where the tech space in particular had gotten so
Speaker 1: extremely overbought that we were inevitably due for some sort
Speaker 1: of correction. I mean, it was really clear in that
Speaker 1: late October early November rip when everyone just rushed right
Speaker 1: back into tech, that this was a sector that was
Speaker 1: overbought in prime for some degree of correction. So we've
Speaker 1: been really since the middle of November in a period
Speaker 1: of time in which this space has been sort of
Speaker 1: rationalizing that extreme as well. So you've got this multiple
Speaker 1: faceted that this multifaceted story going on with tech. It's
Speaker 1: not just about rates. While I think rates are certainly
Speaker 1: playing a heavy part, you know, it's a longer term story.
Speaker 1: It's also at technical story. It's a story of valuations
Speaker 1: and how those are adjusting to a new reality and
Speaker 1: also earning strenths. Frankly, so, so how do you see
Speaker 1: that all playing out sort of in the longer term?
Speaker 1: You know, um, you know, my my guess is that really,
Speaker 1: you know, high growth tech is always gonna command some
Speaker 1: some sort of multiple premium um in a sort of
Speaker 1: normalized environment where you know, inflations normal below two and
Speaker 1: g d p s you know two or whatever, not
Speaker 1: these off the charts, uh numbers we've seen. I mean,
Speaker 1: is that is that a safe bet? And let me
Speaker 1: let me do one more question on there. I'm making
Speaker 1: a two party But um, the other thing to me
Speaker 1: seems to be that, um, you know what we think
Speaker 1: about is growth really isn't growth anymore? You know, the
Speaker 1: magmas aren't really putting up the the eye popping growth
Speaker 1: that they once did. Is that is that part of
Speaker 1: this is absolutely part of the story, is how do
Speaker 1: you really define these magma companies? Are they growth companies?
Speaker 1: Are are are they value companies? Because a few of them
Speaker 1: are actually in the value indices, which is kind of
Speaker 1: compelling information Uh, so, how are they really growth or not?
Speaker 1: You know, I think that the real clarity you can
Speaker 1: you can direct some real clarity by actually looking at
Speaker 1: the duration of stocks, right, And you can even go
Speaker 1: into the tech sector and decompose what are the highest
Speaker 1: duration versus lowest duration stocks. The Magmas are not necessarily
Speaker 1: the highest duration stocks in tech. If you think about
Speaker 1: what's sold off the most over the course of this
Speaker 1: most recent rip and rates, it's really been some of
Speaker 1: the fintech companies, some of the recent I p O,
Speaker 1: some of the non cash companies, right, the companies that
Speaker 1: aren't even generating cash flow yet aren't even posting positive
Speaker 1: earnings growth, right, those are the companies that are most
Speaker 1: at risk, whereas Magma's kind of a safety play. But
Speaker 1: relative to the entire s MP five, they are higher duration, Right,
Speaker 1: So I think that it's all it's all relative and
Speaker 1: what the universe the universe that you're speaking to that
Speaker 1: really matters. But I think you make a good point
Speaker 1: because when we really look at the growth prospects for Magma,
Speaker 1: that was probably what created the valuation bubble that I
Speaker 1: alluded to. When you think about sort of pre crisis,
Speaker 1: these stocks actually traded at a discount to the rest
Speaker 1: of the SMP five Post crisis, they've traded at a
Speaker 1: massive premium. Why have they traded at a premium? Is
Speaker 1: it really just about interest Rate's probably not. It's mostly
Speaker 1: because they were pumping through double digit cash flow growth,
Speaker 1: really strong earnings growth, still posting revenue growth in an
Speaker 1: environment where many companies were in complete distress and weren't
Speaker 1: you know, we're posting negative earnings in some cases. So
Speaker 1: as we get to an environment where more opportunities emerge
Speaker 1: and other companies in the SMP five hundred and the
Speaker 1: broader markets at large can produce the learnings growth, the
Speaker 1: competitive set for investor dollars suddenly changes. Right, there's oh,
Speaker 1: there are energy companies that I might consider buying now,
Speaker 1: or financial companies that I might consider buying now that
Speaker 1: two years ago I thought might actually go out of business. Um,
Speaker 1: So I think that that's a big part of it.
Speaker 1: But when we look, for instance, over the course of
Speaker 1: this year, this subset of companies that just that five
Speaker 1: Magma companies is expected to still produce faster revenue growth
Speaker 1: than the rest of the SMP five hundred, but slower
Speaker 1: earnings growth than the rest of the SMP five hundred,
Speaker 1: and that's a pretty big contrast to where we were
Speaker 1: two years ago, where they were producing much faster earnings
Speaker 1: growth and revenue growth than the rest of the index.
