Dennis I do wonder if this is much more
now a story about corporate fundamentals rather than the obsession that we've had
for the past couple of years over what the Fed is going to do next.
Well, I do think corporate fundamentals are an underlying support for the
market. But there is a particular problem when
it relates to financial conditions right now that are impacting the market.
We ultimately take it will be a short term headwind in nature.
But the fact of the matter is we started this year with economic growth outlooks
from a consensus point of view about 1.3%.
There was a very large consensus that there was going to be six cuts, which
meant that inflation was going to be benign.
And lo and behold, we ended up with much stronger economic growth than people
were expecting a benefit of GDP, in our case, a 2.9% in inflation.
That's clearly sticking to the high side.
So we're in a situation that was similar to three Q last year where financial
conditions are tightening now led by the U.S.
Treasury yields, as you've seen, that will probably go to a point that make
investors comfortable that there's less upside inflation and economic risk and
we don't have to worry about the Fed and potentially even raising rates.
And until we get through that process again, a lot like we did three Q last
year. Until we get through that process, the
market's probably going to struggle. So earnings, yes, they're a support,
don't get me wrong. But we do have this little FCI
tightening that's happening right now, which is complicating and the way out of
it is just lower inflation over time and investors getting comfortable with that
outlook. They were very comfortable to start the
year lessening. Do you have, I guess, any confidence or
are you seeing that confidence and the folks that you survey that we are going
to maybe see that relief soon, meaning like maybe within the next six, eight
months? Yeah, that's I think the issue is I
think there was too much confidence in that.
So there is a signal, an amount of confidence that you'll see some
deceleration in inflation over time. You know, I'd say it's 6040, so it's a
little bit harsh for me to say it's too much confidence.
But, you know, I think most people are still set up for the idea that over the
next year you should see inflation on a quarter basis decline in a way that
would be friendly for asset prices, meaning the Fed can continue or will,
I'm sorry, reduce rates in a way that they somehow get back to the neutral and
any data point that questions that is an issue for the market and most are now
being felt most definitely in say, price momentum factor, which is coming under
pressure today, which is on video Netflix and stuff that you already
noted. I know you don't talk about individual
stocks. You mentioned earnings.
Our source of support, Dennis, except some of the high flyers are, I don't
know, giving less information about earnings.
You look at Netflix yesterday saying that it's no longer going to give
subscription numbers the way that it used to following in Mehta's footsteps.
And we've seen how Apple in the past has stopped reporting sales of units of
iPhones or iPads or Macs. What what kind of statement does this
send to investors in terms of the information that companies are willing
to impart to the market? Well, I use a little sell side trick
here. I think ultimately earnings are a
support for the market over the course of this year.
The problem with earnings season now is earnings expectations came in
or inflected higher in the earnings season.
So the bar was high. Basically since the Fed tightening
program started, earnings expectations had collapsed into earnings season.
And this was the first one we've seen basically in two years where you had
this big lift. So it's not that earnings are
necessarily poor, it's just that the expectations were very high going into
this quarter. So in aggregate, earnings are strong,
they're improving. You'll probably end up at 230 to 40 3 to
45 this year, which is great. You know, I mean, that should support
the market over time, just that expectations were a little bit elevated
in an environment where you have an inflation concern.
Right. I hear what you're saying about how
expectations perhaps are a little bit stretched going into this earnings
season. But the fact that companies are giving
less information to investors who are desperate for evidence that their
valuations are justified. You know, it's a good point.
I think leaning on company commentary about the future, certainly the macro
backdrop is one of the worst thing investors can do, because when we've
looked at this using a natural language processing tool, what they say about
their own business is actually very positive and has consistently been
positive. What they say about the outside world
and the macro backdrop, an inflation backdrop and uncertainty, and every
analyst on the street beating them up about the world is going to end.
You've ended up with company commentary that has consistently been subdued.
So I think it's just a little bit more being felt now because expectations were
lifted going into the quarter. But I would fade this idea of like
uncertainty and not being a signal because that has been really consistent
and wrong, by the way, for the last two years.
I am curious about other signals, particularly when it comes to money
flows. Dennis There's been a lot made of some
of the retrenchment that we've seen in equity markets as well as the idea that
you still have money markets that are still sitting near record levels and a
lot of other cash that certainly isn't being deployed to risk assets, if at
all. Yeah.
I mean, I take a little you know, I understand that view.
I just take a little bit of a more, um. And when you think about it this way, if
money sitting in those assets is because interest rates are higher, because the
nominal growth backdrop is better. Right.
And equilibrium interest rates have shifted higher than your earnings growth
over time should be significantly stronger and your earnings growth is
significantly stronger than the cost of capital, which is the case right now for
most of the S&P. Then the market will be biased.
Over time, money will find its way into the market.
So I fade the idea that there is like this lower return profile in equities
relative to what you could get in cash. The reason cash rates are high is
because demand growth and inflation as a result is a little bit higher than
normal. So you're just kind of shifting up now
with interest rates to just help keep inflation and demand growth in check.
But ultimately you're looking at a pretty good nominal ROE slash nominal
earnings backdrop enough to offset whatever are going to be getting in a
cash cash account.