Speaker 1: So that tells you that margins are Another part of
Speaker 1: the story is these companies, while their margins are high,
Speaker 1: they're not getting higher and you've still got margin growth,
Speaker 1: really exponential margin growth for some segments of the SMP
Speaker 1: five hundred to enjoy in this early part of the expansion,
Speaker 1: where this group doesn't have that natural benefits. So I
Speaker 1: think that that's another headwind that we've got to consider
Speaker 1: for this group just in the short term. Doesn't mean
Speaker 1: that over the long run they might not be great
Speaker 1: investment idea US, right, But in the short term, when
Speaker 1: we're thinking three, six, twell months down the road, it
Speaker 1: could be pretty choppy for some of these um you know,
Speaker 1: really big stalwart positions in the SMP. So I was hoping,
Speaker 1: actually that you would dig into the earnings trends for
Speaker 1: some of these companies because I was looking at one
Speaker 1: of your notes and I watched one of your recent
Speaker 1: Boomark TV interviews and you had said that if we
Speaker 1: look at earnings trends. Tech is likely to lag over
Speaker 1: the course of two and your note said the EPs
Speaker 1: growth pace for these companies may remain below the INDEXUS
Speaker 1: into the fourth quarter, and that that sort of diminishes
Speaker 1: some of these the magma's appeal. So can you can
Speaker 1: you go over that? Yeah? Yeah, absolutely So when we
Speaker 1: look out over the landscape of two and this is
Speaker 1: just referencing what is currently in consensus, a couple of
Speaker 1: things are working against Tech number one company. These are
Speaker 1: guiding us to expect less. So this is something that
Speaker 1: really evolved within the October earning season as all of
Speaker 1: a sudden. Whereas in the early part of this recovery,
Speaker 1: companies were persistently guiding analysts to expect more out of
Speaker 1: them and it's a really positive tailwind for stock prices,
Speaker 1: in the third quarter, companies suddenly started saying, hey, analysts,
Speaker 1: maybe you're a little too optimistic, and that really is
Speaker 1: a reversion to normal times pre crisis, that was the norm.
Speaker 1: Companies constantly told analysts, you might be a little bit
Speaker 1: too optimistic. While we all know this earnings game where
Speaker 1: they guide analysts to expect a little less so they
Speaker 1: can beat every quarter. We seem to have reverted back
Speaker 1: to that norm, but that was particularly a profound change
Speaker 1: for tech, where that's where the vast majority of the
Speaker 1: negative guidance started to come from. As all of a sudden,
Speaker 1: the tech companies themselves were saying, you know what, the
Speaker 1: supply chain of stress is gonna last a little longer
Speaker 1: than we were hoping. And even though our sales are
Speaker 1: pretty strong, they may not be as strong as you
Speaker 1: were hoping for. And no, we're not going to be
Speaker 1: able to be as efficient as you had hoped and
Speaker 1: produced that bottom line earnings growth with margin expansion to
Speaker 1: degree that you're expecting. And we see that throughout all
Speaker 1: most of tech, but especially for the Magma companies because
Speaker 1: they are so in the spotlight and they did have
Speaker 1: such a gigantic valuation premium developed. But if you're just
Speaker 1: looking at over the next four quarters, for example, that
Speaker 1: Magma group is expected to post about eight hundred basis
Speaker 1: points slower EPs growth than the s MP five at large,
Speaker 1: so significantly slower EPs growth, which is anomalous. Right. This
Speaker 1: is a group that really persistently beat the SNP five
Speaker 1: hundred terms of earning growth right through the middle of
Speaker 1: that seems like a very weird scenario to me, where
Speaker 1: companies are guiding lower and analysts are raising their reestimates.
Speaker 1: Have you ever seen that before? And I mean it
Speaker 1: sounds like you're kind of perhaps uh side more at
Speaker 1: the analysts than the than the management. Yeah. So there's
Speaker 1: always these interesting dichotomies that emerge where companies there are
Speaker 1: more companies guiding lower than positive, but we never get
Speaker 1: one of companies giving us guidance as well, right, So
Speaker 1: we can only derive so much of our expectations from guidance.
Speaker 1: For tech, it's usually pretty good as an indicator because
Speaker 1: more tech companies guide than any other sector save consumer
Speaker 1: discretionary UM, so we get some pretty good guidance out
Speaker 1: of tech. We don't get guidance for all of the
Speaker 1: SMP five hundred though. As a matter of fact, we
Speaker 1: get guidance from less than a hundred companies in the
Speaker 1: SMP five hundreds, So you can only get so much
Speaker 1: out of it. But shifting direction can be meaningful as
Speaker 1: long as analyst expectations are still moving higher. That's generally
Speaker 1: the factor that matters more for equity prices and for
Speaker 1: equity markets at large, because that revision momentum reflects the
Speaker 1: entire herd of the analyst community for all SMP five
Speaker 1: hundred companies that large, So it's a much bigger um
Speaker 1: and broader and deeper indicator than guidances. That said, items
Speaker 1: can be meaningful for certain companies, and we certainly want
Speaker 1: to pay attention to it to some degree, but revisions
Speaker 1: are more important to follow. And frankly, the other thing
Speaker 1: to consider from a guidance perspective is just what does
Speaker 1: it really mean for guidance to be more negative than positive?
Speaker 1: And as I suggested earlier, we were in a really
Speaker 1: abnormal position when guidance was more positive than negative. That's
Speaker 1: where that almost never happens. That's what happened in one
Speaker 1: And I think a big part of why stocks just
Speaker 1: ripped so hard over the last two years is nobody
Speaker 1: thought we could do this well, including companies themselves, and
Speaker 1: so it came as such an incredible shock. Yeah, it
Speaker 1: wasn't that there was a situation where so many companies
Speaker 1: just either pull their guidance or give any because they
Speaker 1: just got up, stay through the cards in the errands,
Speaker 1: get it fold. Yeah, Yeah, which makes me wonder, you know,
Speaker 1: I assume, okay, and you know in on I don't
Speaker 1: think anyone, Uh, you know, it's sort of in your
Speaker 1: type of seat who has to make projections and estimates
Speaker 1: and and sort of predict the future. Uh, and correct
Speaker 1: me if I'm wrong, But I'm assuming your confidence level
Speaker 1: and everything was sort of lower than what it would
Speaker 1: have been, you know in a non pandemic environment. Certainly,
Speaker 1: where's your confidence level now in what you're analyzing for
Speaker 1: the for the future. Has it gotten back to that
Speaker 1: you know pre COVID level? Is it halfway there? You know?
Speaker 1: How do you think about how confident you are in
Speaker 1: in what your actually um? You know, your confidence level
Speaker 1: and predicting market valuations is always low. You know, it's
Speaker 1: just we all struggled for the holy grail of trying
Speaker 1: to find that perfect model that tells you where valuations
Speaker 1: should be. But on my regression models, for example, that
Speaker 1: try to predict the earning side of the SMP five
Speaker 1: hundred equation versus the multiple side, the earnings model is
Speaker 1: is roughly two thirds better than the multiple model, And
Speaker 1: there's is no way to know because when you're predicting
Speaker 1: the multiple, you're predicting sentiment to a certain degree. Obviously,
Speaker 1: how much our investor is going to be willing to
Speaker 1: pay for this cash flow over time. I will say
Speaker 1: that the earnings model I I would argue that you
Speaker 1: should be more confident that earnings growth will be at
Speaker 1: least stable to close to double digit growth over the
Speaker 1: course of this year. And I would say I'm more
Speaker 1: confident in our earnings model than i have been in
Speaker 1: the most recent past because things have finally normalized when
Speaker 1: you're coming right into recovery. Our earnings model is based
Speaker 1: on macroeconomic inputs, so we take things like where is
Speaker 1: the unemployment rate trending? Well. When the unemployment rate was
Speaker 1: trending back to five that created a lot of distortion
Speaker 1: in the model, as you might imagine, And now that
Speaker 1: we're back to more normalized conditions of unemployment, we can
Speaker 1: use a model more effectively when it's driven that way.
Speaker 1: And it's the same with durable goods orders. I have
Speaker 1: reasonable confidence that at this stage of the economic cycle
Speaker 1: will probably get pretty strong durable goods orders growth. That's
Speaker 1: an input to the mall at all. Um The things
Speaker 1: that are more uncertain right now are really more multiple
Speaker 1: and valuation based, which you know is kind of an
Speaker 1: environment of normal again. You know what was abnormal was
Speaker 1: an environment where the FED was printing money, more money
Speaker 1: than we'd ever seen. The balance she was expansion expanding
Speaker 1: faster than we've ever seen. Now we're moving into a
Speaker 1: more normalized environment, So hopefully the valuation model proves itself
Speaker 1: to be a little bit more predictable as well. But
Speaker 1: you know, interest rates I think are the big question
Speaker 1: mark for this year as opposed to economic conditions, and
Speaker 1: usually economic conditions drive the earnings models, so we should
Speaker 1: have a little bit more confidence there. Yeah, well, that
Speaker 1: seems like the data has been coming in. You know,
Speaker 1: the magnitude of the beats or mrs is uh come
Speaker 1: back to to earth to some degree. You know, we
Speaker 1: saw CPI at seven right on the those this week,
Speaker 1: So I guess that helps build a confidence I hope,
Speaker 1: so knock on. So, Gina, speaking of earnings, that we
Speaker 1: have the earning season kicking off this week, and I
Speaker 1: was looking through one of your notes and you said
Speaker 1: analysts are raising their forecast for the coming season despite
Speaker 1: company guidance moving in the opposite direction. You mentioned EPs
Speaker 1: growth everybody's expecting, but your guidance space model says an
Speaker 1: even higher is likely, and you said, analyst revenue outlooks
Speaker 1: continue to stun So what will you be looking for
Speaker 1: this season? I know a lot has been made over
Speaker 1: the last couple of quarters of you know, just even
Speaker 1: tallying up how many times people mention inflation or or
Speaker 1: the word transitory on on quarterly calls. So what what
Speaker 1: should we be looking Yeah, it's a great question. I
Speaker 1: we also have been in that involved in that game
Speaker 1: of tallying up inflation mentions and supply chain mentions, as
Speaker 1: you know, and it has been kind of stunning to follow.
Speaker 1: But the thing that I think is most important to
Speaker 1: watch really is what are analysts forecasts and company guidance
Speaker 1: around operating margins going into and beyond, because that's the
Speaker 1: real trigger that I think changed a lot in the
Speaker 1: markets as of last quarter um Where every other quarter
Speaker 1: of this recovery process has been all about a persistent
Speaker 1: beat top line bottom line margin beat everything, and a
Speaker 1: rage to top line bottom line margins. The third quarter
Speaker 1: earning season, which was between you know, mid October and
Speaker 1: mid November, was different in that, all of a sudden
Speaker 1: we started to see some real change in analysts confidence
Speaker 1: going forward, and by that I mean the revenue estimates
Speaker 1: continue to rise, but their earnings estimates stopped rising, and
Speaker 1: those earnings estimates, you know, or at least slowed down
Speaker 1: the pace of increase. And a lot of that is
Speaker 1: because operating margin forecasts kind of hit a ceiling where
Speaker 1: analysts were persistingly increasing their forecast for operating margins for
Speaker 1: the SMP five hundred prior to that season. In the
Speaker 1: third quarter season, we saw roughly half of SMP five
Speaker 1: hundred estimates for forward operating margins fall. So it's not
Speaker 1: that analysts are expecting margins themselves to drop, but they're saying,
Speaker 1: you know what, I'm going to rationalize my expectations for
Speaker 1: the future, and that rationalization ultimately creates a little bit
Speaker 1: of friction for stock crisis. We just want to watch
Speaker 1: how much does it rationalize and does it ultimately manifest
Speaker 1: itself in a reduction in operating margin expectations are not
Speaker 1: I think that's absolutely the biggest key to this earning season.
Speaker 1: We'll have more on that in our our notes for
Speaker 1: next week after a couple of financials report for Friday,
Speaker 1: So certainly look out for that, but I do think
Speaker 1: it's the most important factor to watch and It's not
Speaker 1: just important because I care about company fundamentals and the
Speaker 1: other thing I think to note about operating margin forecasts.
Speaker 1: They're a magnificent timing indicator. So you know, just historically,
Speaker 1: if you go back over the last ten years, all
Speaker 1: of those major corrections in the equity market, excluding the
Speaker 1: coronavirus related correction obviously, but those three major peaks and
Speaker 1: stocks which proceeded in near twenty percent correction in the
Speaker 1: SNP five, we're all accurately forecast by a peak in
Speaker 1: operating margin estimates as well. So I pay a very
Speaker 1: very close attention to this indicator. And should we continue
Speaker 1: to see sort of a material down draft and expectations
Speaker 1: for margins, you would anticipate a much weaker market climate
Speaker 1: to emerge. Um. You know, I'm hopeful that we can
Speaker 1: kind of hold in there and companies can guide us
Speaker 1: that some of these supply chain frictions are easing, some
Speaker 1: of the inflation pressures are easing. But you know, I'm
Speaker 1: not a hundred percent certain that we're we can be
Speaker 1: that rose colored glasses UM kind of optimistic. Yeah, this uh,
Speaker 1: supply chain issues seem to be lingering longer than anyone
Speaker 1: really expected. You know, and now flaring up again with
Speaker 1: the with this new variant of the virus. You know,
Speaker 1: I wanted to rewind a little bit, and you mentioned how,
Speaker 1: you know, interest rates or obviously you know, first and
Speaker 1: foremost on on most people's minds, uh this year. And
Speaker 1: I think we've talked about this in the past, about
Speaker 1: how it's it's often sort of that rate of change
Speaker 1: of interest rates. You know, if if it looks like
Speaker 1: it's a disorderly sell off in the bond market and
Speaker 1: rates jump really quickly quickly, that's really the scariest thing
Speaker 1: to equity investors, I think, I mean, is it is
Speaker 1: it that simple? You know, Could a sort of a
Speaker 1: slow grind higher in rates uh be digested at least
Speaker 1: from the index level, uh, you know, by the equity
Speaker 1: market and sort of a quiet rotation that that keeps
Speaker 1: the index a float, we're you know, Or does a
Speaker 1: grind higher eventually tighten financial conditions enough that uh, you know,
Speaker 1: either the FED has to stall its plans and sort
Speaker 1: of backtrack a little bit or that week. You know,
Speaker 1: I think it's a complicated question, and honestly, I would
Speaker 1: like to say that a slow grind higher should be
Speaker 1: relatively easily absorbed by equities. But a lot of that
Speaker 1: depends on what's happening with the curve um as well
Speaker 1: as what's happening with growth amid that slow grind higher.
Speaker 1: And I think that this is what the equity market
Speaker 1: is going to grapple with over the course of the year.
Speaker 1: Is okay. You know, when we throw into our model
Speaker 1: that we're likely to get a two to two point
Speaker 1: to five ten year treasury yield through two that's not
Speaker 1: particularly impactful to stocks. It's you know, it's relatively meaningless.
Speaker 1: Does constrain the multiple from moving higher, but doesn't necessarily,
Speaker 1: you know, crush the market by any stretch of the imagination,
Speaker 1: as long as the two year treasury remains somewhat anchored
Speaker 1: and only goes up incrementally. We have three hikes in
Speaker 1: the in the Fed funds rate over the course of
Speaker 1: the year, and economic growth conditions remain intact. Right, So
Speaker 1: it's really almost imposed usible to just isolate that tenure
Speaker 1: and say here's its impact by itself, because it really
Speaker 1: is why is the tenure rising, what's happening with the
Speaker 1: shorter end of the curve, and is it rising because
Speaker 1: you know, investors are freaking out about inflation while growth
Speaker 1: is plumbing because that's a really tough environment for stocks.
Speaker 1: Or is it rising because inflation pressures are still high
Speaker 1: and growth is skyrocketing, because that's a great environment for stocks.
Speaker 1: So I just think it's all about context. And unfortunately, UM,
Speaker 1: you know, we can isolate it, and we do. We
Speaker 1: isolated in our models, and certainly a three percent tenure
Speaker 1: considering our economic forecast would be pretty restrictive to equity
Speaker 1: multiple valuations at this point in time. But if a
Speaker 1: three percent tenure comes along because you've got forty earnings growth,
Speaker 1: that's a totally different environment, right, And and so I
Speaker 1: think that you do have to kind of consider a
Speaker 1: context from in which those rates are moving higher. Speaking
Speaker 1: of your outlook, I do want to ask you about
Speaker 1: what you're actually foreseeing for the SMP five hundred for
Speaker 1: this year, because just about everybody I talked to has
Speaker 1: been saying it's going to be just so much more
Speaker 1: choppier than it's been. In what I hear over and
Speaker 1: over again, is there storm clouds on the horizon to
Speaker 1: grapple with or some sort of iteration of of of
Speaker 1: that sentiment. And I know in your year head outlook,
Speaker 1: you said the path is likely to take its fair
Speaker 1: share of twists and turns as the economy transitions to expansion.
Speaker 1: So what do you foresee for the SMP fire and
Speaker 1: feel free to break it down into sort of, you know,
Speaker 1: the first half in the second half, as Chris Harvey
Speaker 1: did on the podcast last week where he said, we
Speaker 1: might see this cathartic up chuck in the first half
Speaker 1: of the year, which I love and so I want
Speaker 1: to bring it back with. So what what are you think? Um? Well,
Speaker 1: I can't promise any clever equips like cathartic up check
Speaker 1: up chuck, I can't even say it. Forgive me for that,
Speaker 1: But what you know, I I think the consensus that
Speaker 1: we're pretty close to consensus. Frankly, we've got low slow,
Speaker 1: slow growth and choppy growth in the SMP are most
Speaker 1: likely outcome for stocks over the course of this year.
Speaker 1: I'd say the likelihood that I'm too bullish is lower
Speaker 1: than the likelihood that I'm too bearish. I do think
Speaker 1: that most likely, if I'm wrong, I'm wrong because I'm
Speaker 1: too um too cautious. That may be a function of
Speaker 1: hanging out with you guys all day long, constantly, you know,
Speaker 1: asking me to really question whether or not I should
Speaker 1: be so bullish or not. But I, you know, I
Speaker 1: I do think it's going to be a function of
Speaker 1: where we end up on operating margins that largely determines
Speaker 1: what happens this year and can companies withstand inflation pressure.
Speaker 1: Will we see wage growth start to overcome? Um, it's
Speaker 1: start to over well other categories of inflation. While wages
Speaker 1: have been very very dormant over the last several years,
Speaker 1: all of a sudden, we're seeing a little bit of
Speaker 1: wage growth. And that's one factor that I think we
Speaker 1: probably don't pay enough attention to is what will that
Speaker 1: mean for operating margins going forward? Um? I think that's
Speaker 1: so far what the market has done is absorbed a
Speaker 1: pretty rocky move and interest rates and a pretty significant
Speaker 1: sell off in tech with relative ease. I mean, I
Speaker 1: think that you've got to take the signals from the
Speaker 1: rally in financials and energy for what they are, and
Speaker 1: they're very bullish. Uh So, if we can continue that
Speaker 1: kind of environment where you know, maybe we rationalize our
Speaker 1: expectations or valuations in some bloated sectors, but start to
Speaker 1: keep start to see more investment flowing into some of
Speaker 1: these cyclical spaces, we could have a much better market
Speaker 1: landscape than I think many of us are anticipating. Um.
Speaker 1: You know, I think the likelihood for recession is very,
Speaker 1: very low. I think the said if anything, will air
Speaker 1: on the side of caution as opposed to too much aggression.
Speaker 1: Even though the market is worried they might get aggressive,
Speaker 1: they've shown very little sign of of thinking about getting
Speaker 1: too hawkish. And as long as those are your baseline conditions,
Speaker 1: I think you've got to be pretty constructive toward risk assets.
Speaker 1: And then I go back to one other thing, and
Speaker 1: that is the fact that there is just no evidence
Speaker 1: that households are overly bullish towards equities. If anything, they
Speaker 1: just don't want to own stocks. They'd rather throw everything
Speaker 1: at crypto and n f T s and some of
Speaker 1: these other risk assets and just leave the poor stock
Speaker 1: market behind, as if it just doesn't matter anymore. You know.
Speaker 1: I hate to sound like the red headed stepchild, but
Speaker 1: I kind of am and have been for a long
Speaker 1: time now, where people just don't want to own stocks
Speaker 1: that much. So as the bond market becomes less and
Speaker 1: less investable, you know, as they start to lose a
Speaker 1: little bit money in in the bond market, they start
Speaker 1: to think about where are my other investment opportunities, And
Speaker 1: some of that capital could continue to trickle into the
Speaker 1: equity market kicking and screaming. But nonetheless it ultimately lands
Speaker 1: in the equity market, and that could produce more upside
Speaker 1: than we're anticipating as well. So I'm not, you know,
Speaker 1: overly worried about a major shift in stocks occurring this year,
Speaker 1: except for with respect to margins. It's the one thing
Speaker 1: that I really want to watch very carefully for risk emersion.
Speaker 1: Everyone spends so much time and effort analyzing sort of
Speaker 1: the fundamentals of the companies and the economy, and and
Speaker 1: not a lot of time looking at the fundamentals of
Speaker 1: the investors in the world. You know that this savings
Speaker 1: rate that went through the roof and corporate balance sheets
Speaker 1: that are really in many cases very strong, and and
Speaker 1: could you know, boost buy back and dividend programs, um,
Speaker 1: is that come more into your thinking, you know, the
Speaker 1: sort of the fundamentals of the of the bye side. Yeah,
Speaker 1: it's something I think about quite a lot. Actually, um.
Speaker 1: We do a lot of work on supply and demand
Speaker 1: for stocks, because I think it's something that we possibly
Speaker 1: really underappreciate it over the course of the last ten years.
Speaker 1: Is this idea that stocks didn't go up because people
Speaker 1: bought them. Stocks went up because corporates bought them right
Speaker 1: and and fewer corporates issued stock than bought back share.
Speaker 1: So ultimately that net supply and demand balance worked in
Speaker 1: favor of stocks, not because everybody had to own them,
Speaker 1: but because corporates bought them back and didn't issue us
Speaker 1: new ones. So there's just no supply. Now. I think
Speaker 1: that's some some things have changed over the last two years,
Speaker 1: many of them are very healthy, and that we have
Speaker 1: finally had new issuance of share class you know shares.
Speaker 1: We've had some I p O s come to the market.
Speaker 1: It's not all kind of trapped in private hands anymore.
Speaker 1: There is the capacity for new equity ownership UM in
Speaker 1: the public markets with new IPO issuance, but it's still
Speaker 1: the supply of new share is is still largely underwhelming
Speaker 1: how much companies are buying back in the form of
Speaker 1: demand UM. So it's something we watch very carefully. And
Speaker 1: then when I think about, you know, sort of getting
Speaker 1: a handle on what the real retail investment community holds
Speaker 1: for equities. I just look at household ownership in the
Speaker 1: flow of funds data because it's the biggest, most comprehensive database.
Speaker 1: I mean, a lot of people follow things like e
Speaker 1: t F flows, but et f s are a third
Speaker 1: of the overall market, so you can't really get a
Speaker 1: feel for what what ownership looks like. Um And if
Speaker 1: you look at household ownership of equities, they've increased on net,
Speaker 1: you know, excluding gains from the equity market themselves, of
Speaker 1: roughly one percent a year for the last two years,
Speaker 1: so they have started to add ownership. But over the
Speaker 1: last ten it's point three percent per year, So we've
Speaker 1: started to see some real interest gathering for the equity market.
Speaker 1: But if you go back to the nineties, we were
Speaker 1: looking at nearly two percent net increases in ownership every
Speaker 1: single year for a decade. So there's just there, just
Speaker 1: seems to me this enormous potential for all of a
Speaker 1: sudden people might actually like stocks again. You know, how
Speaker 1: do I capture that in a model really tough to do,
Speaker 1: But I want to respect the data for what it
Speaker 1: is and acknowledge that if people start to come back
Speaker 1: to stocks. It could produce incredible upside that none of
Speaker 1: us are forecasting. Yeah, and demographics, I guess make it
Speaker 1: tough too, with the you know, the baby boomers on
Speaker 1: one side of the barbell and the millennials. Maybe these
Speaker 1: millennials like l Donna will find I'll just take some
Speaker 1: of that, honestly, if you know, unless you have I
Speaker 1: checked a bit coming with it doing so great so
Speaker 1: stock work, it looks to be doing all right right now.
Speaker 1: Maybe maybe we'll get a little bit of that. Well,
Speaker 1: speaking of getting a little bit of that, love, Vildonna,
Speaker 1: you know what time it is, I know exactly what
Speaker 1: time it is. Stand clear of the craziest things we
Speaker 1: saw in markets this week, Jed, I think I gave
Speaker 1: you I I I hopefully I gave you enough notice
Speaker 1: about our craziest thing. Gimmick, uh not gimmick. Pardon pardon
Speaker 1: my lack of voca. Our tradition, it's a tradition we do.
Speaker 1: You kick us off. What's your craziest thing you saw
Speaker 1: in markets this week? Well? So, as Jina mentioned, cryptocurrencies
Speaker 1: have been under pressure recently, but there's one coin that's
Speaker 1: up a hundred percent so far this year. I don't
Speaker 1: know if either of you are aware of it. I
Speaker 1: feel like I should know this. I did read the story,
Speaker 1: but I can't remember they all They all blur together
Speaker 1: in my mind. It's one of the silly meme coins,
Speaker 1: isn't You could put baby dog baby does. That's right,
Speaker 1: put dog in there somewhere and you and your guests
Speaker 1: would be really good. It's called baby does. When I
Speaker 1: was checking how much it actually had gone up, and
Speaker 1: when I checked, it was more than a dred percent.
Speaker 1: But there were so many decimals involved. I knew you
Speaker 1: would love this. It was like zero point zero zero
Speaker 1: zero zero zero zero zero zero zero seven one. Yes,
Speaker 1: how many cents is that? It's like one billion? You
Speaker 1: could buy so many of them. Yeah, what's the whole
Speaker 1: crypto experience I'd like for you? Is it? You know?
Speaker 1: I feel like a lot of us kind of just
Speaker 1: ignored it, hope it would go away at some point.
Speaker 1: I mean, have you finally had to engage as an
Speaker 1: equity strategist um to some degree? And you know I
Speaker 1: say that investors are you know, forced into the equity
Speaker 1: market kicking and screaming. I've been forced to pay attention
Speaker 1: to crypto kicking Because I am an equity strategist. I
Speaker 1: kind of live in breathe stocks and what's happening, and
Speaker 1: even then in the most boring stocks in the SMP
Speaker 1: five hundred, So I'm I'm tend not to be on
Speaker 1: these sort of fringey risk assets spectrum. That's said, we
Speaker 1: got to a point where the equity market and the
Speaker 1: crypto market we're trading pretty closely together, hand in hand,
Speaker 1: so I do have to respect it as a measure
Speaker 1: of risk tolerance. I am a little bit worried about
Speaker 1: just how much ownership there is in crypto and how
Speaker 1: many you know, real dollars have moved into the crypto
Speaker 1: universe over the course of the last five years or so.
Speaker 1: It's pretty phenomenal. And what that might mean for economic growth.
Speaker 1: If the fate of a certain investor is really tied
Speaker 1: to crypto and we have a pretty big crash like
Speaker 1: the one we've had, can they hang on or how
Speaker 1: much of their overall income and spending base is really
Speaker 1: dependent upon this asset. I don't know, and I think
Speaker 1: there's a lot of uncertainty there, but I do pay
Speaker 1: attention to it. I still try not to, admittedly, but
Speaker 1: it's hard not to. I mean, there's just there's a
Speaker 1: lot going on. It's it's driving a lot of trends
Speaker 1: um in fintech as well, so I think we have
Speaker 1: to pay attention. It's it's turning into a real macro. Yeah,
Speaker 1: I am a little worried it might be. Have you
Speaker 1: seen anything crazy this week up there in the Peppers genius?
Speaker 1: I think our first strategist joining us from there there
Speaker 1: we go see excited about that. That's a differentiating factor. Um,
Speaker 1: you know the thing that's really a couple of things
Speaker 1: have struck me this week and again, live and breathe
Speaker 1: in the equity market. But I think the biggest thing
Speaker 1: is this just kind of return of the old school financials. Right.
Speaker 1: If you think about what's happening in the financial sector,
Speaker 1: all of these disruptors are really losing out to old
Speaker 1: financial companies like coin based, square Hood all of them
Speaker 1: making new lows, while Goldman, master Card, Schwab all of
Speaker 1: them making new highs. I thought was really fascinating and
Speaker 1: a pretty big divergence. At the same time, your best
Speaker 1: performing spaces energy, that's the space nobody wants to own.
Speaker 1: Good old fashion energy companies like these are the oil
Speaker 1: producers of the world's um, you know, these are the
Speaker 1: gas pump station owners. Right, It's like, Wow, what an
Speaker 1: interest thing world we've moved into from metaverse and all
Speaker 1: of the height flying growth fintech stocks really taking all
Speaker 1: of our mind share for so long. I mean, I
Speaker 1: have to say, it's a very comfortable world for me.
Speaker 1: I'm really enjoying this transition. Um but but it's been
Speaker 1: fascinating to watch just how much things have really shifted
Speaker 1: over the course of just a week. Yeah. Absolutely, the
Speaker 1: old what's that old expression is? I gess that's pretty good?
Speaker 1: All right, I'll give you mine. I'm inspired by you.
Speaker 1: You seem to think anything involving any public company's fair
Speaker 1: game for crazy questure. All right, So I'm gonna go
Speaker 1: with Remember it was a few days ago there was
Speaker 1: this big traffic jam on in Virginia. It's snowed like
Speaker 1: seven inches in Virginia. People were stuck in traffic for
Speaker 1: like twenty four hours. One poor guy was stuck in
Speaker 1: that trapp thick in an uber with the meter running
Speaker 1: in an uber. Which but when you think about it, though,
Speaker 1: you know, you hit the uber and you get a price,
Speaker 1: you're expecting that to be your your price that you get.
Speaker 1: But no, they can apparently jack it up if it
Speaker 1: takes too long to get there, to get to their destination. Uh,
Speaker 1: they will. They will add some fees on onto it.
Speaker 1: So this guy was stuck in an uber for nine
Speaker 1: hours and that that snowstorm, so as you know, it's
Speaker 1: time to play prices. Right, what do you think the
Speaker 1: bill was for a nine hour uber ride? What do
Speaker 1: you think they hit him? This is really good? This
Speaker 1: is this is your best one ever? Wow? Um, okay,
Speaker 1: let's let me think. I mean, but there must come
Speaker 1: a point where you could even like fight Uber for
Speaker 1: like capping it, right, I don't know. I'm gonna say
Speaker 1: that he did. He did, and he got a refund.
Speaker 1: But but what would you guess they tried to tried
Speaker 1: to build. Okay, I'll go with six hundred and seventy dollars. Okay,
Speaker 1: I'm gonna keep a poker face. You know, what do
Speaker 1: you think dollars? I would have gone. I would have
Speaker 1: thought that too. I would have thought they would have
Speaker 1: you know, because I don't know, you try to do
Speaker 1: the math in your head of what's a fifteen minute
Speaker 1: uber ride? But they tried to hit him for a six.
Speaker 1: Can't believe it. I usually am like really under really
Speaker 1: really I would have I would have I would have
Speaker 1: bid what geta I would have been in Genus camp.
Speaker 1: I would have thought it would have been in the thousands,
Speaker 1: but still a heavy bill. And the guy complained and
Speaker 1: they gave him. They gave him a refund, but they
Speaker 1: won't say how much they but it was originally supposed
Speaker 1: to be a two D ride, so pretty pretty expensive.
Speaker 1: So the I think the morale for all of us
Speaker 1: is checked that weather forecast before you get in an uber.
Speaker 1: Uh you know, I imagine if that was a New
Speaker 1: York taxi app for nine hours, that would have been
Speaker 1: like a Hopefully you know, then they got along. Maybe
Speaker 1: they're best friends now, you know, there could be a
Speaker 1: silver lining to this. Well, yeah, we'll have to reach
Speaker 1: out to this guy. This was via USA Today, who
Speaker 1: got it from w t op news whatever that is,
Speaker 1: So maybe they'll follow up. Hopefully. This is really speak
Speaker 1: of fobs, Gina. We're gonna have to get you back again,
Speaker 1: uh soon. Always a pleasure to catch up at you.
Speaker 1: We haven't. We don't get to talk to Geno much
Speaker 1: anymore since we're all hiding in uh well, thank you
Speaker 1: very much for having me. It was a great, a
Speaker 1: great pleasure. Thank you, Gina. What Goes Up. We'll be
Speaker 1: back next week and so then you can find us
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Speaker 1: What Goes Up is produced by Magnus Hendrickson. The head
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